How to treat capital for bonding?

July 15, 2025

by a searcher from Columbia University in New York, NY, USA

I'm evaluating a fairly large GC (~$200M in GV) that requires bonding capacity in order to secure its customers/projects. The bond is secured by ~$5MM in cash, that the sellers understandably want to keep. Has anyone here acquired a firm like this, or seen it done, and how this was treated?

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Reply by a professional
from Florida State University in Tampa, FL, USA

Are we talking $5M in cash posted as collateral to the surety? Or $5M in the composition of the balance sheet which will leave after the sale? Assuming the latter. We’ve dealt with many deals like this in various forms and sizes. And it’s critical to understand how surety is underwritten, and ultimately how that $5M is going to be balanced from a ratio standpoint; otherwise it could be detrimental to the bonding program. “Working Capital” is the most critical ratio for bonding. It is a liquidity ratio. Liquidity translates to Cash Flow and poor cash flow is a contractor killer, a surety’s bad dream. Many buyout deals do two things which can severely strain bonding: liquidity leaves the balance sheet (to the sellers), and then new debt comes in. We tend to see low, no, or deficit Working Capital and almost always deficit Equity since Goodwill isn’t counted by the surety. For a $200M GC needing bonds, this could be very bad. It’s important to go into a deal understanding how surety works, some creative ways of structuring the buyout, and possibly some non-traditional ways of structuring the bonding program post-transaction so things continue smoothly. Just definitely do not wait to figure it out after the fact! More than likely it will require moving to a new surety company. There are a handful in the game that understand these deals and can get comfortable in ways the typical sureties cannot. Happy to talk more details any time.

Reply by a searcher
from Columbia University in New York, NY, USA

Appreciate the comments here. Some details I'll add: - We have experience with bonding, and long-term relationships with several agents/sureties. There is not a good way to eliminate the tied up capital. - The bond is secured by cash on the balance sheet, rather than some other measure of balance sheet value. - The seller is amenable to a phase out. However, this effectively means that many years of retained earnings are tied up in the bonding program. I'm unsure of the right way to treat this in the valuation of future cashflows. - Treating it as tied up w/c is untenable to the deal. The amount tied up is similar to the EV of the cashflows. Effectively the seller's fallback option is to wipe the cash and close up. I feel like I'm looking for a magic solution, which might suggest the deal is untenable. However, I know that people acquire this sort of firm, suggesting that there must be a way.

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