By Mike Reed, Merchants Bonding Company

For construction companies considering a change in ownership, effective succession planning is key. But even the best laid plans can go awry if the company hasn’t included one of their most important business partners, their surety. Successful succession planning involves proactive collaboration with the surety, ensuring a secure and seamless transition for construction companies.

Unexpected Outcomes: The ESOP Dilemma

As part of their succession planning, a construction company implemented a partial Employee Stock Ownership Plan (ESOP) which would support long-term employee retention. Their choice, however, triggered an unexpected outcome – their ability to retain their surety credit. ESOPs essentially create a large amount of debt that will be due either to the prior owners or to a bank. Although this debt was due to the former owner, who continued to lead the company, the surety saw the debt as a liability. They put new terms on the table and required personal indemnity. This had not been required previously due to the strength of the company relative to their bond needs, so this came as a surprise.  The company found the new terms unacceptable and sought a new surety just as the need arose for a sizable bond. The resulting scramble to secure credit, under the pressure of a looming deadline, might have been avoided had the original surety been included in the succession planning.

Partners in Planning: 3 Ways to Include Your Surety in Succession Planning

While no amount of planning can predict every outcome, construction industry expert Todd Feuerman, of business consulting firm Ellin & Tucker, recommends construction companies partner with their surety on any changes that could significantly affect their balance sheet, and offers these suggestions for successful succession planning:

1. Go Beyond Financial Forecasting

Any succession plan will include projected revenue after the transition, and a surety will be extremely interested in the integrity of these forecasts. Be sure to go beyond just debt service, worker agreements and revenue necessities and include possible financial implications that could impede the continued operational needs of the company.

2. Facilitate Continuity

Any standing meetings with the surety should include key employees who are remaining in place after the transition. As experts in the company’s operational and financial plans, these employees can instill confidence and help forge relationships between the new ownership and the surety.

3. Prioritize Expertise

Sureties want to know that once new ownership is in place, the company’s vendor connections, workforce, and financial position will remain strong, and projects will continue to be completed. So, leadership should always think about the ways a firm could evolve beyond the transition and the specific areas of expertise that should be developed by any of the executives staying on board.

Feuerman’s final recommendation? “In order for owners to protect their ability to obtain or retain surety credit, they would be wise to treat their surety as a true partner.”

How do I get a Surety Bond?

Surety bonds are issued by Merchants Bonding Company (Mutual) through insurance agents. Contact your local insurance agent or use our Find an Agent tool. They will guide you through the process, informing you of what documents and information are needed by the surety (Merchants Bonding Company (Mutual)) to underwrite your bond.

All information provided is subject to change.

About the Author

Mike Reed, AFSB, is Regional Vice President – Contract Underwriting for Merchants Bonding Company. With more than 20 years of experience in contract surety at Merchants Bonding Company, Mike’s spent his career building lasting relationships with agents and forging his reputation as a trusted advisor.