EP7 - ESOPs for contractors - discussion with Michael Strahan of KPS Bonds out of San Diego CA.
Mar 8, 2021
auto_awesome
Michael Strahan, a bonding expert, discusses ESOP transactions for contractors. Topics include structuring ESOP deals for bonding, government certifications, and personal indemnity. Insights on transitioning to an ESOP, managing debt, communication with surety companies, and importance of pre-qualifications in bonding.
ESOPs provide contractors with a tax strategy, continuity plan, and employee rewards for successful transition.
Proper planning, communication, and negotiations with bonding companies are crucial for addressing working capital and debt concerns effectively.
Deep dives
ESOP as a Strong Exit Strategy
ESOPs are considered a strong exit strategy for contractors when the proper management team and structure are in place. They offer benefits such as a tax strategy, continuity plan, and employee rewards. Initially, owners may need to personally guarantee the debt until they are completely bought out, but eventually, personal indemnity can be released as the ESOP-owned company becomes financially stable.
Planning Process for ESOP Transition
A comprehensive planning process is crucial for successful transition to an ESOP. It involves conducting a company valuation, building a feasibility model, and engaging in open communication with the bonding company and surety to ensure alignment. Early planning allows for adjustments in working capital and debt structures, facilitating a smoother transition.
Managing Working Capital and Debt Structures
In an ESOP transaction, working capital requirement needs to be negotiated to ensure the company can maintain operations effectively. Managing debt structures like shareholder debt and hard debt is vital for maintaining balance sheet health. Early planning and continuous communication with the bonding company help address working capital and debt concerns proactively.
Addressing Personal Indemnity and Pre-Qualification concerns
Dealing with personal indemnity issues during business transitions involves gradually releasing personal guarantees as ownership shifts to the ESOP. Pre-qualification challenges due to changes in balance sheets post-ESOP can be mitigated by providing cover letters from CPAs explaining the new financial structure. Proper documentation and communication ensure smooth transitions and maintain contractor credibility.
In this episode - Michael Strahan and I discuss how the bonding company's look at the ESOP transaction. Very helpful information related to possible structuring your ESOP deal as a contractor dealing with future bonding, government customer certifications, and personal indemnity.
Get the Snipd podcast app
Unlock the knowledge in podcasts with the podcast player of the future.
AI-powered podcast player
Listen to all your favourite podcasts with AI-powered features
Discover highlights
Listen to the best highlights from the podcasts you love and dive into the full episode
Save any moment
Hear something you like? Tap your headphones to save it with AI-generated key takeaways
Share & Export
Send highlights to Twitter, WhatsApp or export them to Notion, Readwise & more
AI-powered podcast player
Listen to all your favourite podcasts with AI-powered features
Discover highlights
Listen to the best highlights from the podcasts you love and dive into the full episode