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OldCo/NewCo

May 27, 2022

Succession planning is important to companies and surety bond underwriters. One great way to perpetuate a construction company is through an Oldco/Newco arrangement. Learn more about how this ownership transfer mechanism works and the benefits of its setup. 

 

What is an OldCo/NewCo Method of Perpetuation?

 

OldCo/NewCo involves transferring ownership through future profits with the backing of the current ownership. The Existing Company (OldCo) identifies new shareholders to take over the company. Oldco helps the New Owners (NewCo) set up a brand new entity.

 

NewCo then borrows, rents or purchases OldCo’s equipment and hires OldCo’s employees. NewCo finishes OldCo’s work under contract and new contracts are put into NewCo’s name. NewCo retains a small portion of the profits and pays a fee to OldCo. Over time, OldCo gets less and NewCo gets more. 

 

Typically both OldCo and NewCo will provide indemnity to the surety bond company and lenders until the balance sheet from NewCo can stand on its own. Once that happens, OldCo can get off of the indemnity package

 

OldCo/NewCo Structure. This is a graphic showing the relationship between the Old Company, New Company and Bond Company.

 

Bonding Benefits of OldCo/NewCo

 

Ownership transitions can create challenges for Contract Surety Bond Underwriters. Many forms of succession planning involve taking out loans and creating debt and Goodwill. Both of these things can cause problems for contractors needing performance bonds and payment bonds

 

However, many surety bond companies like OldCo/NewCo because it doesn’t create a lot of debt. Further, by keeping the indemnity of OldCo until NewCo can get established, the bond company has a strong combined underlying balance sheet on which to give surety bond capacity

 

Finishes Bonded Work

 

Another benefit for both OldCo and the surety bond company is that projects bonded under OldCo can be completed and liability run off. This can be a challenge for other forms of ownership transitions where the selling owners have to determine how to keep the company running long enough to finish their open projects. 

 

Continuity of Management

 

Surety Bond Companies also like OldCo/NewCo because the former owners and managers have an incentive to stick around through the transition. This typically helps make the transition smoother and helps existing projects get finished. 

 

The Bond Company May be Able to Keep the Account

 

In many types of ownership transitions, the surety bond company loses a customer. If a business is sold to a third party, they usually already have a surety relationship. Under OldCo/NewCo, both the surety bond company and the contractor have an opportunity to continue working together. 

 

Other Advantages of OldCo/NewCo

 

Low Capital Outlay

 

OldCo/NewCo is a great option when perpetuating to family members or employees who do not have the financial means to purchase existing shares or to borrow enough to get to a fair purchase price. The new ownership group is using sweat equity to earn shares and typically does not need a significant amount of capital. 

 

Ownership Maintains Some Control

 

Another big advantage to this model is that the former owners maintain significant control. Because the majority of the financial strength is coming from OldCo early on, they get to maintain control while NewCo builds up financial strength to stand on their own. This is a large benefit compared to other models where former owners may immediately lose decision making ability in the company. 

 

Flexibility

 

OldCo/NewCo can be set up in a variety of ways. Sometimes the new owners must agree to buy a certain percentage of stock to give them “skin in the game”. Other options include an agreement for renting real estate or equipment from the former owners for a period of time to supplement their income. This is a very flexible form of ownership transition.

 

Disadvantages of OldCo/NewCo

 

Little to No Cash Upfront

 

A big downside to this method is that selling owners typically get very little to any cash up front. This also means they bear the risk of performance from the new ownership group. If NewCo fails to properly execute new work, this method will fail and the selling owners will not get their money. 

 

Time

 

Similar to the point above, this method of transition usually takes years to complete. This is not an effective method for owners who need to sell quickly. 

OldCo/NewCo is a great way to transition construction companies. Transition is very important to surety bond underwriters and should be important to contractors too. Axcess Surety can help contractors with this method as well as other successful ownership transitions methods such as ESOPs. Contact our Surety Experts anytime.

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