Do License and Surety Bonds Transfer in a Sale?

Usually not in the way buyers hope. A surety bond is underwritten on the business and on the people who sign the indemnity agreement behind it. When the owner changes, the surety usually re-underwrites the account and issues new bonds or riders (written changes to an existing bond), and the new owner signs a new indemnity agreement, often personally. Bonds on jobs that are still open at closing need their own plan, because the seller's indemnity to its surety generally survives the sale. This guide is for new owners of contractors and other bonded businesses who need to keep bonding in place without inheriting someone else's promises.

The short answer

A surety bond is not insurance for your business. The surety expects to be repaid by the principal (the bonded business) and the indemnitors if it pays a claim.
Because sureties underwrite the owners and their finances, a sale usually means new or re-underwritten bonds, even when the legal entity stays the same.
License and permit bonds often need to be reissued in the new owner's or new entity's name. The obligee (the agency or customer the bond protects) decides what paperwork it accepts.
Performance and payment bonds on open jobs are the hardest part. The seller's personal indemnity generally stays in place for bonds already written, so expect the seller to negotiate hard over them.
Expect to sign a general indemnity agreement, often personally and sometimes with a spouse, on top of any personal guaranty for your acquisition loan.

Why don't bonds just move to the new owner?

A surety bond is a three-party arrangement. The principal (your business) gets the bond from a surety, and the bond protects the obligee: a state licensing agency, a city issuing a permit, or a project owner on a construction job. If the principal fails to meet its obligation, the surety pays the obligee and then has the right to recover what it paid from the principal.

That is the key difference from insurance. Insurance spreads expected losses across many customers. A surety prequalifies the principal, expecting no loss at all, and backs that judgment with a written indemnity agreement signed by the company and usually its owners personally. So the surety is really underwriting the people and the balance sheet behind the bond. When those change, the surety's original decision no longer fits, and it will usually want to re-underwrite. See surety bond vs liability insurance.

What happens to each type of bond?

The answer depends on the bond type and the deal structure. This table shows how it usually works. The bond wording, the surety and the obligee decide the actual answer.

Common bonds and what usually happens after a sale
Bond type	What it protects	Stock purchase (same entity)	Asset purchase (new entity)
Contractor license bond	The state and the public, if you break licensing laws	Bond may stay in force, but the surety usually wants the new owner's indemnity and financials. A seller who stays an indemnitor may ask to cancel, and a cancelled bond with no replacement can put the license at risk. Arrange a replacement or rider before closing	New entity often needs a new license and a new bond
Permit and right-of-way bonds	A city or county, for work in public areas	Usually continue, subject to the surety's review	New bonds in the new entity's name
Bid bonds on pending bids	The project owner, that you will sign the contract if you win	Surety may need to approve the change before you sign	Pending bids may need to be withdrawn or rebid
Performance and payment bonds on open jobs	The project owner, that the job gets finished and subcontractors and suppliers get paid	Bonds continue; the seller stays on the hook as an indemnitor for them	Contracts and bonds stay with the seller unless the owner and surety consent to a change
Maintenance or warranty bonds on finished jobs	The project owner, during the warranty period	Continue until they expire	Usually stay with the seller, who may ask you to do the warranty work
Business service bonds	Your customers, against theft by your employees on their premises	Surety reviews the change	New bond in the new entity's name
Retirement plan fidelity bond	The plan, against theft by people who handle plan money	Continues; update plan officials. Federal law sets the amount: at least 10 percent of the plan funds handled in the prior plan year, with a $1,000 minimum and a $500,000 maximum required amount ($1,000,000 for plans holding employer securities)	Follows the plan, so check what happens to the seller's plan

Business service bonds and retirement plan bonds are fidelity bonds. They work more like crime insurance than like the surety bonds above, and the bonding company generally does not expect the business to repay it for an employee's theft. The indemnity points in this guide apply mainly to license, permit and contract bonds.

The retirement plan bond is a special case set by federal benefits law, not by your surety relationship. Ask your benefits advisor how the plan, and its bond, are being handled in your deal.

What about bonded jobs that are still open at closing?

This is where bond questions get expensive. A performance or payment bond backs one specific contract between the seller and a project owner. In an asset deal, moving that contract to your company usually needs the project owner's consent, and moving the bond needs the surety's consent. Common approaches:

The seller finishes the job, often with your company as a subcontractor. The seller's bond and indemnity stay in place, and your subcontract should spell out insurance, payment and warranty terms.
The contract is assigned with consent, and your surety issues a replacement bond or the seller's surety issues a rider, usually after underwriting you.
The job is carved out of the deal entirely, with the seller keeping it.

The seller's personal indemnity to its surety generally survives a sale. A clause in the purchase agreement shifting responsibility to you does not by itself release the seller, and the surety can still look to the original indemnitors if a bonded job goes wrong. Sellers know this, so expect them to ask you to indemnify them for post-closing performance, to replace bonds quickly, or to leave money in escrow. Removing the seller's indemnity for future bonds is possible with the surety's agreement, but that does not release bonds already written. Review this with your deal counsel, and see seller indemnities vs insurance.

