If you’re like most owners of construction companies, preparing for your untimely death or disability is not high on your list. Afterall, there are proverbial fires to put out, jobs to finish, bids to submit, and taking the time to plan for what is an unpleasant and hopefully unlikely event to think about does not exactly sound appealing. Based on our experience, 9 out 10 construction companies don’t have a formal plan in place, and this can leave your family and your employees that you’ve worked so hard to provide for in a very vulnerable position.
A Story of What Can Go Wrong
Let’s describe what can go wrong with a story. Many years ago, our agency wrote bonds for a pipeline contractor. It was a solid operation with a single owner in his mid-50’s whose wife was not involved in the business. They had several jobs going on, and one day the owner unexpectedly had a heart attack and died. It was tragic. The shock and grief hit his family and the employees hard.
Unfortunately, there was no plan in place for how to deal with this type of situation. There wasn’t a key person capable of taking over to continue the business or the jobs, and the spouse wasn’t able to keep the company together. One by one employees left in fear of not having a job if the company folded. This caused the projects to go south, and as a result, all the equity in the company that had been built up over the years was depleted. The surety company ultimately had to step in to complete the bonded jobs. It will come as no surprise that even though the jobs were going well, the surety’s cost to hire new contractors was well in excess of the contract balances the owners had, and thus they incurred a substantial loss under the bonds.
Ultimately, the owner’s wife lost all of the equity in the company and had to repay the surety out of their personal assets for the loss under the bonds. This made an extraordinarily sad and difficult situation that much worse.
Simple Steps to Protect Your Family and Employees
Creating a succession plan doesn’t have to be as difficult or time consuming as you may think. Here are a few questions to ask yourself as a way to start formulating a plan.
Partner and shareholder
If you have partners or other shareholders, do you have a buy/sell agreement?
A Buy/Sell agreement is important whenever there are multiple owners of a business, because it sets the terms, both price and payment timeframe, of any buyout between the parties. You can also purchase life insurance to pay for all or part of the buyout to lessen the strain on the business and buying shareholder(s) in the event of a death of one of the shareholders. Having the purchase price set ahead of time will reduce the chance of disputes, and it is advisable to set the payment terms at something reasonable like 5-7 years to minimize the impact to the company since that is most likely where the funds will come from to pay for the seller’s ownership interest. This will also help limit any disruption to your bond program by avoiding a big withdrawal of capital from the company.
Key people to continue the business
If there are no other owners of the business, the first question to ask is whether there is one or more people capable of continuing the business. If so, you’re in a fortunate position. Similar to a Buy/Sell agreement, you’ll want to create the terms of the purchase and memorialize that in writing as having been agreed to by all parties. While the parties aren’t bound to the terms as they are with a formal Buy/Sell agreement, it at least brings everyone together on the same page before something happens instead of after when emotions are high and the situation is difficult.
Key people to wind down your projects
If you don’t have anyone that can run the business if you’re gone, consider whether there are key employees that can run the jobs and maintain the administrative side. You’ll want to have conversations with these employees to confirm their willingness to take on the challenge, and then you can set up a financial incentive to stay with the company. Typically, these Management Agreements will provide a bonus to the key employee up to a certain amount for successfully completing the company’s jobs in progress. The amount is up to you, but remember it has to be significant enough to overcome the risk and fear the employee will have of knowing their job will be coming to an end. Typically, this may be the equivalent of one year’s pay, but each situation is different. We have sample Management Agreements that our clients have used in the past, and if you would like one, please just let us know.
Creating a strategic agreement with another contractor
In some situations, we’ve had our contractor clients put informal agreements together with other contractors they are close with to complete each other’s work if something happens to them. Obviously, the other contractor has to be in the same or similar trade and there could be some sort of compensation provided.
What if none of these contingencies are options?
While rare, if none of these options work for you, consider purchasing a significant amount of life insurance. Life insurance is beneficial in any of the above options, but when those options aren’t viable, you’ll want to consider getting more than you might otherwise. You can even purchase a policy where the company is the beneficiary, and in doing so, you increase the likelihood that there is enough money available for the surety to complete your work, if necessary, without having to turn to your personal estate for reimbursement. You’ll want to check with your surety, estate attorney, and CPA to confirm the best way to structure this depending on your personal circumstances.
By Protecting Your Surety, You Protect Your Family
You’ve probably been asked by your surety at some point what your continuity plan is for the company. Hopefully, after reading this article you have a better understanding of why it matters not only to them but to protecting your family and employees as well.
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