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You have spent years building your company to the success it has now, but what happens when you want to retire? Figuring out how to carry on your legacy and transition ownership can be a challenge! This is not a decision you can rush into, and it’s important to understand the different succession options you have.
There is no “one size fits all” when it comes to succession planning since each company has its’ own unique dynamics. Not only is there a cultural impact on a company when ownership is transferred, but more importantly there can be a big financial impact on the company. This impact can affect your surety bond program and credit facilities. Including your surety broker and business professionals in your succession planning early on is important for making this a smooth transition.
Below are three of the most common options for transitioning ownership in the construction industry:
1. Sale to Family/Key Employee
The sale to a trusted family member(s) or key employee(s) that works within the company is a great method to utilize. This option promotes stability for the business during the transition process. The original owner still has control for a period of time; if the business is selling to a family member, there can be tax provisions that can save the family money in estate and gifting taxes.
If the sale of the business is structured properly, this method could have the least amount of impact on your surety program and/or credit facilities, since you are bringing in a new owner that understands your business. Ideally, the sale would be structured so that the company is not taking on too much debt at one time. This would allow the company to have sufficient working capital during the transition.
2. Private Equity Purchase
The Private Equity Purchase is a transition option that involves an investment management company purchasing the company. Private Equity firms will raise money through outside investors and are often structured as a leveraged buyout. The existing executive team usually remains involved with the day to day operations with the investor’s oversight.
Although this option may be ideal for a business owner who is looking to obtain the equity out of their company, the leveraged buyout can heavily impact a company’s balance sheet. It’s important to consult with your surety broker and business professionals to see the best way to structure the sale, so that you do not negatively impact your bond program or credit facilities. If the sale structure jeopardizes your bond program/credit facilities, that could hurt your overall future earnings of the company.
3. Employee Stock Ownership Plan (ESOP)
An ESOP can be a great option for an owner to sell their business and grant their employees ownership interest in the company. This is done by the company developing a trust fund that contributes shares or cash to buy existing ownerships’ shares. The company owner then has the ability to compensate the employees with stock.
The benefit of an ESOP is that the ownership stays within the organization. This preserves the company’s culture and allows employees to focus on overall performance. Similar to the private equity purchase, there is debt required to finance the buyout; it is important to consult with your surety broker and business professionals, to see the impact this has on your bond program/credit facilities.
It’s important to explore the various ways to structure ownership transitions. Ultimately, you need to see which option is the best fit for you and your company’s future success. If you have any questions, be sure to reach out to your surety broker and other business professionals, to discuss your options. Creating a plan now is key to ensuring your company’s future success. If you have questions about your company’s succession plans and how it may affect your bonding capacity, contact TSIB today!