Lawyers and other professionals talk all the time to Contractors about having good contracts or having their contracts reviewed, and rightfully so. But one contract in particular that every construction business owner needs, and gets overlooked even more, is a buy-sell agreement.
A “buy-sell” is a contract formed by the business owners that describes how ownership changes will take place. Like a good insurance policy, one of these arrangements will help protect the owners in tough times. One of the partners pass away, where do his shares go? Do they go to his wife, or his kids, someone else? Did the surviving partner just find herself with a new partner who has zero experience in construction (or who they’ve never gotten along with)? Or two partners reach an impasse on the critical decisions or direction of the business, and no longer want to work together. Now what? A strong buy-sell can resolve these issues.
But in construction, a good buy-sell agreement can be even more critical. Without a business continuity plan, and the means to execute it, contractors may find themselves unable to get the bonding they need for their next project or phase of growth.
A buy-sell agreement creates a planned and orderly transfer of ownership, especially when one of the owners dies, and it can help avoid other pitfalls when an owner fails to plan properly. In other words, security, continuity, longevity – all of which help maintain the bondability of the company. OK, fine. You’re convinced. You start to have a buy-sell agreement put together – but how is the surviving owner or key employee going to buyout the deceased owner’s interest?
Life insurance is the logical choice to fund buy-sell agreements — because the death benefit will be available when it’s needed and the premium expenses are typically manageable. The alternatives are generally not nearly as attractive from a surety’s perspective since they usually involve taking on debt (e.g., bank loan), which can impact some key ratios on the balance sheet and negatively affect cash flow of the business. These are important factors sureties consider when underwriting a bond.
In addition to a contingency plan to transfer ownership after one owner passes away, she should have a succession plan for when she retires. Surety underwriters typically like it when there is a planned transfer of stock from one generation to the next and the current owner is grooming a new owner to run the company. An orderly succession gives the surety confidence that when the ownership interest eventually transitions, the new owner will be capable of leading the company and keeping the business going.
Regardless, it is critical to have the input and involvement of your most trusted advisors, specifically, the company’s bonding agent or surety, your construction attorney, and your construction-specific CPA, all of whom are aware of the winning (and losing) strategies of employing a buy-sell and succession plan. And perhaps more importantly, you’ll be giving your family, your employees and yourself peace of mind that you’re securing your company’s future for generations to come.