For decades, the construction, contracting, and building industries garnered little interest from outside investors. That dynamic is changing.
Historically, private equity (PE), avoided the construction industry. The market was seen as “too lumpy,” “too cyclical” and “too project driven.” The unknowns and downside risks were enough to discourage large scale investment. And, frankly, few firms had the appetite or expertise to tackle the intricacies of understanding and operating a construction operation: from the complexities of each project, the balance sheet, to managing relationships with unions, municipalities, and customers.
As an investment banker operating in the industry for more than a decade, a convergence of factors are challenging the status quo. There might be no better time than the present to consider a sale or outside investment to expand operations—if you are built for the job.
What’s changing the dynamic?
For any business owner, understanding what’s driving the market is essential. For the construction market, several factors are at play:
- PE firms in general have a large capital overhang to invest, which is opening the door to non-traditional target areas such as construction to enter the consideration set.
- At the same time, many construction companies are improving operations, diversifying service lines, adding all-important recurring revenue streams through maintenance, service, and repair operations, and showing growth, factors of which make them much more attractive to PE investors.
- Aging infrastructure in many North American cities and regions, which will require significant spending in the next one to two decades, has piqued the appetite of investors. The prospect of entering a growing market with the potential for a vast amount of work and healthy backlog is certainly enticing.
- Lastly, more firms jumping into the market means more exit doors are opening for sellers. Under PE ownership, a Company can be optimized and grown to attract a strategic buyer looking to consolidate operations, explore a public listing or sell to a larger PE firm upon a secondary exit.
That all said, PE firms are still discerning when it comes to where to invest and with whom. If you’ve ever considered selling, consider these questions first:
- Are you a true market leader? Investors getting into the construction industry are investing in premier organizations – true market leaders with solid reputations and well-established track records on performance, profitability, and attracting new business.
- How’s your backlog? Waiting to clear a backlog of work before considering selling isn’t the best strategy. In fact, a quality investor is going to view a healthy backlog as a net positive.
- Where are your recurring revenue streams? If your backlog is a strong indicator of future growth; recurring revenue streams through maintenance, service, and repair contracts may be even more valuable in the eyes of potential investors.
- What’s your growth plan? As the expert in the industry and your market, identifying possible acquisition and expansion opportunities and a rationale to support them for a potential buyer makes you a catalyst for revenue growth.
- Who’s your banker? An investment banker with experience in the construction industry can not only advise you at every stage, but also connect you with potential buyers who share your perspective and long-term goals for the company you’ve built.
Even if you’ve never considered selling your business, now might be the time to explore your options. For well-managed, well positioned and respected players, the potential upside is worthy of consideration. And getting your house in order today will certainly benefit you if and when opportunity knocks.
Steven M. Rathbone is a Managing Director within the Stout Investment Banking group. He has more than 15 years of experience providing strategic advisory and corporate financial services, with a primary focus on sell-side mergers and acquisitions in the diversified industrials and automotive aftermarket sectors. Steve is experienced at all stages of middle market transactions, from origination, to execution, through to closing, representing clients in the United States, Australia, and the United Kingdom.