Construction Industry Business Acquisition Consultant
I was recently asked, “what is the best way to approach acquiring a Construction related company? How does one sort through the hype?” The short answer is “manage the process.”
Types of Business Purchases
As you read this, the starting point is the answer to this Question: “Are you in this business now?”
The approach is markedly different if this is an M&A situation as opposed to looking to buy as an Investment (passive) or to become a new business owner. Mergers and Acquisitions (M&A) are, in this case, usually successful Construction Companies that want to grow and expand or economize by acquiring a related company.
Example or Merger and Acquisition
Let’s use an example. Here we have a Grading Contractor. 30 year established, 50 trained employees and profitable. A competitor would like to merge and become twice as big. If either Owner makes a direct approach – he loses. The approach is best handled by a skilled Consultant. NDAs are signed, information is collected and reviewed, and then the parties sit down to talk, with the Consultant as the Intermediary. This keeps the playing field level. If they elect to go forward, the Business Acquisition Consultant is worth his weight in gold in managing the next steps in the process.
Example of Investment Purchase
The other approach is a private party, perhaps someone coming out of Corporate America or a couple of businessmen partnering up and combining funds to buy a profitable company. Construction is a favorite target. The margins are good, and they think they can make them even better with the skills they bring. Their first Qualification is “Cash Flow”. The price ratio to cash flow and the ultimate factor of debt service. They will borrow heavily in most cases. The Consultant advises and assists in subtracting this new debt service from cash flow and ascertaining what is left for profit taking. There are many kinds of Construction entities. Home builders, Electrical Contractors, HVAC, Solar, Roofing, Gutters, with prices from $100,000 to $1M, $2M, $5M and then on to $10, 20, and 100M plus. Managing the process is similar but unique to each. Having a Business Acquisition Consultant should be your Ace in the Hole!
What exactly does “manage the process” mean?
Good Question! This tells me you have been reading along so far. The Process of Buying a Business is covered in more detail on a page under that heading. “Managing the Process” is simply being organized and taking a step by step approach. The most common error Buyers make is trying to cover all the bases or multiple areas too quickly. This is natural since they overlap: However, this can lead to confusion and misunderstandings. The Consultant has done this many times and keeps the process orderly and flowing smoothly. For instance, jumping immediately into due diligence. Before you ‘dive deep’ and order a QE (Quality of Earnings Report, similar to an Audit), you need to meet the Owner, do a site visit and see if this Construction Company feels like a good fit.
How do you identify a good business to purchase?
Another Excelent Question. We begin with an Initial Interview with YOU! – the Prospective Buyer. We listen and ask questions. What are your goals, skills, financial limits and risk tolerances? Once we know what to look for, it’s easier to identify a good fit. The next thing is we do a search, unless of course, you have found a Construction Company to target. Nearly every ‘good business’ will be listed with a Broker. (Along with many no so good ones!) We make contact on your behalf and obtain Broker-to-Broker respect. We let the Broker know you have a skilled Representative and obtain a CIM (Confidential Information Memorandum) or something of the like. We review this and share it with you. This is how we help identify a ‘good business’ with and for you.
What are the steps to purchasing a construction business?
Once we have identified a target, met the Owner, seen the business and read the CIM, the next step is securing financing and an LOI (Letter of Intent). Now the real challenges of negotiation and a deep dive into the business financials can begin. I have generally found that if there was a good meeting with the Owner in Step One, these other Steps can be managed. The final step is then the actual Closing and Transition of new ownership.
Why do both parties lose when they use a direct approach?
No matter how businesslike we want the initial meeting or contact to be, you and the business owner are still emotional people to some extent. If the personalities clash, or one offends the other, even by accident, it’s hard to recover. The Buyer is excited and wants to make a great deal. The Seller is wary and does not give his trust away easily. The need for an experienced Third Party to be the Intermediary is critical and more good deals are lost at this stage than any other. In the Process, on many occasions, after such a first meeting, I have had either the Buyer or Seller say something in frustration, that had he said it in the meeting, the deal would be as dead as a doornail. And I was glad I was there to keep it from being said because later they worked it out!
I hope these answers have helped to identify some pain points and their resolution. To “Manage the Process” is to offer to solve these and many other problems as Your Buyer’s Representative, specifically as it related to my services as your Construction Company Business Acquisition Consultant.