Building A Contracting Business To Sell

Within the last decade or so, consolidation has become the name of the game within many of the sectors in the construction and contracting industries.

It was once a space dominated by acquisitions performed by large public firms, private equity, and large private companies. The question for the current owners looking to retire and exit their long-held businesses is, "How do I position my company to get the highest valuation possible?"

You can breakdown the critical factors contributing to the valuation of contracting businesses into 5 categories:

Recurring Contracts
Specialty Work
Customer Concentration
Customer Type/End Markets
EMR

First, the most essential factor to consider when selling your business is the work your company performs. For example, real estate is about the location but in a contracting business; it's maintenance. Buyers have shown they want to see long-term relationships with customers with recurring contracts in place. Generally, many owners of contracting businesses will refrain from service or maintenance work as this can extend warranties on the job done. This creates the potential for liability issues if specific components the company installs fail.

However, from the perspective of a potential buyer, maintenance work is seen as less dependent on economic cycles. While building operators may not invest in new HVAC systems or developers may not construct new facilities in a high-interest rate environment, they understand the importance of maintaining existing infrastructure. Maintenance work offers higher profit margins as it is often less time-consuming and requires minimal new materials. In a well-operating facility, a maintenance check can be as simple as taking readings or conducting inspections. Repair or replacement work can then be done through proper agreements. Many owners know that time and material are usually more profitable than bidding on competitive projects. Buyers recognize these advantages of maintenance and service work and are often willing to offer higher valuations, with 2 or 3 additional turns of EBITDA associated with maintenance compared to ground-up new construction.

The second crucial factor to consider when selling a contracting business is whether you specialize in any specific areas. Specialties such as low-voltage work or expertise in the power generation industry can command additional turns of EBITDA from buyers. Technological expertise plays a significant role in specialties like low voltage, involving the setup of security systems and IT networks.

Compatibility issues may arise when using specific hardware, so it is important to ensure that all equipment can communicate effectively. For example, having 20 cameras on a building is only beneficial if they can be linked to a central monitoring office. If access control systems do not interface with the software used for the cameras, complications may arise during the linking process. Specialized areas often require additional expertise and create barriers to entry, limiting potential competing acquisition targets.

Customer concentration is another important aspect that can impact interest and potential valuations. If a contracting business relies heavily on one general contractor, developer, or corporation for all its work, it poses a risk to the business and its margins. Buyers are concerned about the potential loss of future revenue if a competitor offers lower rates. Mitigating this concern involves implementing a robust sales process and continually signing new customers.

The type of customers a contracting business works with also affects its valuation. Whether focusing on residential, commercial, industrial, or municipal projects, it is crucial to differentiate oneself in the market. For example, excelling in multi-family construction and maintenance, where competitors struggle to break even, can drive higher margins. It is important to highlight these strengths to potential buyers, as they will prefer to acquire the best company that meets their criteria over the second best.

Lastly, the EMR (Experience Modification Rate) rate should be considered when selling a contracting company. A low EMR rate is desirable, as it indicates a lower risk for potential buyers. Companies with a history of EMR issues may seek to acquire businesses with a low rating to bid on jobs that they otherwise could not. By creating a holdings company and making both the current company and the potential new company subsidiaries, they can focus on bidding on jobs with lower EMR requirements. EMR rates have become a qualifying factor for many buyers and are often one of the initial questions asked during the sales process.

These are just a few of the important factors to consider when selling a contracting company. Other factors such as in-house apprentice training, bonding requirements, job size, and annual volume of work should also be taken into account. While not comprehensive, these factors can help guide the process of building a company with the intent of achieving the highest possible valuation upon exit.

Author
Jack Carter
Senior Deal Analyst
Benchmark International

T: +1 615 924 8613
E: jcarter@benchmarkintl.com

Americas: Sam Smoot at +1 (813) 898 2350 / Smoot@BenchmarkIntl.com

Europe: Michael Lawrie at +44 (0) 161 359 4400 / Lawrie@BenchmarkIntl.com

Africa: Anthony McCardle at +27 21 300 2055 / McCardle@BenchmarkIntl.com

ABOUT BENCHMARK INTERNATIONAL:

Benchmark International is a global M&A firm that provides business owners with creative, value-maximizing solutions for growing and exiting their businesses. Benchmark International has handled over $10 billion in transaction value across various industries from offices across the world. With decades of M&A experience, Benchmark International’s transaction teams have assisted business owners with achieving their objectives and ensuring the continued growth of their businesses. The firm has also been named the Investment Banking Firm of the Year by The M&A Advisor and the Global M&A Network as well as the #1 Sell-side Exclusive M&A Advisor in the World by Pitchbook’s Global League Tables.

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