Expecting the Unexpected: Continuity Planning for Contractors

Do you have a plan in place in case something happens to you or other leadership in your construction company? If so, when was the last time you updated that plan? This week, we discuss the importance of continuity planning and some key considerations to keep in mind as you plan for the unexpected.

Topics we cover in this episode include:

  • Practice continuation agreements
  • Planning for key employees 
  • The importance of clearly stating in writing what should happen to your business 
  • Continuity plans need to be looked at regularly
  • How to assess the risks a contractor might have
  • Continuity and the value of the company


Find all episodes and related links at ContractorSuccessForum.com.

Join the conversation on our LinkedIn page: https://www.linkedin.com/company/CarpenterCPAs

Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | SuretyAnswers.com


[00:00:00] Wade Carpenter: Welcome to the Contractor Success Forum. Today we are talking about continuity planning and why, if you have built a construction company, it is so important to protect it.

Here on the Contractor Success Forum, our mission is to provide game changing financial education for contractors to help you be more profitable, grow and succeed in your business. 

And who is here to help us do that? As usual, Stephen Brown with McDaniel Whitley Bonding and Insurance Agency. And I’m Wade Carpenter with Carpenter Company’s CPAs. 

And Stephen, I know you were talking about calling this one Expecting the Unexpected.

[00:00:43] Stephen Brown: Yeah, expecting the unexpected is, gosh, the worst thing that that can happen is that something happened to you as the owner of a company.

[00:00:51] Wade Carpenter: Right.

[00:00:52] Stephen Brown: Multiple owners. Your company ceases when you cease to exist, there’s no doubt about it. But there’s a whole lot to continuity planning besides just planning in case of your death.

Continuity means continuing something without any essential changes. You’ve got something good going, you want to continue it, right?

[00:01:12] Wade Carpenter: Right.

[00:01:13] Stephen Brown: And so from a bonding standpoint, continuity planning has nothing to do with planning for emergencies and contingencies. 

In their mindset, continuity planning is just what happens if you die? Who’s gonna take over the business? Who’s gonna finish the projects? That’s what they care about.

[00:01:34] Wade Carpenter: I think there’s a lot more to it. I think we’re gonna get into, but you and I both for the last couple of years we’ve talked about different situations where we’ve had contractors die unexpectedly. But I think we’ll also get into maybe like being disabled, but like in my business, I think about, say if you have a CPA firm and was tied to one person, then, if that person died, how many people leave that CPA firm?

[00:02:02] Stephen Brown: Sure.

[00:02:02] Wade Carpenter: And in the construction company we had the same thing as well you gotta finish a project, but if your key employees leave, you’re not able to finish those projects, those kind of things.

So I think that’s some of the things we’re gonna kick around today.

[00:02:16] Stephen Brown: Sure, sure. All, all of that is huge.

Plan to keep employees from leaving

[00:02:19] Stephen Brown: I think the most thing that most contractors would think about is key employees leaving. That’s the number one thing. 

And how do you plan to keep them from not leaving? One thing that you can do is you can put in place a stay bonus into their employment agreement. And this stay bonus, of course, has to be funded somehow. It comes outta your cash or life insurance.

But the whole idea is if you do a stay bonus and you tie it to profit, you don’t want that employee to wait to get their profit on a job that they may or may not get, because they’re not in control of the pricing and everything. They’re not in control of the risk. 

You, you want them to think that way. But the most important thing to a key employee might be just, look, we’re gonna give you a bonus to stay that’s gonna be so good that you won’t leave until these projects are completed. 

You all assume that all of your employees wanna stay, you’re one big family, right? But each, each one of these key employees has to look after their own family. So, that’s one way to do that. 

Company morale after the death of a leader

[00:03:19] Stephen Brown: Another thing is the morale of the company when a leader or owner of the company dies, there’s just a vacuum of leadership, Wade.

[00:03:28] Wade Carpenter: Mm-hmm.

[00:03:29] Stephen Brown: There’s inner squabbling and, people fight well, I do this or I do that.

There’s always someone that you really would least want to run the company that kind of steps in and starts acting like they’re the head honcho. That’s always the case.

[00:03:43] Wade Carpenter: Right. 

Practice continuation agreements

[00:03:44] Wade Carpenter: Well, I think about it too, like for what I did in my business. So as a CPA firm, I have to have a CPA. So I had some agreements with some CPAs that I’m friends with that we, mutually, like if something happened to me, you’d step in and make sure this either the firm got sold or whatever.

