Continuity Planning for Construction Businesses in Ownership Transitions

BY DAVID V. JEAN

Ownership changes are critical moments in the life of any construction business. Whether due to the untimely death of an owner, the departure of a sole owner, or the exit of a co-owner in a multi-owner business, these transitions present unique challenges that require thoughtful planning. Effective continuity planning, especially in the construction industry, can help ensure that a business not only survives but also thrives through these transitions, maintaining the confidence of surety bond producers and clients alike.

Continuity Planning Following the Death of an Owner

The sudden death of an owner can be a devastating event for any construction firm, particularly for small to medium-sized enterprises (SMEs). Without a well-thought-out continuity plan, the business may face significant disruption, which could lead to operational paralysis, loss of key projects, and eventual closure. A few key considerations for this scenario include:

Succession Planning: One of the most critical components of a continuity plan in this scenario is a detailed succession plan. This plan should identify who will take over the owner’s responsibilities and how the transition will occur. In the construction industry, it is vital to ensure that the successor is qualified to handle complex project management, client relationships, and bonding requirements. Additionally, surety bond underwriters will need to evaluate the successor’s credentials and experience to maintain bonding lines.

Business Continuity Instructions (BCI): BCIs provide the deceased owner’s family and key employees with a roadmap for managing the business in the immediate aftermath of the owner’s death. These instructions should include contact information for trusted advisors, detailed plans for continuing operations, and clear guidance on the eventual transfer of ownership. For construction businesses, BCIs should also address the continuation of projects and how to manage surety bond obligations. It’s also crucial to outline how bond claims, if any, should be handled during the transition.

Financial Considerations: Life insurance policies can provide the necessary funds to maintain operations, pay off debts, and support the transition to new ownership. These funds can also be used to finance a Stay Bonus Plan to retain key employees during the transition. Surety professionals should ensure that the life insurance coverage is sufficient to fulfill bonding requirements and protect the business’s financial stability during the transition. Furthermore, the financial health of the business will be reassessed by bond underwriters to ensure ongoing surety support.

Continuity Planning for Owner Departure in a Sole Proprietorship

In sole proprietorships, the departure of the owner, whether due to retirement, sale of the business, or other reasons, poses a significant challenge. Unlike multi-owner businesses, there is no one to automatically take over, making advance planning crucial. Important steps in this scenario include:

Identifying a Successor: For sole proprietors, it’s vital to identify and prepare a successor well before departure. This could be a family member, a key employee, or an external buyer. The process of grooming a successor should involve training and gradually increasing his or her responsibilities to ensure the successor is ready to take over when the time comes. In construction, this preparation includes understanding bonding processes and maintaining strong relationships with surety bond producers. Surety professionals will also need to assess the successor’s ability to maintain existing bonding programs and their impact on bond capacity.

Business Valuation: Regular business valuation is essential to ensure that the owner receives fair compensation upon exiting the business. An accurate valuation also helps potential successors or buyers understand the financial health of the business and its growth prospects. For construction businesses, valuation should include an assessment of ongoing projects, equipment, and bonding capacity. Sureties often require updated financial statements, which will factor into their decision to extend or modify bonding support during ownership transitions.

Transition Planning: A comprehensive transition plan should outline the steps for transferring ownership, including legal and financial considerations. Legal counsel should be consulted to ensure all agreements comply with state laws and industry regulations. This plan should be shared with all stakeholders to ensure a smooth handover and to minimize disruption to business operations. Surety professionals play a crucial role in ensuring that bonding requirements are met during the transition. It’s important to engage sureties early in the process to avoid any delays or disruptions in bonding lines, especially for ongoing or future projects.

Continuity Planning for Departure of One Owner in a Co-Owned Business

In construction businesses with multiple owners, the departure of one owner can create tension and uncertainty, particularly if the remaining owners are unprepared. A well-drafted Buy-Sell Agreement, developed in consultation with legal counsel, is essential to govern the transition and ensure fairness to all parties.

Buy-Sell Agreement: This agreement should clearly define the terms under which an owner can exit the business, including how the exiting owner’s share will be valued and purchased by the remaining owners. Legal counsel should ensure the agreement includes payment terms and any necessary financing arrangements to complete the buyout. For construction companies, it’s crucial to address how the departure impacts bonding capacity and project continuity. The surety will also need to review and possibly approve any changes in ownership to ensure that bond obligations remain secure.

Valuation Methods: The Buy-Sell Agreement should specify an independent and fair valuation method for the departing owner’s share of the business. This helps prevent disputes and ensures that the process is transparent and equitable. In the construction industry, the valuation should take into account the firm’s bonding capacity, ongoing projects, and client relationships. Surety bond producers may need to provide input on how the valuation impacts the company’s bonding line and future bonding potential.

Impact on Business Operations: The departure of a co-owner may require a reassessment of the business’s strategic direction, particularly if the departing owner played a significant role in decision-making. It’s important for the remaining owners to communicate clearly with employees, clients, and other stakeholders to maintain confidence and stability during the transition. Surety bond producers should be involved to assess how the ownership change impacts bonding capacity and project obligations. Additionally, they may need to help facilitate the process with surety underwriters to ensure continued support.

Common Considerations

While each ownership transition scenario presents unique challenges, several common themes emerge:

Proactive Planning: Whether dealing with the death of an owner, the departure of a sole proprietor, or the exit of a co-owner, proactive planning is crucial. Waiting until a crisis occurs can lead to hasty decisions that may jeopardize the future of the business. Proactive planning also ensures that surety bonds remain intact, protecting both the business and its clients.

Legal and Financial Preparedness: In all scenarios, having the right legal and financial structures in place—such as succession plans, Buy-Sell Agreements, and life insurance policies—can mitigate risks and ensure a smoother transition. For construction businesses, this preparedness must include considerations for bonding requirements and financial obligations related to ongoing projects. Surety bond producers can assist in evaluating these structures to ensure they align with bonding needs.

Communication: Clear and consistent communication with all stakeholders is vital. Whether it’s sharing Business Continuity Instructions with family members or discussing the terms of a Buy-Sell Agreement with co-owners, transparency helps prevent misunderstandings and builds trust. In construction this includes clear communication with surety bond producers and clients to ensure continuity and confidence in the business. Keeping sureties informed is critical to maintaining bonding capacity and avoiding any issues with existing bonds.

Ownership transitions are inevitable, but with the right continuity planning, construction businesses can navigate these changes successfully. By understanding the unique challenges of each scenario and taking proactive steps to address them, business owners, surety professionals, and financial managers can ensure that their companies remain resilient and poised for continued success.

David V. Jean, CPA, CCIFP, CExP, is a principal at ARB (https://arbcpa.com/accounting-firm-portland-maine/) and the Practice Leader for the firm’s Construction & Real Estate, Succession Planning, Professional Services Firms, and Business Advisory Services Teams. Jean provides specialized tax, financial accounting, and business advisory services primarily to construction, real estate, and manufacturing companies. He is a participant on the NASBP’s Certified Public Accountant Advisory Council. He can be reached at [email protected] or 207.772.1981.