Latest / Construction ESOP Collective / Protecting Bonding Capacity During an ESOP Transition | Alan Starks

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Protecting Bonding Capacity During an ESOP Transition | Alan Starks · Construction ESOP Collective

• speaker-0: I I'll remember this forever. That I'd go into their office and they had whatever at the time, 300, 350 employees in a small town. And when I'd asked how the year went, ⁓ you know, maybe it was a tougher year, he wouldn't tell me he'd you know, he'd tell me what they, you know, the PL said. But he says, you know what's more important, Alan? I, you know, I put food on 300 families tables every day for the last year. And that's more important to me than what you're gonna tell me, you know, I did or didn't do right on my PL. And Like again, those are the type of people that, you know, tend to own construction companies and build them is have that type of mindset. And then the ESOP, like, you know, that's the type of guy that Esop works perfect for, where he's just proud that he's providing a living for all these people in town. speaker-1: Welcome to the Construction Aesop Collective. I'm Chuck Mazzanti, Senior Vice President at Christiansen Group Insurance, and this is the show where we explore the wins, challenges, and real-world lessons of employee ownership in construction. Each episode brings insights from CFOs, former owners, and employee owners who are building something bigger together. Let's get into it. Today I'm joined by someone I have the pleasure of working alongside every day at Christiansen Group. Alan Starks, our senior vice president of Surety. Alan brings a unique perspective to this conversation. He works alongside Aesop-owned contractors in his day-to-day, along with being an employee owner himself. We break down how Surety companies view an Aesop transaction. Why early communication and planning matter and what contractors can do to make sure their bonding program doesn't skip a beat is ownership changes. Here's my conversation with Alan Starks. Alan, great to have you on the Construction ASOP Collective. speaker-0: Thanks for having me, Chuck. Appreciate you ⁓ having me on here. speaker-1: Yeah, no, it's great. And so a little bit of background for ⁓ our audience. It's Alan Starks. He's our head of surety and bonding at Christensen Group Insurance. So a teammate of mine. So I'm a little biased, but I I think you're the best in the business. And I I'd like to give the audience just like a 10, 10,000 foot overview of you know who you are, why you're at Christianson Group, and and you know, why you're passionate about surety and bonding for our e sub contractors. speaker-0: Absolutely. ⁓ so like Chuck said, Alan Starks, I'm the senior vice president, surety practice leader here at Christensen Group in our Eden Prairie office. ⁓ I joined Christensen Group ⁓ about five years ago in the spring of 2021, after the agency that I was at ⁓ had some transitions and we all became free agents. I was by ⁓ a lot of dumb luck in my life. I happened to own my own book at that time and chart connected with Charlie. Charlie was looking to start a surety practice and I happened to have a bolt-on shirty practice at that time ⁓ that was able to come in and and that's why I met Christensen group. ⁓ the value of the eSop ⁓ Charlie presented me was one of the big factors of doing that. I've been in the business since 2003. My father ⁓ got me into it ⁓ at that time. I didn't know what I was doing, but ⁓ back in those times shirty was pretty easy. And I just saw that my there was a lot of golf and beer drinking going on in the shirty business. I said, I that as a 27-year-old kid, I said this seems like a great. Great job. And then ⁓ 2008 came and learned that we actually had to really do some roll up our sleeves and do a lot of work in the business. But ⁓ so I've been doing it for 23-ish years now. ⁓ we've bit since we've been at Christensen Group, we've built out the team. I brought my team from my prior agency with me. There was ⁓ three of us in the ⁓ department then besides myself. Now ⁓ in the last year we've added two more. So with the growth at CG kind of us handling all the different offices and ⁓ markets that we're in, we've had some growth. So we're able to Put on a couple more employees and to to allow me to spend more time with the clients, with the other producers here that bring us, you know, bring us into deals and and do more of that. So ⁓ that's kind of the big overview, I guess. We have, you know, depending on the day, 18 to 20 different surety markets we're working with here. So we do get a broad view of the surety underwriter marketplace. ⁓ from the construction side, the contractors work with, we've got a little bit of everything ⁓ by Because we're based here in Eden Prairie, we ⁓ are, you know, I brought a large book over with us. Most of our clients are in the Minnesota, North Dakota, South Dakota area. We have done surety work in the Kansas City, Texas's, and Chicago offices as well, but we're still fairly, you know, upper Midwest based ⁓ from the large part of our book, you know, pretty evenly split between our heavy highway and vertical contractors, you know, trades in each side of those, things like that. So again, you know. pretty spread out book, you know, from some pretty large ⁓ contractors in all the spaces doing, you know, three to four hundred million down to Amon Pas starting off a a shop on day one that that knew us through their prior employer and and we help them out from their first, you know, couple hundred thousand dollar bond that they'll ever need. So ⁓ you know, good view of the market. We don't, ⁓ I guess we don't handle some of the jumbo jumbos, but other than that we see a little bit of everything. speaker-1: Yeah, no, it's awesome. I mean, I could vouch for for the team. It's ⁓ it's it's one of the best in the business. And I've been at some of the biggest brokers in the world and and you and your team, just the white glove service that that you give every client, not just the jumbos, but down to the startups. ⁓ it it makes a big difference. And before we get into the specifics of you know, surety eesops and all that, since we we are unique in the sense that we are a hundred percent Aesop owned. Since two thousand six, I'd like to, if you wouldn't mind, now and tell me what ESOP means to you and and what it's done for you and your team and maybe the difference it it's made in in servicing your clients. speaker-0: Yeah, and I mean I go back a little bit to the prior agency I was at, they were a partial ESOP. So I had a what I thought was knowledge of an agency ESOP then. and then, you know, so when I came over here and Charlie presented the ESOP, to me, it was a part of our decision to come here, but it was some other things that really drove the bus ⁓ on what that was. And I said, Yeah, the ESOP's great. If it you know, but it but I'm coming here because of our the value