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How ESOPs and Continuity Planning Affect Surety Bonding

Posted by Ironwood Property & Casualty Insurance Brokerage on Aug 31, 2018 11:33:41 AM

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When it comes to succession planning, most people think of protecting their legacy by arranging their personal estates ahead of time, and the same holds true for business operations. Depending on if and how continuity plans are structured, a company may become employee-owned through an ESOP (Employee Stock Ownership Program).  The stability of ESOPs can strongly influence the outcome of obtaining surety bonding and are often underutilized in the construction industry.  There are many factors in bond underwriting, but one of the most under-discussed is continuity planning.

What is a surety bonding?

Surety bonds involve three different parties: the obilgee, the principal and the surety company. Surety bonds ensure that contractual obligations and financial commitments to the obilgee are completed as required by the principal.  The surety serves as a safety net to the obilgee in case the principal can no longer fulfill their requirements.  However, just like any other area where there is risk on investment, sureties are issued to those companies who present themselves as low liabilities.

What role do ESOPs have in continuity planning?

Every company should have a continuity plan in place in case an emergency arises such as the company’s leader experiences a sudden death.  There are a few different avenues a company can go down when developing a continuity plan.  One of these options is to transfer the company to its employees as an ESOP. ESOPs are not only attractive from a financial perspective, but are a benefit to the employees.  Many times they serve as a way to retain employees and boost morale.

How can ESOPs best position themselves for surety bonding?

  • Just like with any other business transaction, consistency is key. ESOPs that can show a long employee tenure, especially for higher ranking positions, increase the likelihood of a favorable surety bond program.
  • Cash flow and positive balance sheets are always important when evaluating an ESOP.Trying to obtain a surety is no exception to this.  ESOPs that can show a history of positive balance sheets and cash flow are favored by surety bond companies. 
  • When set up correctly, ESOPs can take advantage of huge tax benefits which should automatically serve as a boost to their bottom lines.

When working with surety bonds, the more planning that can be done ahead of time and the better an ESOP can show that they are a safe investment, the higher the chances are of being able to obtain a surety bond.  When an emergency or change in leadership occurs, well planned companies far exceed companies that do not have a plan in place and sureties will always choose to a company with a well-rounded continuity plan and healthy balance sheet over one with gaping holes and liability.

For help with your company’s continuity planning or surety bonds, please contact Ironwood today.