The following article appeared as a web exclusive in the Winter 2022 issue of NASBP’s Surety Bond Quarterly magazine.
In a marketplace filled with labor shortages and supply chain uncertainty, construction firm owners and executive management teams must be focused on completing construction projects on time and on budget. But as they balance long-term strategies with daily demands, succession planning may be the one task that should get the most attention and be flawlessly executed. However, in practice, it is commonly the last item on the planning list.
The successful continuation of any construction firm’s operations, reputation, and value depends on a well-developed and thoughtful succession strategy. While these plans should consider the needs of owners, executive management, and others within the firm, it is crucial also to consider how the plan will be received by financial business partners outside the firm, chief of which is the relationship with the firm’s surety.
Because surety companies underwrite construction firms on the overall assessment of the firm’s ability to successfully complete a given project, construction firms should realize the importance of minimizing distractions during an ownership transfer. This means evaluating a plan from the surety’s perspective, ensuring the firm maintains technical and operational excellence, cultivates a relationship between the surety and the new ownership, communicates projected cash-flow implications of the succession plan, and demonstrates an ability to maintain a sound financial position throughout the process. Whether the plan includes a sale to family members, key employees, or a third party, communication of important details early and often will ensure that the firm’s surety partner will continue to provide support well after the transition.
When evaluating your succession plan from the perspective of the surety, there are four areas to focus on:
Maintaining Technical and Operational Excellence
The surety will want to be sure that the firm’s expertise, industry connections, and business acumen will not be at risk once the firm has changed hands. Construction executives need to consider how the firm may evolve after the transition and what skill sets will need to be developed by the remaining executives to ensure the transition does not negatively affect the firm’s finances.
Relationships with the Surety
If the plan includes a transition to family members or key employees who are familiar with the day-to-day operations, it is imperative that those people be included in regular meetings with the surety. Allowing the surety to interact with these team members well in advance will not only reduce the surety’s uncertainty, but also will provide the surety an opportunity to obtain a perspective on the future leadership team’s approach. It will also help to keep continuing executives focused on the operations of the firm—rather than on “selling” the new leadership team—during the transition.
Projected Financial Implications
A succession plan will only be successful if the construction firm can meet the financial obligations of the proposed plan; and the surety will be paying particular attention to the credibility of the plan’s financial projections. But projecting cash flow goes far beyond just looking at the plan itself. Although potential debt service, employee agreements, and other future cash requirements related to the plan are necessary considerations, an accurate financial model should also include cash-flow implications related to the ongoing operational needs of the firm.
Maintain a Strong Financial Position
Although some succession plans may occur relatively quickly, many are implemented over several years. The surety will be looking for the construction firm to demonstrate a strong financial trend throughout the transition process. But construction firms should be ready to react to any changes to the plan and share those updates with the surety as soon as possible.
Succession planning for construction companies is complex and requires significant effort and focus by the owners and executive management teams. Anticipating challenges and stumbling points from the surety’s perspective will help to simplify operational challenges during this emotional process and ensure success for many years to come.