that we put of our clients here at Christensen Group that we do You know, our three C's, our clients are one of the main things that we we focus on here. ⁓ but now after being here for five years and seeing how a well-running SUP works, you know, it's amazing what that provides to to the team and all of us that work at Christensen Group. You know, having somebody like Charlie Christensen that runs that and that's his passion, you know, provides value to all of us and the you know stability of our retirement and all the different things that it does, stability of the company, ⁓ knowing that we don't have ⁓ something coming from left field one day. And we all are a member of a different organization that we didn't know was coming. So ⁓ the stability, you know, financial security is great. And and I don't want to make light of the financial security that that provides us, but it's more it's stability across the board, knowing that we don't have one group of owner here here that can make decisions that, you know, you and I chuck are equals and and our support staff are equals in decision making in this agency is is huge. And I think we feel that in the culture that we're all bought in. ⁓ you know, the everybody, you know, the the Bad example. The receptionist has just as much power as you and I do, Chuck. And I love that. You know, ⁓ that that once they're, you know, given their eSop shares, they've been here a year good eShop shares. We're all the same here. We're all pulling the same direction. ⁓ you know, I don't know if you talk on your other ⁓ podcast, but you know, our ESOP party is just a an absolute blast to see everybody that we work with every day again. This goes more to the financial side, but getting a financial lift. And, you know, some of the you know, some people it's you know, if they've been here a long time, they're they're getting a lot more money than they ever thought they'd have in life in just one year and that lift. And that's really cool to see from, you know, the agency across the board. speaker-1: Yeah, yeah, it's hard to hard to believe, but we're what two weeks out from our our annual ASOP gala. So I'm I'm pumped for that. ⁓ well thanks, Alan. So so the next thing is I I'd like to put the audience in in your shoes when you're talking to a client or prospective client and and they say, Hey Alan, you know what? We we're looking to have an exit in the next, you know, whether it be the next five years, 10 years, or maybe they're like, Hey, we want out. In the next year, and we're thinking about going ESOP. I I'd like to know what's the first few thoughts that that you think about when you hear that. speaker-0: Yeah, I mean it changed the question a little bit there, Chuck. You know, when they used to talk when usually I get brought up in an exit strategy way before there's thoughts. It's, hey, five years from now, I want to exit. What's the what's the story? ⁓ what's the best ways to do that, Alan? ⁓ and then it gets to what's their goals. So, you know, if they're just looking for a financial transaction, ⁓ and get all the chips off the table, get a max and get some big, you know, the dump truck full of cash coming in the door, most likely they're gonna go the PE route. ⁓ but that's I we've had very few of my close clients go the PE route because most of them, when you sit and talk to this entrepreneur in my book and most of the CG book, I think in general, ⁓ on the P and C side as well, is entrepreneurs that started the company, either, you know, a family member and they took it on and grew it, or they founded it or whatever. When you talk to those business owners, you know, they don't want the dump truck full of cash and to disappear off in the sunset and move to Florida and never think about their company again. And in construction, especially. These entrepreneurs have put their blood, set, sweat, and tears into it. So we start having these exit discussions. It talk we're talking about legacy and all these different things that they want before we get to the financial piece of it. So when you s when we sit down with somebody and say, Yeah, I want to, you know, when in retirement, I want to drive my grandkid over to the the shop and kick some tires and have coffee with the guys and and you know, and still be able to show up and and have everybody know who we are. That's what the legacy they want is. And that they they want to see the name of their company driving down the road and point out to the grandkids that that's us. That was what I did. ⁓ and so when when you have that mindset, then we start talking about whether we're transitioning to, you know, family members, you know, managers, next generation, one way, shape, or form, Aesop, you know, what the next way to do it is. And, you know, so the if again, and it's hard to if you especially if you don't have family involved, close family members, then you don't want to look like you're giving it to one or two, you know, a handout to them. And that's where the ESOC conversation starts to make a ton of sense where hey, these X amount of employees got me to where I am today. I want to transition to all of them. Let's look at the ESOC route. And so I it's a it but it's again it's about the values and you need to have a legacy transaction that wants to happen there because you are going to have a little bit different transaction than you would with the PE firm that just backs up the dump truck, dumps some money and but they're going to change the name A year later, and you're not welcome to come, you know, sit in the shop with the mechanics and drink coffee and and tell the stories you like to tell. So that's a big piece of it to me is you've got to have, you know, the first steps is is is creating that mindset of what do you want ⁓ the future to look like. And if you click, you know, a lot of my clients think they want the, you know, they're sitting drinking coffee with their other construction owners, and you know, probably one of them had an ESA or a PE transaction. And they really want this, they want to be able to brag they got X amount of dollars. When you sit and break down with them, what they're gonna do with X amount of dollars is where they start to struggle. And where we usually turn into a legacy type transaction is these are guys that didn't live big lifestyles and you know have putting every dollar back in the business, even if they had all the money in the world, they're probably not gonna change their lifestyle. And so what what means more to them had being able to say that they got X and that? But what would they do with the money? Do they wanna start ⁓ you know, scholarship funds for their, you know, legacy of their Do they want to give to the church? Do they want to give to an organization? Because the reality is they're going to have more money than they ever thought they needed. And now if we can go to the ESOP route and give them a really big, you know, close to that same valuation and