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Succession planning may be one of the most important strategic initiatives a construction business owner and the executive management team need to execute. But in practice, it is commonly the last item on the list, as leaders struggle to balance long term strategy with day-to-day demands.

The successful continuation of any construction firm’s operations, reputation, and current and long-term value depends on a well developed succession strategy. While these plans must consider the needs of owners, executive managers and others within the firm, they also must consider the impact on outside business partners, including surety relationships.

Because surety companies evaluate construction companies on the overall perception of the firm’s ability to complete a given project successfully, contractors should realize the importance of minimizing distractions during a contemplated or imminent ownership transfer. Construction executives should evaluate their plan from the surety’s perspective. This ensures the firm maintains technical and operational excellence, cultivates a new relationship between the surety and the next generation of owners, communicates the plan’s projected cash flow implications and demonstrates the ability to maintain a sound financial position throughout the process.

Whether the plan includes a transition or sale to family members, employees or an outside party, communication of the details early and often will help ensure one of the construction firm’s most significant financial partners will be able to continue to support the firm.

When evaluating a succession plan from the perspective of the surety, executives should focus on maintaining the following four areas.

Technical and Operational Excellence
Perhaps the first and most significant question for the surety is: Will this transition compromise the firm’s technical and operational excellence? The surety will want to ensure that the firm’s expertise, industry connections and acumen will not be at risk once the business 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 work in the field and, subsequently, the firm’s financial performance.

Surety Relationships
If the plan includes a transition to family members or employees who currently work for the construction firm and are familiar with the day-to-day operations, it is imperative that those key executives be included in regular meetings with the surety. Allowing the surety to interact with the team well in advance of any transition will not only reduce uncertainty for the surety, but also provide an opportunity to obtain its perspective on the future leadership team.

This insight will put the construction firm in a better position to secure necessary bonding throughout the execution of the plan. It also will help keep continuing executives focused on the operations of the firm—rather than on “selling” the new leadership team—during the transition.

Projected Cash Flows
A succession plan will only be successful if the construction firm can meet proposed financial obligations. The surety will be paying particular attention to the viability of the financial projections.

Projecting cash flow requirements goes far beyond 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 also should include cash flow implications related to the firm’s ongoing operational needs. When the surety reviews the plan, it will need reassurance that the contractor has considered significant future projects, equipment acquisition and maintenance, employee compensation and compliance with new regulations.

Strong Financial Position

Although some succession plans may occur relatively quickly, many are implemented over a number of years. The surety will be looking for the construction firm to demonstrate a strong financial trend throughout the transition process. This will go a long way in proving the firm’s ability to execute the plan.

Construction firms should be ready to react to internal or external factors that require changes to the plan. Preemptively providing the surety with updates as challenges are faced will provide peace of mind that the next generation of executives has the ability to navigate unforeseen distractions.

Succession planning for construction companies is complex and requires owners and executive management teams to exert significant effort and focus. Anticipating stumbling points from the surety’s perspective will help simplify operational challenges during this emotional process.

Bryan C. Porter is a director in the audit, accounting and consulting department of Ellin & Tucker, Baltimore. For more information, email bporter@ellinandtucker.com.

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