5 Key Takeaways for Building Value in Your Construction Company *For Construction Pros
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As a foundation, it is important to understand how value is built in an organization. Back in the 1990s, a study on pre-job planning was conducted for the Construction Industry Institute. It was found that the ability to influence the outcome and the ultimate success of a construction project is largely determined by how well pre-job planning is executed before the project begins. Likewise, when it comes to Construction mergers and acquisitions (M&A), the quality of the pre-transaction process greatly influences the ultimate success of a deal for anyone selling a business.
If we were sitting down over a cup of coffee at a local coffee shop and you asked:
“What do I need to do to sell my business?”
“What can I do to maximize the value I receive from a transaction?”
I would give you a lot of needed advice but the most important thing I would tell you is that preparation is the key driver of maximizing the value of your business in a transaction. Having worked with both buyers and sellers of businesses in the construction industry on dozens of transactions over 20 years, I know that the more a business is prepared for a transaction, the more successful the outcome will be for the owner.
Put yourself in the shoes of a potential buyer and ask:
· Why would I want to buy this business?
· What makes this business more attractive than another?
Whether you are thinking about selling your business in the next few months, the next few years, or somewhere in the distant future, you can prepare your business now by working on the following value-building ideas.
Customer Concentration
You have heard the saying about not having all your eggs in one basket. The “too many eggs in a basket” issue is commonly found in construction companies and can destroy value. The issue is having too much of your annual revenue coming from too few customers. It turns buyers off because of the inherent risk it brings. Here is a general guideline to assess your business: If 40% or more of your business comes from one or two customers year after year, you have a serious business risk issue that might bite your business in the backside. Buyers are attracted to companies that have diversity in their customer base from year to year.
Early in my career, I worked on the acquisitions team for a national construction firm. One of the companies that we acquired had a key customer that made up 60% of its annual sales. We knew it was an issue going in, but we still purchased the company because it fit our overall strategy. Unfortunately, a few years later, that customer went into bankruptcy and we were the recipients of a very painful seven-figure lesson.
1. Value-Building Takeaway
Having just a few customers that make up most of your annual revenue will cause most buyers to walk away or offer substantially less because the risk is too high. Lasting customer relationships are a sign of a solid company with a strong reputation – just make sure your business builds that great reputation across multiple customers.
Management Dependency / Depth
A common issue in a lot of construction businesses is the dependency of the business on the owner or another key employee. This is a big risk to any organization and usually makes buyers very squeamish. If something tragically happens to the owner or key employee, the business may take years to recover, or it may not recover at all. In the last month, a construction company client of mine lost a key operations employee in a traffic accident. The remaining employees are scrambling to get their arms around current projects and are trying to rebuild from the large gap left by this tragedy.
There is another closely related issue that can cause hesitation from buyers that centers around the depth of the management team in the organization. Much like professional sports teams, having player depth for key positions is critical to the success of any organization. Of course, this is not always possible with smaller companies that have fewer employees. However, all companies (regardless of size) can begin to address this issue by cross-training and developing its people for future roles.
2. Value-Building Takeaway
If the business is dependent on the owner or a key employee, begin to set strategies in place to reduce the dependency issue in your organization. Cross train employees and put development programs in place for your people. This builds resiliency in your organization.
Project Controls
When it comes to impacting value for a business in the construction industry, one of the riskiest areas is in the quality and consistency of a company’s project controls–its systems, processes, and tools used to manage the entire project life cycle–from estimating to project closeout. Years ago, when working on the acquisition of construction-based companies, one of our major due-diligence focus areas dealt with assessing the effectiveness of a firm’s project controls. This area played a large role in determining whether to pursue an acquisition or pass. Our review would look at the performance of their current work in progress and look at how the business performed on previous projects with the systems and processes they had in place. If the quality of their project controls were weak and we could not get a comfort level on how well they executed work, we would simply walk away from the deal.
3. Value-Building Takeaway
Having solid project controls is critical to the operational, and ultimately, the financial performance of a company. To build value, have the proper systems, processes, and tools in place to manage the life of your projects consistently, from estimating to project close-out.
Financial Management
This area gets the most scrutiny from interested buyers and it is the very first area that they want to review. Buyers will pour over the financial statements of a potential acquisition upfront to see how the company has performed over the past few years and to decide whether to move forward with an offer. Not only are they looking at company performance, but they are looking at the quality and accuracy of the financial statements they are given.
Buyers also like detail. The more level of detail that can be provided in your financials, the better a buyer can develop an overall understanding of your business. As an example, a general contractor might have financial statements that show the overall performance of their company and have an additional level of financials that show the performance by customer type like healthcare, industrial, high rise office, education, etc. Other contractors may have financials divided up by the type of work performed like new construction, remodel, or service. Meanwhile, multi-location companies could show financial performance by location or branch. You get the idea.
4. Value-Building Takeaway
Produce accurate financials on a regular basis with a level of detail that shows how you are performing overall. If possible, list by customer type, project type, or even geography. This will help anyone outside your organization that reviews your financial statements develop a more solid understanding of your company’s performance.
Strategic Planning
This is an area that is critically important, sometimes thought about, but at best, implemented inconsistently in our industry. A strategic plan at its base level lays out the direction of the company over the next few years through the setting of a few short-term goals. The strategic plan also defines the unique set of strategies and tactics it will use to achieve those goals. Having a strategic plan in place is a great value-building tool. It shows potential buyers that you are strategically savvy and that your business has a plan to attack the market.
Recently, I heard of an acquisition deal that went south in a hurry. The management team of a $100 million construction and service company was meeting with a potential buyer in the company’s conference room. The conversation started out great with the team covering the history of the company and its financial performance. Eventually, the conversation turned toward the future and the buyer asked an important question that is common in acquisition discussions: “What are the opportunities for growth with your business?” The CEO of the company gave a completely honest, but unfortunately, disappointing answer. He said, “I do not know.” The buyer walked away from the deal because he had no confidence that the management team knew how to develop and execute on a strategy that would grow the business.
5. Value-Building Takeaway
Being able to develop and execute on a well thought out strategic plan gives a buyer a greater level of confidence that your business will be a solid acquisition. Regardless of whether you decide to sell your business, keep in mind that an organization focused on the development and execution of a strategic plan will produce better results year after year over those companies that avoid this important value-building discipline.
There are a lot of items to focus on when it comes to preparing your business to sell. Ultimately, as a business owner, put yourself in the shoes of a potential buyer and ask:
- Why would I want to buy this business?
- What makes this business more attractive than another?
These questions may be hard to answer objectively, but it is a good place to begin. If you are having trouble coming up with answers to these two questions, you might want to start working on the value-building areas outlined above.