Growing up in a family that owned an electrical contracting business, I was always surrounded by a strong work ethic and dedication to the business. While my role was focused on pulling wire, bolting on stadium light pegs in the middle of winter, and sweeping floors, the heartbeat of the company was my father. When something happens to the heartbeat — in this case, a serious illness that required significant time away from the company — the rest of the structure can start to crumble. A 20-year-old company can go out of business in a flash. Not having a proper — and clearly documented — continuity plan in place for business succession in the event of an unforeseen disability or death could have compounding and detrimental effects on a company’s ability to weather the storm.
Part of the problem is that we never want to think about our mortality or potential inability to provide, and much in the way we think about life insurance and estate planning from a personal standpoint, it’s much easier to push those conversations (and costs) down the road to avoid decisions than to think about our own fate or the fate of a company.
Sometimes, we just get busy and life gets in the way. The good news is that when you expect the unexpected you can mitigate the hardships and provide a path to recovery if needed.
A few items to consider as you start business continuity planning:
- Do you already have a formal transition plan in place, or is the future of the business unsecured?
- Who would the ownership transition to: a family member, key employee, third party? All three options provide their own unique challenges.
- Is this a formal plan that is funded through proper techniques? Perhaps a buy-sell agreement (with a life insurance plan in place) or some other method? Without funding, the financial burden can be large and spouses/family members may need to be bought out. Most times, there is a loss of funds and diminished cash flow as transitions are taking place. The ability of a company to operate both financially and from a personnel standpoint as it previously was (think maintaining the same bond program or not having a key estimator leave) is paramount.
- Is the plan to simply close the doors of the business? If so, is there a key employee or other company that can handle the remaining work so that it’s not the burden of a family member who isn’t involved or capable of running the business? What is their incentive (perhaps profit sharing on any projects they complete)? Drafting a simple management agreement is a good solution.
- What are the legal and tax ramifications of any transfer?
The only action that shouldn’t be taken is to take no action at all. A qualified continuity planning attorney would provide the best path and create options, but even an internal plan that everyone is aware of is a great starting point.
Lastly, remember that continuity planning is going to be a revolving door as companies grow, change personnel, and personal situations evolve, so it’s a good idea to review the plan in place regularly. The surety company wants to know that continuity planning is either formally in place or that key stakeholders are in the process of coming up with a plan.
As someone who has seen the effects that unforeseen circumstances can have on a family and construction company when things don’t go as planned, I urge you to have the conversation at your company. Continuity planning is so important to our industry, which consistently has one of the highest default probabilities of any industry out there. Pair that with the results of the 2017 FMI study that showed that only 22% of contractors have a formal continuity plan in place, and the results could be disastrous. If you haven’t put together a plan for the succession of your business, expect the unexpected, and be a step ahead.
For more advice on continuity planning, contact an appointed agent, or reach out to an Old Republic Surety branch nearest you.
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