Private equity acquisitions of companies that need bonding have become more frequent in the past few years. This is partly due to the increase in the number of private equity firms that are looking for good investments. I think that it is also partly due to business owners being to busy today to do the necessary advance planning to ensure that an exit strategy is in place when they decide they would like to retire from the business.
Companies may look to private equity firms for various reasons throughout their lifetime. Private Equity firms may be needed as a lender to help the company with a major equipment expansion, or the company may utilize the private equity firm as part of the owners exit strategy from the business.
When a company utilizes a private equity firm to facilitate the owners exit strategy from the company, the owner of the company will be selling the majority ownership of the company to the private equity company in return for a significant amount of cash. Typically, the owner of the company will retain a minority stock ownership and will still manage the company for the next 5-7 years.
The financial impact of this stock sale can significantly impact the ability of the company to obtain surety support for future projects. In many situations, the private equity company is purchasing the stock at an amount that exceeds the book value, which results in the post-acquisition financial statements reflecting a significant amount of goodwill. Surety companies focus on tangible net worth as a critical consideration when evaluating the amount of bonding support to provide a company. To arrive at tangible net worth, goodwill is deducted out of equity and in many cases this results in a negative tangible net worth.
The proper structuring during the pre-acquisition period can significantly impact the bonding terms post-acquisition for the company.