get the legacy piece to it, now we're getting that's when we get the things to the ball to start rolling of what makes sense to that entrepreneur trying to look at the exit. speaker-1: Yeah, no, you you bring up a really good point as far as being able to go back to the shop, share that with the grandkids, ⁓ have you know, go over with your dog. It's still, even though you sold the company within an Aesop, you're still part of it. You know, to your point, Alan. I think you go PE, maybe you get a really ⁓ hands off, but oftentimes they, you know, it's their company. And after a year, two years, three years, that when the earnout's done, you you may not be welcome back. You know, and it it's funny, I was at the NCEO conference two weeks ago and on one of the panels ⁓ it was about MA in in the ESOP space. And they said, Listen, we can't sell to PE because we won't be able to go to the grocery store or the local diner because they were so prominent in their community. And so they're the legacy means so much more than just your own family to a lot of these contractors, as well as the construction business is so ⁓ you know built around your employees. If you don't have good employees in a labor force, you don't have a company. And so I I'm never going to argue for a founder or a multi-generational construction firm to take a haircut. It's their business to do with it as they they please. But I think a lot of people are surprised when you go Aesop, you can get damn near close to the money you you would ever need or want. And then there's a lot of legacy things that it that it solves that other exit strategies just can't. speaker-0: Say it's a good point about the the diner and the stuff. It's like, you know, my biggest ⁓ clients with, you know, employees, one of them I I'll remember this forever, that I'd go into their office and they had whatever at the time, 300, 350 employees in a small town. And when I'd asked how the year went, ⁓ you know, maybe it was a tougher year, he wouldn't tell me he'd you know, he'd tell me what they you know, the PL said, but he says, you know what's more important, Alan? I, you know, I put food on 300 families tables. Every day for the last year. And that's more important to me than what you're gonna tell me, you know, I did or didn't do right on my P and L. And like again, those are the type of people that, you know, tend to own construction companies and build them is have that type of mindset. And then the ESOP, like, you know, that's the type of guy that Esop works perfect for, where he's just proud that he's providing a living for all these people in town. Yep. speaker-1: No, I couldn't agree more. And and so what about from the surety underwriters point of view? So you're having this conversation with your clients or prospective clients, and you're part of the planning, you're integral in that process. But now we need to make sure that it's served up to the surety market to not have them get skittish or scared. Because you know, for a lot of our contractors, especially heavy civil, it's it's all you know, surety-backed business. And so what are you doing from that standpoint to educate our clients, but also make sure that our underwriters really understand esop and so it doesn't become a deal breaker or a big bump in the road for the contractors that are looking to go eSOP. speaker-0: Yeah, and there's two pieces to this. And you know, kind of surety one ⁓ one is that from a surety underwrite, we're you know, surety is a indemnification product. It's non-insurance. So if there's a loss, we look to have assets to indemnify the loss. So again, that is that's back surety forever. So when we're surety's underwriting a balance sheet, we want equity and working capital there to do it. By definition, when we do an ESOP transaction, that balance sheet's gonna flip ⁓ and you're gonna have negative equity. Because we're going be using the multiples of book value. And one power we get to the price, the sale price, it's going to be on a multiple of something other than just pure book value. So we're going to create some negative equity in that transaction. ⁓ So we have to show the surety that, you know, and there has to be some support from probab the seller in this situation on the notes. We can subordinate that, you know, there's probably some portion of the financing that's a bank financing and some that's a seller note. And if we if the seller is willing to leave some chips on the table in the form of that note ⁓ saying that they're not going to take that money out if they're unless the surety is okay with it, then the surety is going to add that back to the balance sheet, create positive equity again here, and then the surety is going to have equity that we can provide a surety program based on that. ⁓ again, we're gonna in our world, we're gonna fight and say the working capital is more important than that equity, but we still have to be in a position that the surety has some assets that they can base their case on to go after. And so as we'll get into more on this. ⁓ throughout the discussion here, Chuck, you know, the one piece that you that we definitely want to educate the ⁓ sellers on if they want to go ESOP is just like in a legacy type transaction to a next generation family or non, there's gonna be have to be some help from that seller. So be they want to enter this transaction maybe a few years before they really want to be have all their chips off the table because they want to project when the chips are going to be off the table and they're gonna, you know, get all their you know, the different risks that they have off the table. So if we want, you know, our risk off the table five or seven years from now, we should probably start that, you know, e legacy or continuity down to the next generation or into an ESAP. We should start that discussion sooner rather than later. So they can still hit their de-risking at the same timeframe to or try and hit that goal at that same time frame. speaker-1: Okay, yeah, that makes sense. And is there is there anything that you know you're you're discussing with our clients or prospects in terms of different financial metrics or or ratios and so forth that you want them to uphold or start being able to have all their ducks in a row, so to speak, before we start talking to the the surety underwriter? speaker-0: Yeah, I mean the biggest piece, especially if we're looking at a transaction of any type here, is making sure that working capital is going to be a strong working capital case. I mean again, surety 101 kind of is you want a 5% working capital case or 20 times the backwards, 20 times your working capital is your max aggregate program. So that's kind of the the first number to start with. The ac we can because of the that we've got some moving piece on the equity, the subordination, or however we're gonna work through the again, every ESOP transaction is different. Well, what's seller note, what's bank, and