Or we had what was called like practice continuation agreement. So maybe one of them would take over the practice or something like that. But I also see that in, A lot of construction companies where they will do something like, hey, this person’s been a key employee. They’re gonna become an owner. They’re gonna end up owning it. And we had this agreement in place where, there’s gonna be some leadership and all this stuff.

[00:04:29] Stephen Brown: Sure.

[00:04:30] Wade Carpenter: Talk about that some.

[00:04:31] Stephen Brown: Yeah. You could be as simple as instead of key bonus employee working out a key bonus agreement with a competitor that will finish the jobs for you. You might say, if something happens to me, I know my wife doesn’t want to handle it. I don’t wanna do all the planning for the employees to handle it.

Let’s just not rock the boat. That’s a real easy way to work something out. You just have to fund that. You have to make sure that your competitor’s gonna take over work know that not only is this set up, this is what’s gonna happen in case of my death. This is how you’re gonna come in and finish these projects. And that’s one thing. 

Planning for key employees 

[00:05:06] Stephen Brown: And then as we talked about other part of continuity planning is planning for your key employees to buy the company someday, the sharing profits, there’s a lot of a lot to that.

Key man life insurance is another thing that can keep a key employee from leaving. You buy an insurance policy on that key employee and then at retirement, that employee gets the policy with the cash value that’s in there, that’s one idea. 

Or you get a key man life insurance that just pays you if something happens to one of your partners because they have to be replaced and there’s gonna be all kind of expenses and headaches because of losing that partner. So that’s another part of it. 

And so the continuity plan is literally putting in writing with your partners if you have it, what’s gonna happen in the case, any of these, something happens to any of these partners, because you are gonna be working with your partner’s spouse and their attorney if you haven’t planned ahead.

[00:06:07] Wade Carpenter: I know I’ve seen that a few times over the years that spouse comes in and, the other partner does not want that spouse in, and they have no idea how to run that business and they’re, they may have a toxic situation.

It also could be like divorce or something like that. That happens where somebody comes in and you’ve got an unexpected owner. So there’s a lot of things to think about here.

The importance of clearly stating in writing what should happen to your business 

[00:06:30] Stephen Brown: Okay. Yeah, you’re right, Wade. There’s just a lot of things to think about.

But a continuity plan, the ones I’ve seen I’ve got numerous examples. I know you do too. But a simple continuity plan is just something that is a plan that puts in writing exactly what’s gonna happen.

And here’s the most important thing about having that plan in writing is when you die, your estate goes through probate and when there’s an ongoing business involved, the judge sometimes will appoint someone, usually an attorney, to oversee that ongoing business until it can be liquidated, or whatever the will states that you want done with it. 

So it’s up to the probate court to enforce your wishes. And that’s the great thing about it is they are there to enforce your wishes. 

But on an ongoing business when it’s clearly stated what’s gonna happen and that judge appoints someone to continue the business, or if there’s a key family member that is gonna do it, they’re gonna report back to the judge that they have done this according to the will. And they’re held accountable for that. And so that’s another reason it just needs to be done in writing.

[00:07:45] Wade Carpenter: Well, a great point there is, number one, if you got this agreement in place and you get to appoint who is gonna be running this business rather than someone lawyer that knows nothing about your business and all they’re worried about is like closing this estate out one way or another.

They may not have the best interest at heart. They may not ge l with their current employees and run people off.

[00:08:10] Stephen Brown: They may not even wanna liquidate the business quickly because they’re getting fees.

[00:08:15] Wade Carpenter: Exactly. I–

Continuity plans need to be looked at regularly

[00:08:17] Stephen Brown: It’s amazing all the things you’ve seen. I used to do a lot of work in probate court with bonds and I’ve seen all sorts of crazy things, but you know, when you talk about continuity, if you have a father and son scenario, and this is just based on a true story, is, is that the father was gonna leave everything of the company to the son at his death. And that’s pretty standard.

But it didn’t say anything in that continuity agreement about if he became disabled. And in this case, the father got dementia. Got mean dementia. And was running off employees, forgetting key customers’ names, screwing up bids. And the son had to get him out of there to get permanent care and then had to keep making money through the company to pay for his care. And he wasn’t able to because he wasn’t the owner.

[00:09:11] Wade Carpenter: Right.