A hypothetical example. A buyer acquires the assets of an electrical contractor with three bonded public jobs in progress, totaling $2,000,000 in contract value. The project owners agree to assign two contracts. The buyer's surety bonds them after reviewing the buyer's financing and signing the buyer and spouse to an indemnity agreement. The third owner refuses, so the seller finishes that job with the buyer as a subcontractor, and the purchase agreement holds back $100,000 until the job is accepted and the maintenance period ends. The buyer also gets a new license bond for the new entity before the first permit is pulled. The numbers are illustrative only.

Will I have to sign a personal indemnity?

Probably. Most sureties require a general indemnity agreement from the company and, for a privately owned business, from its owners personally. Some ask spouses to sign. These agreements usually let the surety recover its losses and costs from every indemnitor, can require you to post collateral if a claim looks likely, and stay in force for bonds already written even after you sell or step away.

For a buyer with an acquisition loan, this stacks on top of the personal guaranty you likely signed for the lender. Both are personal promises, and neither is covered by your business insurance. Read the agreement with your attorney before you sign. Personal home, auto and umbrella policies are generally not designed to pay either promise, so treat them as part of your personal risk picture.

How does a surety look at a newly acquired business?

Sureties usually review the business's financial statements, working capital, net worth, bank credit, work in progress, and the experience of the people running the jobs, along with the indemnitors' personal finances. A leveraged acquisition changes that picture. Acquisition debt and a balance sheet heavy with goodwill can reduce the bonding capacity a surety will offer, even if the business itself performs exactly as before.

Start the conversation early. Share your financing structure, the management team, and a plan for keeping experienced project managers, and ask whether your accountant's statements will meet the surety's standards. If your bonding needs outgrow what the market offers a new owner, look at the Small Business Administration (SBA) surety bond program. It backs bid, performance, payment and related contract bonds that participating sureties issue to eligible small businesses. Contracts can run up to $9 million (non-federal) or $14 million (federal). It does not cover commercial bonds such as license bonds. On performance and payment bonds, the small business pays SBA a fee of 0.6 percent of the contract price. That fee is separate from, and on top of, the surety's premium. SBA charges no fee on bid bonds. Check SBA's page for current terms.

What should you do before and after closing?

List every bond: type, obligee, amount, surety, expiry, and who signed the indemnity.
Match each bond to a license, permit or contract, and mark which ones depend on the seller personally.
Introduce yourself to the seller's surety and to a surety agent of your own early, with your financials and financing plan.
Decide, with deal counsel, how each open bonded job will be handled, and write it into the purchase agreement.
Have new license and permit bonds issued before your new entity starts work under its own license. See when the seller holds the contractor license.
Calendar bond renewals, maintenance periods and any obligee notices.
Keep bonding separate from insurance in your head: your general liability policy is a different product from your bonds. See surety bonds and what surety bonds cost.

A Morrow review can inventory the bonds you inherited alongside your policies and flag the ones that need new paperwork.

Keep reading

Frequently asked questions

Does the seller's surety bond cover my company after I buy the business?

Do not assume so. In an asset deal your new entity usually needs its own bonds. In a stock deal existing bonds may stay in force, but the surety will usually want to re-underwrite and have the new owner sign an indemnity agreement.

Is a surety bond the same as insurance?

No. A bond protects the obligee, such as a state agency or project owner. If the surety pays a claim, it expects the principal and the indemnitors to repay it. Insurance, by contrast, is designed to pay covered losses for the insured, subject to the policy terms, without expecting repayment.

Is the seller released from bonds when I buy the company?

Generally not for bonds already written. The seller's indemnity to its surety usually survives the sale, even if the purchase agreement shifts responsibility to you. That is why sellers often ask buyers to replace bonds or indemnify them.

Will I have to sign a personal indemnity agreement for bonds?

Most sureties ask the owners of a privately held business to sign personally, and some ask spouses. Read it with your attorney, since it can reach your personal assets and stays in force for bonds already issued.

Can a leveraged acquisition affect my bonding capacity?

Yes, it can. Sureties look at working capital, net worth and debt, and acquisition debt or goodwill can reduce what they will offer. Talk to a surety early, and ask whether the SBA surety bond program fits your contracts.

References

Just bought a business? Get your insurance reviewed.

Send Morrow the declarations pages, loss runs and key contracts you inherited. Morrow can review them against the business you bought, flag gaps and request quotes where it makes sense. Any new terms depend on carrier underwriting.

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This article is general information, not legal, tax or financial advice, and not a coverage determination. Coverage depends on the actual policy wording, carrier underwriting, your purchase agreement and your contracts. Ask your attorney and accountant about deal and legal questions.

Do Surety and License Bonds Transfer When You Buy a Business?