what we have to work with there to create some equity through different metrics, that working capital is going to a true number. We want to make sure that we're maintaining that. We're going to want the the ESOP advisors, the banks, everybody giving us good pro forma numbers to say, hey, this working capital needs to be here. The next big number we're going to look at is a a debt-to-worth number, especially if we're talking about our civil contractors, where what they already have some leverage on that equipment, most likely, and making sure that debt-to-worth number doesn't really go above that four to five to one is kind of it or if we do go above that, that we've got a quick plan in place to bring it back down, that we don't have, you know, plans to go out and acquire a bunch more new equipment that are heavily leveraged or whatever it may be that we can work through. ⁓ again, the equity numbers one we can manufacture a little bit different through subordination and different other ways to do it, but we really want that working capital and debt to work to still fit into the the surety kind of 101 metrics and probably be a little stronger than we'd normally want because we're our equity case might not be where we would have it. And then put the game plan together of saying how we're going to get the equity to that normal standard mark metric. And then we can start kind of really ramping from there from the Shirdy program. speaker-1: Sure. No, that makes sense. speaker-0: I guess to sum it up, Chuck, the we'll look at working capital equity and your debt to worth. I mean, I would talk about a lot more surety metrics, but those are kind of the three big ones I think in any transaction we're gonna do that we wanna focus on to make sure that those that, you know, at bet hopefully two out of three of those are really healthy to kind of overcome one that might be weakened by the transaction. speaker-1: Well, and and one of the big C's and ⁓ that surety underwriters are looking at is is character. So I I would argue that ⁓ for everything we've already discussed in this podcast, character is is being highlighted via the the ownership choosing to go ASOP and caring about their employees and being able to be around in some shape or fashion to have a you know an ongoing connection to the business because you know, in a PE deal outside of an earnout. If they sell and they vanish, a lot of times these owners are integral in the the go forward basis of the business, having relationships with customers and in the community and so forth. So for some of the perceived negatives with going Aesop as it pertains to surety, which I think those are in large part going away with the proper planning and communication, I would say one of the biggest obvious benefits would be that that character. ⁓ piece of it in in a sale. speaker-0: I agree. You've got the character, the ownership, but you also the chances of keeping your your top managers around and foremen and superintendents and all important pieces. It's much more likely in an eSop transaction than in a PE transaction. Like you said earlier, your the conference you're at, the guy said he didn't want to go to the supermarket anymore. Yeah, because all those guys are looking for a new job when the P happens, they they know that there's a change in culture. The the positive of that, the ESOP transaction is that, yeah, the The character and the culture of the organization stays the same because we've got we're not bringing in new blood. We're not bringing in new people. We're we're letting the people that are already there and made the the seller successful. We're allowing them to run it. I mean, what more can we want as a surety underwriter to know that the exact same people are running the ship? We don't have some PE firm that could come in and grab a bunch of cash one day when the cash shows up to use it somewhere else. Like it's all it's the top people that made it what it was for the last 20, 30 years that are taking over. You know, in my mind, that's what I want in a transaction is knowing that the people that made it successful are still there. And the again, we can't promise anything in ESOP transaction, but it's a heck of a lot better chance they're sticking around than in a PE transaction. speaker-1: Yeah, I I agree a hundred percent. And and when you start, so we we've kind of covered pretty well like our internal discussions with with customers and prospects, getting them ready, making sure that their metrics and and all those sorts of things are in line. Now let's let's cross the barrier into your conversations with our actual surety underwriters. What are a couple things that you would like esop Contractors or prospective contractors looking to go ESOP, I'd like to inform them on what are we hearing from our underwriters in terms of questions they're asking, scrutiny they're putting on certain things and and so forth. speaker-0: I it's gonna go to sophistication. You know, if you're gonna be doing an ESOP transaction, you know, your accounting department just to even get to that point, you're gonna have to be a fairly sophisticated contractor to deal with, you know, the valuations and all that, and to have so your accounting department, it's it's putting together sophistication of the proformas of the post-close day one. What do the balance sheet look like after ESOP credit jacks? It's also then forecasting out, you know, cash flow, you know, all the debt service you have to pay. as we get down the road, the future obligations for buy for ⁓ when as people retiring, we have to buy out their their shares and repurchase obligations, but it's showing the sophistication that you can look forward and improve this out and you know and risk you know, do some stress testing on to say, hey, if this happens and it's not the perfect year, we still got this covered. It's showing the underwriter that we have plan A, B, C, D, E, F, G for, you know, cash flow. If You know, because number one, the cash is king in any business. And so it's showing the underwriter that, hey, yeah, we're gonna do this. Yes, we're the balance sheet looks a little different, but here's all the steps we've taken to show that this isn't riskier than we were before. And so I think the big key is transparency, communication, and then just being sophisticated enough to be able to put together all the projections they're gonna want to see and show them that you've already stress tested them, show them that you've already have backup plans in place so that you know. Again, if whatever it is, if the you have a reduced bank line because of the this that we've got, you know, that we've already had conversations with, for example, the seller and say, hey, if we need a backstop, are you willing to to put a million back in for the short term to allow us some cash flow for a startup cost if we're a heavy similar contractor in the north here with seasonal and we have a lot of startup costs? Are