[00:09:12] Stephen Brown: So you– 

[00:09:13] Wade Carpenter: –shared that story with me and that was a pretty amazing story, but it’s definitely something that obviously could happen very easily,

[00:09:21] Stephen Brown: That’s the point. These continuity plans need to be looked at regularly. A lot of times one will be in place and they’re not checked for years, but things change. The valuation of the business changes, what you originally agreed to you think may not work so well. Especially if you have a partner, you know, the personality of the partner and what it would be like working through his estate or her estate if something happened to them.

So, gotta check these plans regularly. You gotta do it first and you gotta check on it. And also, I would say the most important thing is if you haven’t done this yet, just put together a simple will. If you don’t have a will, and remember you can hand write it, you don’t have to have an attorney to do it.

But a will with your signature that’s witnessed is the first thing that a judge looks at when he decides how to probate your estate.

[00:10:14] Wade Carpenter: Right.

[00:10:15] Stephen Brown: Gotta have a will.

Pay to Stay Bonus

[00:10:16] Wade Carpenter: Yep. I guess another thought you, you brought up the Keyman insurance but you also, we could say Keyman or key employee, but you’ve got project managers out there running a job. And so I’ve also seen where say we have something like Pay to Stay bonus to where like you get a bonus if you finish out this project, as opposed to the owner dies and you abandon the project, you’re probably gonna tank the company.

And so things like pay to stay, just even if these project managers, they get a bonus to stay there and make it well worth their while. 

But if a project manager walks out and they’re the only one that knows what’s going on with the job, that can be devastating.

[00:11:02] Stephen Brown: Sure. Key employees that have to be replaced among their death that are producing income for you. Have to be replaced and it costs you money. But it’s also a good way to keep an employee as an, an extra incentive to stay till retirement.

[00:11:18] Wade Carpenter: Right.

[00:11:19] Stephen Brown: Because you own the policy.

But also a lot of times if you have partners or multiple partners, if you have one partner, definitely. You get life insurance policy that upon that partner’s death, it pays you so you can buy out their half of the business. And it’s all spelled out in the continuity agreement. 

So that’s why it’s, it’s called being funded by life insurance. And why not? Because it’s the death that you’re concerned about and it’s a whole lot easier to finance something like that through a life insurance policy if you can get it on each partner.

And in this situation you may have two partners that are not equal health situation. You can work around that. There’s more premium for one, that one’s older, one’s younger. But however you look at it, you can work that out equitably. 

And these proceeds, if you set it up correctly from the life insurance, come to you without being taxed. So it’s important how you pay those life insurance uh, your CPA and your life insurance agent can help you with that.

[00:12:27] Wade Carpenter: Yeah. Well, can we change direction a little bit? And I’m gonna put you on the spot for a minute. Since you, you are in the business of risk. 

How to assess the risks a contractor might have

[00:12:33] Wade Carpenter: So are there ways we can assess the risks that a contractor might have? That you can think about or we can talk about?

[00:12:41] Stephen Brown: Yeah. As a contractor, you look at risk all the time. You’re weighing risk of a construction project. Buying a piece of equipment of hiring this person. Are you gonna have enough work for them on the project? What about weather delays? What about material delays, shortage?

You can do continuity planning or risk analysis for those type of scenarios. Of course, we were talking about that earlier. But from understanding the risk of what happens is if you don’t plan for your continuity–

[00:13:12] Wade Carpenter: Right.

[00:13:13] Stephen Brown: You might say, well, look, they’ll work it out. I’ll be dead. Who cares? But that’s not the way to think about it. Of course. That’s a obnoxious way to look at it.

But again, that may be just a practical way of you looking at it. But what you’re doing is you’re setting in place all the things that you have to do to make your company succeed, and it’s forcing you to think about how you’re gonna do that. 

For example, when I came to McDaniel Whitley, Mike McDaniel, Richard Whitley are two of my best friends. And we worked for a year on our contract because we were not gonna let our friendship be hurt by us working together. 

And there’s been a couple times over the, the years one of us brought something up in that contract and, and the other ones of us just laugh. Yeah, were you right about that? Yeah. So it’s just the right way to do things.

But did that answer your question about–

[00:14:07] Wade Carpenter: Well, absolutely. Is this something that do you help contractors do these risk assessments?

[00:14:13] Stephen Brown: Yeah. All the time.

[00:14:15] Wade Carpenter: Do you, like if, if somebody wasn’t your client, would you talk through something like that with them?

