Maintaining Surety Credit in Times of Growth and Transition

Nina Conner News

Posted by Erik Mueller, OldRepublicSurety

Most construction companies in the U.S. are owned by an individual or the members of a family. Yet, according to the Family Business Alliance, only 30% of family-owned businesses survive into the second generation, and just 12% remain viable into the third generation.

That means when owners are ready to retire, they likely will sell to someone outside the family. And with greater frequency, we’re seeing owners sell to private equity firms. From a surety’s perspective, may not be a healthy sign. Most of the time, an acquirer’s aggressive growth philosophy is at odds with the steady, incremental growth we like to see in companies.

Private equity firms seem to be willing to sacrifice bottom-line profitability for top-line revenue since their goal may be to sell the company to another buyer in a few years. Often the balance sheet is not strong enough to support such rapid growth, and this in turn can jeopardize a company’s bondability.

Our advice: Don’t sell to a firm that plans to use debt to achieve fast growth. If your balance sheet gets turned upside down, your surety credit may be reduced or cut off. Your company might not be able to bid on projects that require bonds.

As a seller, you may be thinking, “That’s the new owner’s problem, not mine.” It is your problem, though, if your sale has an earn-out. With reduced bond credit, you may not be able to meet your earn-out goals and have to forfeit part of the proceeds of your sale.

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