you willing to give us a short term, you know, seller finance line of credit to get us up and running to mobilized for the year? It's getting way in front of, you know. The surety underwriter is to want to go, well, but what if this happens? And you can boom tell them what that your plan for that already is. That's where you're going to get that conversation on a really good path when you sound like you've already thought through all the questions the underwriter told you. speaker-1: A hundred percent. Yeah. If you could, I call it the eight mile approach, right? If you could confront the objection before they even have it, it it just goes so much more smoothly. ⁓ and so that's more from the lens of of going eSOP. What about you touched on the ROs or repurchase obligations? You know, we you flip the balance sheet, you got a bunch of debt, but now in in most cases, especially if you go 100% S Corp ESOP, you got no federal. Income tax. In most cases, you don't have state income tax. So you have all this excess cash flow to pay down the note and and start really looking super profitable. ⁓ but then you become a mature Aesop and fast forward seven, eight, nine, 10, 11 years down the road, and in some of the people that that have been with you and have the benefit of the ESOP growing, now maybe they want to exit, retire, and you have these repurchase obligations. So a a new financial stressor potentially, and you don't necessarily get to choose when people retire. And if a 2008 happens again, now you got this like, you know, cyclical nature of the the business. And it that is a a true peril. And so if if you could talk us through how you get existing ESOP, you know, contractors ready to just not have, you know, a bump in the road with with surety as they're ongoing, you know, going through the life cycle of the ESOP. speaker-0: Yeah, great. I mean, great question. And moving to the mature phase, hopefully we've got good cash management through those good years because really the reality is the repurchase obligations from a heavy cash standpoint aren't going to happen for 10 or 15 years down the road when you've got some built-in, you know, that equity of each individual that shares have really grown, and we've got that. So now it's being a good steward of the ESOP. You know, we have got we you and I get lucky enough to listen to Charlie talk around here, and I don't think we could ask for a better steward of our e-sop than Charlie here. But it's making sure that, you know, ⁓ for a heavy silo contract, we don't get yellow fever when we three or five years into this, when they we pay off, you know. I guess I should we should talk a little bit, you know. So there's kind of the cycle of the ESOP. You know, you do it, you're debt heavy, you're leverage, you you know, we're getting a lift because of the no taxes. And we've got the first three to five years that you're really focused on paying down that debt to d-lever that ESOP. And then that five to ten or twelve year stretch is when it real the ESOP really starts kicking. ⁓ and and you're you're able to hold that free cash flow. ⁓ and it's making sure that you utilize that extra cash in a good way and you're not getting yellow fever. You know, we're we're taking we want growth because the growth helps the ESOP. So taking a conservative growth trajectory, but not getting too crazy on that, eating up all that free cash flow that comes up after you've paid off the debt and making sure that you're, you know, again, you're making smart growth decisions in that time and putting away cash in the right spot. usually good analytics to model when the ROs are gonna be you know gonna come up and again knowing that sometimes you can't predict it you might you know again you the somebody can get rubbed by a bus one day you can't predict that the somebody could have a health issue retire early but making sure that you've got kind of the rainy days and you know set aside for those ROs when necessary but again it's that sophistication there's there's a sweet spot I think you know in the contractors to go ESAP you have to be at a size That you are going to create enough cash flow once the debt's paid off to be able to start squirreling some away of it and really be a steward of that and make sure that they're, you know, everybody knows that cash has got, you know, a future need for it. And we can't go run to a new market and take on some risky work that might have us have to claw back that cash ⁓ until we get, you know, that piggy bank set up to be set up for the repurchase obligations. Now we can get a little bit more risky when we've got that kind of. put away and that's healthy and we know that we can cover our repurchase obligations in the future. speaker-1: Yeah, no, that's I think that outlines it perfectly. speaker-0: And again and being transparent at with the surety and showing the surety, you know, your what analytics you're using to project your your ROs and all the different things that are there. It's just a again, it's being a very having that open, transparent relationship with your agent and the surety. ⁓ that's you know, I view surety relationships as a marriage. They're, you know, most of my clients have been with their same surety for 30 years. I, you know, you hope when you go through a transaction like this, you want to stay, hopefully stay with the same surety that's seen you during the good years that knows why you're a great. candidate for an eSop, hopefully that Shirdy and the underrating team can back you on this because that's going to give you a lot more rope. And again, that's where the marriage I preach this all the time to our clients. You know, it's like any 20 or 30 year marriage. There's some ups and downs in that. And there's times that each one's mad at each other. And that's okay. They those you know that's this is one of those times like, hey, we've shown you for 20 years how outstanding we are. We want to do this to make us even better for the future. Will you buy into it? And If you've got that good relationship with your surety, they should be really open to this conversation. And even if maybe as a as a whole, they're not a big ASOP ⁓ a fan of Aesops, if you're open with them and and have them involved in the process, you might be able to get them behind you and have that same surety. It's going to give you a little bit more capacity when you need it during those during right in the beginning phases of this because they've they've known all the the key people and all the other things on that. So I think that's where the other pieces is, is you know, believing, you know, I I stick to my guns that I still think. that ⁓ you know, my biggest clients, a lot of them have the same shirty for thirty or forty years. And and I'm I, you know, we have our tough times. We we talk about what the, you know, what it looks like ⁓ on the grass next door. It's a little bit greener, but is it worth the giving up the positives that