[00:14:21] Stephen Brown: Sure. Of course. Just to give you some ideas to get you started, I may not be your total source for it, but what you’re looking at when you’re analyzing the risk, Wade, is, where are you and what ideally would you wanna see happen? And I can help you get started on that and I’m happy to.

[00:14:38] Wade Carpenter: Right. Well, I guess another thought too, which again, I’m changing directions yet again, but.

Continuity and the value of the company

[00:14:44] Wade Carpenter: One of the things that comes up when somebody dies or disabled or something like that is the value of the company. 

And I know we’ve had some podcasts about that as well. But you know, again, as one of the points I was making at the beginning is you have to worry about are the key people still there?

And if the key person leaves, is that hurting the value of the company? But have you got any thoughts or ideas about specifying what the value of the company is in the contract or, or continuity plan or?

[00:15:15] Stephen Brown: Well, you certainly do that. You remember that movie Tommy Boy, big Tom Callahan? Tommy’s dad died. He was everything. Remember? He was the life and the spirit and everything of that company. And you’re probably that person to your construction company. No doubt. If you’re watching this podcast, you are that person.

You’re the dynamo that makes this happen. And so, when something happens to you, people naturally look to you, what do we do now? Well, it was his wishes to do that. How do you know that? Well, it’s in writing. It’s agreed upon, this is how he wants the company to move forward without him if something happens to him. That make sense?

Continuity planning is the responsible thing to do

[00:15:55] Wade Carpenter: Absolutely. Well, I guess the way I think about it is that this is a subject just like life insurance or things like that, nobody wants to talk about. But it really is the responsible thing to do.

[00:16:08] Stephen Brown: Mm-hmm.

[00:16:09] Wade Carpenter: I know that from a bonding company, obviously sometimes they wanna make sure that these things are in place. But you know, when you’re thinking about your family and what’s gonna happen, but we sweep it under the rug or whatever, I believe this is a responsible thing to do. And so what’s your thoughts on that?

[00:16:27] Stephen Brown: Well, I can tell you my uncle was the insurance agent that got me into the bond business and he was also an attorney. And he had a tragic accident that he eventually died from. But I was so proud of him after the fact. My aunt had absolutely no expense. He was in critical care unit for six months. Can you imagine how expensive that is?

And everything from his estate to the taxes to what he wanted done with the state, he had gotten that knocked out. And he tweaked it regularly, and I can tell you that it was a beautiful thing to see. So I’ve seen that in action. I also have a customer that is now continuing to go strong after the death of one of the two owners.

And that one of the two owners was absolutely visionary as a leader, because both partners are. But I can tell you that the partner that’s remaining really misses what the other partner did. And it’s not only do they miss them personally, but they miss what they did for the company. 

So this is real. In this case they did all their continuity planning during Covid.

[00:17:39] Wade Carpenter: Cool. Okay. Yeah.

[00:17:40] Stephen Brown: They did a lot of work during Covid for this. So, you think you don’t have time to do it, but the best time to do it is now, right? So.

[00:17:49] Wade Carpenter: That little thing about like, when’s the best time to plant an oak tree?

[00:17:53] Stephen Brown: Yeah.

[00:17:54] Wade Carpenter: Would’ve been 20 years ago, but if you hadn’t done it, do it today.

[00:17:58] Stephen Brown: Well that’s a great analogy. Plant that oak tree, folks. And get your continuity plan started. If you have any questions, feel free to reach out to me. Also, you can look on our website and see an article where we address some of the practical aspects of this.

[00:18:13] Wade Carpenter: Okay.

[00:18:14] Stephen Brown: All right.

[00:18:15] Wade Carpenter: Any other closing thoughts or is that it?

[00:18:17] Stephen Brown: Plant that tree, like you would say, just do it. But you’re, but you’re right. I was thinking when I wrote the article, Wade, that I would end things with, do a continuity plan so you can rest in peace now. And I thought, oh, that’s creepy stuff. But really, when you get this planning done, it is a peaceful feeling. You’re glad you’ve done it and you can knock it out. It just gives you a lot of peace. So maybe I’ll end it on that.

[00:18:44] Wade Carpenter: Okay. Well, I agree with what you said too about expecting the unexpected, so thanks for doing that. And thank you all for listening to the Contractor Success Form, wherever you might be tuning in from. Find us on all major podcast platforms, on the contractorsuccessforum.com or the CarpenterCPAs YouTube channel.

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