we have with that long term relationship with the shirty? speaker-1: Yeah, I I think continuity of all business relationships, it's not to say you're not going to stress test them. You want to make sure that you're, you know, competitive in the marketplace and and no one's getting fat and happy. ⁓ but to your point, you know, everyone has ups and downs, both from the surety carrier, but also the contractors. And I think the best business relationships are the ones that both sides have gone through bumps and they stuck it out. And then when the next bump happens, because it's going to happen at some point, they already know they could trust each other and they're willing to put their their neck out on a limb ⁓ versus just being transactional. And I I think the Aesop sale is it's so nuanced that if if that's your approach, it'll it'll be paid back in spades. speaker-0: Yeah, and again, it's everything we kind of the, you know, transparency early in the process with the your your agent and the sh and the your ex legacy surety, your current surety is the is the big key to this and bringing everybody in early to know what stress you might be be looking at. Because again, your company, if you're a heavily bonded contractor, the value of the company is part of it's in the surety program. And if you sell it to whatever it may be, There's no surety program left. It's not worth as much as it is if you sell it and there's a massive surety program in existence. And so that's one of the things that sellers have to get their head around a little bit is that they probably are gonna be part of the surety process between subordination of the note, maybe personally indemnifying, maybe on a limited part for a little bit. But that that risk that they're still taking is getting them significant value in the sale price because they're allowing that that contractor to still have the exist, you basically the existing surety program. to create the profits and the cash flow that they need to pay off the debt. speaker-1: Right. No, a hundred percent. And and so we touched on, you know, the the more mature Aesop and repurchase obligations and and some other stressors. ⁓ a big topic in in construction right now is just that a CFMA event yesterday on you know MA in in the construction industry is you know, if if you're not growing, you're dying. And and so a big powerful piece to an a mature ESOP. Is all that tax free cash? ⁓ and and they may want to go on a MA spree and utilize that story of hey, if we buy you, we're not going to you know strip everything out of the company. We want to keep your employees and and we want to give them the added benefit of being employee owners now, and then also helping grow the construction company because that's a huge recruiting tool of hey, all things being equal, you're an owner now. And we're gonna pay you a similar wage for, you know, concrete guys and gals in the in the field, that could be a tiebreaker. And so what are the surety implications for an Aesop owned contractor that's now looking to go on, you know, acqu make an acquisition? Is there anything you can impart to again help empower them to get their surety house in order and and then make the acquisition versus making the acquisition and then realizing that that could speaker-0: We got tell somebody about the acquisition we just made and and build that in. Again, it's the transparency piece. It's and it's again, it's making sure you're in the right spot that you've gotten through deleveraging your ESOP transaction. That you've, you know, that's the first step. You probably don't want to go on an MA tier until you've really taken care of the first piece of that and gotten the debt paid down from the that piece. You know, talking to your your agent and the surety. Hey, if I do this, do I have the capacity from a surety side to add this on in general? And and then again. Making sure that your analytics are perfect. So you still got your cash set aside for the repurchase obligations. It's it's making sure you're sophisticated, you've got the right people in your accounting department that are really looking at all the different angles on this and showing your surety why this all makes sense and that you're not putting too much stress on that balance sheet while you do this. You know, trying to build in a pro forma with, okay, we add this in, you know, what does this provide from new cash flow for us from a profitability standpoint? So again, it kind of I'm gonna sound like a broken record here. ⁓ You know, just transparency and openness and getting ahead of it, doing it, you know, b well before you make the transaction. It's never good in the surety space when you call ⁓ your agent or your agent calls a surety and says, ⁓ by the way, this just happened a week ago and it's a big deal. If you say, you know, you're leading up to it and everybody knows about it, it's like, ⁓ okay, they closed on that deal. We all know everything about it, whatever. We've already got all the performance as a non-event on the the closing. So that's the key is to make sure that you don't You know, surties, we live in the shirty world. I'm kind of we're still about twenty years in the past. We just don't like surprises. Everything we still move pretty slow and we don't like to get the phone call that something major happened in the balance sheet that nobody knew about leading up to it. ⁓ so that's the big keys. It's just transparency and communication. speaker-1: Yeah. Yeah. It's a it's not like a surprise birthday party that's good. Surprises in the shirty world is speaker-0: No, they don't surprise birthday parties and shirty underwriters don't go don't go well together. They like to you know, they got their day all planned out. They don't want anything thrown a loop in their speaker-1: Correct. ⁓ so so you know, I I don't want it to sound like you we're trying to pitch that Aesops are the be-all end all and and the only way to go. I mean Aesops are are they're intricate ⁓ decisions and and there's a lot of pieces to the puzzle that have to be lined up and it's just not right for for every single contractor. So I'd like I'd like for you to touch on when when in your opinion Just professionally as as being part of an aesop organization, but also from your seat of, you know, the surety, when should a contractor either hit the brakes and say, hey, maybe we we want to go Aesop, but we're just not ready for it? And then also when is it like it's just probably not a right fit and and maybe don't go the ESOP route? speaker-0: Yeah, I think one of the things we taught we touched on a little bit ⁓ earlier, but the big key to getting a green light to ESOP is that your management team is in place too that's really strong, has a long runway. They're not all, you know, not ⁓ hate to pick on ages, they're not all 63 years old and looking to retire in two, three, four years, that we've got a runway of of high-level people that are, you know, staggered ages that are going to be able to run this for the next 20 years. And we've kind of got those people identified. If you don't have Great management, ⁓ both financial operational in every different sector. And maybe you're missing one piece of that. That's fine. You know, every business has got their, you know, different pieces where, you know, maybe it's not clicking as good as you want it to. Maybe you want to tap the brakes until we find the right person to sit in that seat on the operation side or on the finance side or whatever it may be. And then say, okay, maybe we get the right person in that seat and then we can kind of move forward with it a little bit more. ⁓ I think that'd be the making sure the pieces are in place from that side of it to To know because that's the underwriters. ⁓ number one as a seller, you need this to be successful on the back end because you are going to have some sort of seller's note or options or however you want to whatever terms the lawyers put into it, you're gonna have some risk still there. And you wanna make sure that you get that so you can get your full value out the company. ⁓ and secondly, that's what the surety operate the surety people would look at. Do we have the people in place to that have been there for a while that know how to run this to keep it going the way it is? So if maybe you just had some key people retire. And you've got some real green people there, maybe we tap the brakes and wait a couple of years and say, when these people have shown that they there really are the right person there, we can move forward this conversation. ⁓ to your no-go one, if you're a little bit too cyclical in your your PL every year, and if you're in a business that you have too much ups and downs, and that you, you know, you hit some you one year you hit two home runs, you make a just a pile of cash, and the next year you might, you know. have a couple of flunkers and the next thing you know you lose some money. You really want this kind of a real level cash flow for the ESOP to work. ⁓ and I think you have to have to have some mass from it. You and I've kind of talked before, I think you want to be, you know, making a couple of million dollars of of free cash flow a year, whether we call it EBITDA, however whatever term we want to use on it, we want a couple of million dollars of free cash flow that we can really get that lift from, like you said earlier, Chuck, not having to pay the US the corporate taxes and the govern for the US or possibly our state. That's you know, on two million bucks, we're probably talking about ⁓ you know, eight hundred grand ish that we're creating in free cash flow. Now we got enough mass from a cash standpoint to start paying the attorneys the all the TPA cost, all the evaluation, all the stuff that comes in an ESOP where you've got you're you're adding another line item on your PL that you didn't have before. And we could absorb that and still move forward. So I think, you know, or if you maybe you're not quite there yet and you want to do the ESEP, maybe your focus for the next two or three years is kind of growing the business to get there or understanding if we have a cyclical business because of ⁓ the econom maybe you know just the economy in general that your business your top line goes like this or you know how do we fluctuate you know maybe we look at another ⁓ try and diversify and fill in this gap here so we can be a little bit more consistent in that if we've if we're just in a risky type of operations that has some home runs and some some clunker jobs every once well that's the one that that one's harder. You know, how do you Maybe we try and get our, you know, dive into our estimating to say, how do we try and get rid of some of these more clunker jobs and bring that up so we can try and level it out. Now in some industries, it's just not possible. You're gonna have the home runs and the clunkers. I mean, I just that that's the risk reward basis and they make that's why there's the home runs because there's clunkers in there. ⁓ and maybe they're just not a perfect fit for an eSOP when they have years that they do tend to lose some money ⁓ and that we you're not being able to really take advantage of that free cash flow. speaker-1: Yeah, I think that's a good point, right? And it it's it's redundant, but I think it's it's by design, and that's okay if something's redundant is planning, preparation, and transparency help ease the the transaction of of an ESOP. And so to that point, you have the home runs out the gate. There's one I won't name drop them yet. Hopefully they'll come on the podcast, but there's one local to you, Alan. It's a billion-dollar civil contractor. It just went Aesop, that that's a home run. Great namesake, great business, great reputation. Then there's the clunkers that don't want to change the business model and don't force it. There, there's another avenue to to have a succession plan. And Aesop probably isn't isn't a a part of that. And then there's the the stuff in the middle. And if they could have the right advisory team from a surety broker to an attorney to you know all the different advisors, the more time you have. The more benefit you could get ASOP ready and get your bonding line ready to absorb an ESOP transaction. And so if you have 10, you know, five, 10 years of, hey, we're looking to make the transaction at that point, then you could start steering the ship in the right direction and smooth out any bumps than if you're doing a fire drill trying to sell, whether it's ESOP or otherwise, I don't care in a year. It's you're just gonna cause yourself a lot of unnecessary heartburn. speaker-0: Yeah, I mean I think succession planning in general needs to be thought of all the time. And you know, my dad who was really brilliant and always he'd ask, you know, what's you know, we always knew the the f what the next succession plan was, but he always asked, Well, what's the one after that? And I mean and it could have been 25 years out, but he wants to get them thinking about it because again, you know, this there's a lot of different ways to skin these cats. And and again, n decisions don't have to be locked in stone, but the more you can have people advising you on this is your goal. We can we can help a lot in a in a 10 or 15 year process if that's the goal to help steer you little bits and ways in that direction. If you got 90 days to work on it, well there's not much steering we can do in 90 days. It it is what it is. You either get it done or you don't. That's kind of where we're at in a 90 day process. ⁓ so the more we can get, you know, again and that's our job as a as your advisors on the surety side is talking to you that we shouldn't be surprised when you are ready to exit. If we're surprised when you're ready to exit the business, we haven't done our job for you either, because that should be a constant communication ⁓ with us for years and years and years leading up to it is, you know, because again, before even the esops were more popular, we had to worry about, you know, life insurance and you know, back when it was always just passed to the oldest son, right, wrong, or indifferent. Okay, well, how does that look? You know, is a tax man going to come after him and take all the cash of the business? So, you know. As a surety advisor, it's no different now than it was when I started twenty-three years ago. We still need to know what the plan is to help you plan for it. Now it doesn't need to be perfect and that doesn't mean it's exactly how the plan happens, but we should have a plan in place so that we're here to help you make sure that there's a surety program after whatever the plan is happens. speaker-1: A hundred percent. I mean it's it's the the old adage, begin with the end in mind. And and it's not perfectly linear, but the more you could think about that in every business decision you make and and try to be intentional, ⁓ you're you're gonna thank ⁓ your future self is gonna thank your past self with that. speaker-0: It I mean again, it's no different in any business. Chuck, even you and I are, you know, I'm you know, we need to plan for and Charlie's, you know, talking to all the different guys here, you know, kind of not to say my in my late forties. What's your plan? And, you know, how do we put the next person in place for you? And, you know, what if Alan gets run over by a truck one day? I mean, every business should be thinking about these for their key people of how do we what happens? ⁓ there's there's too much between all of our ears that, you know, is not in some system somewhere. And the businesses need to survive after, you know, that. that person goes away. And ⁓ so again, this is this is fun to talk about in the construction because there is nuance to it. But a lot of this has nut it should be every single business from, you know, top to bottom should be thinking about these things. speaker-1: A hundred percent. before we start to wrap up, is there ⁓ any parting thoughts in terms of from the sh you know the surety underwriter perspective? Anything else you want? You know, let let's single out a prospective eSop transaction for a mid-sized contractor. Is there anything else you want to impart on them to get them ready to make, you know, a decision that's gonna to benefit them in the speaker-0: Around. Yeah, I think a big key is just get everybody in the room, you know, get your your surety agent, get your the lawyers, get your ESOP people that are talking about it. Once you made that decision, get us all in a room. So everybody's gonna have, you know, your tax guy, your your banker, your your surety guy, we're all gonna have little different angles that is important to us, and let's make sure everything's on the table up front so that all your advisors, they're all pulling the direction for you. You know, that's we all work for you. Put us all in a room, let us get everything on the table. And then, you know, before anything's put in writing and and then let that lawyer listen to everybody that's trying to put the documentation together, listen to all the different pieces of it and and create open communication between all the different advisors you have in that process so that we can, you know, again, if the banker needs to call me, that he's got the he or she's got the ability to call me without having you, you know, give approval each time. And that makes these tran any transaction much easier when we can just have full transparency across all the different parties that are that have a a stake in it. And ⁓ yeah, j again, just our repr the broken record we keep saying, you know, transparency and and being open with us will will really help out that process all around. speaker-1: Yeah. Yeah. All the boats pointed in the right same direction and and having comms to each other with is as far as the advisors is is paramount in this type of stuff. ⁓ well to end on a lighter note, Alan, ⁓ you know, like you said, and I know for me specifically, I I never planned on being in insurance as a as a young boy. So I'm curious if you weren't in ⁓ you know, leading our surety practice for Christianson group, what what would you be doing? speaker-0: ⁓ God, who knows? ⁓ flipping hamburgers, I guess, is about the only skill. Doing this for twenty three years. I think it's the only skill I have is to talk about surety. ⁓ you know, who knows what ⁓ where it w the life would have sent me without this. I you know, I think even young I worked for ⁓ some of my contractors. I think somehow or another I would have been ⁓ in the construction space. ⁓ probably ⁓ you know, who knows at what level. But I I did like construction from a kid as a laborer, but ⁓ you know. Like the numbers side it. Maybe I would have been in an accounting department at a construction company. Who knows? ⁓ again, I didn't ⁓ I got into this pretty young and early in my ⁓ working career. So I I don't know much else. Either either that or flipping hamburger somewhere 'cause I don't have any other skills in life. speaker-1: Hey, hey, flipping hamburgers on the beach is not ⁓ nothing to scoff at, man. speaker-0: I I could handle it. I could handle it. Less it sounds like ⁓ you know, ⁓ especially not you say on the beach, that sounds pretty low stress. I can sit there and flip hamburgers on the beach. speaker-1: There's something to be said about calling it quits and and ⁓ at the end of the day and not having it carry, ⁓ carry with you home. So I I'm not gonna scoff at the the beachfront hamburger flipping. So in in our next life. Well, Alan, really appreciate you coming on. ⁓ appreciate all the good work you do for our clients. How can people reach out to you if they want to pick your brain or just learn more? speaker-0: ⁓ I think ⁓ the Christensen group website's probably the best way to find me if you get me there. ⁓ I won't try and our email address is is long and complicated here. And so I would I'm not gonna repeat that. ⁓ yeah, find you'll find my profile on the Christensen group website. ⁓ all my contact info is there and you can get a hold of ⁓ Chuck and myself on that website and ask us any questions. ⁓ again, we're both here to to help in any way we can. speaker-1: Yep. Yeah. And you could always ⁓ I could always connect ya. I mean we're we're pretty close, Alan and I. So you could always come to me and then I'll I'll connect the dots from there. But Alan, thanks again. Looking forward to seeing you at our ⁓ ESOP share price reveal in a couple of weeks. speaker-0: Absolutely. Looking forward to seeing you there, Chuck. speaker-1: All right, we'll see ya. Thanks for listening to the Construction Aesop Collective. If this was useful, follow the show and share it with a colleague. Join the conversation with me, Chuck Mazzanti, on LinkedIn and find all episodes at constructionesopcollective.com. Until next time, keep building ownership one conversation at a time.