Is it time for mid-sized construction firms to embrace private equity?
- Private equity partnerships can help mid-market construction businesses grow, add velocity to their strategic execution and invest in new technologies and markets, while also providing a valuable exit strategy for owners nearing retirement.
- However, construction firms that pursue speed over alignment when choosing a strategic partner risk cultural challenges, employee frustration and tension over decision-making authority.
- Construction CEOs should approach a partnership search with curiosity, clear goals and a focus on strategic, cultural and values alignment in order to boost the likelihood of finding a good fit.
Construction is increasingly a grow-or-sell business. More consolidation has left many remaining small or mid-sized construction companies struggling to keep up with the scale of their larger peers, even as many in the present generation of owners near retirement.
As a result, more owners are starting to explore private equity or strategic partnerships. These can be either an outright sale or a minority investment, but both can provide an injection of capital and strategic guidance to help a construction firm scale up to stay competitive.
Keep reading to learn more about the benefits and risks involved in working with a private equity partner.
How can private equity investment help a construction business grow?
Construction firms that partner with private equity firms usually do so to boost growth capacity and add resources. In many cases, the partnership also allows the owner to exit the business, although some owners choose to pursue a deal that keeps them involved.
Here are more details on key benefits that can emerge from a successful strategic investment:
- Growth: As the construction business becomes more consolidated, smaller firms need new resources to keep up with bigger rivals. Strategic partners can deliver those resources, allowing smaller firms to scale, meet the demands of today and even expand into new geographic markets and service verticals.
- Liquidity: Strategic partners provide much-needed access to capital. This can involve buying the business outright from the current owner, but it could also mean taking on a minority stake or even buying out inactive co-owners who no longer wish to be involved in the business.
- Clear strategy: Most private equity firms will only invest in your business if they see clear pathways to value creation. This kind of strategic guidance can help break through existing growth hurdles and augment your existing team’s capacities.
- Higher valuation on a sale: For owners who are ready to exit, a private equity buyer will often offer a better multiple on invested capital than selling to an internal succession or an employee stock ownership plan (ESOP).
- Tech infrastructure: As newer technologies like AI and automation become more useful to construction firms, strategic partners can help firms upgrade, upskill and figure out how to make the most of that technology in their businesses.
Construction firms should value alignment over speed when choosing a private equity partner
Not everyone interested in buying or selling a construction business is a good match. Misaligned deal partners risk employee frustrations and cultural challenges, and owners who remain involved with the business after a sale may also face tensions over who has the final say on major decisions.
This is why alignment is the foundation of a successful strategic partnership. If you have a significant financial incentive to pursue a sale or investment, you may be tempted to quickly agree to a potential partnership that makes sense from a value perspective.
However, you’ll typically be better off carefully weighing your options, exploring potential partners’ strategic visions and choosing a deal that offers long-term alignment and a high likelihood that both partners will make each other stronger by working together.
How should your construction firm find the right private equity partner?
Finding the right private equity partner for your construction business is a process. Take your time, thoughtfully assess your options and don’t be afraid to walk away if a deal doesn’t feel right.
Here are five elements to consider during your search:
1. Be curious
A strategic partnership may or may not be right for your business. But you won’t know until you see what’s out there. Be curious, explore potential options and weigh them against alternatives like an ESOP, internal succession or an M&A involving another construction firm to decide what makes the most sense for you.
2. Get clear on your goals
Why are you trying to do a deal? What are your goals for yourself, your family, your team and your business? Asking these questions at the beginning of your search will help you figure out whether a potential partner or acquirer could be a good fit.
3. Decide how you feel about control
As you consider a potential partner, make sure both of you are clear on how your relationship will function after a sale or investment. This can be a source of considerable tension, so you need to decide if you’re looking for a minority investor or an outright acquirer who will take a more active role in the management and governance of your business.
4. Assess strategic, cultural and values alignment
If your company is going to thrive in the wake of a transaction, you need to be aligned with your new partner on strategy, culture and values. Have honest conversations to discover whether you’re on the same page about where your business could go and how to get there. With the right partner, 1+1 can equal 3.
5. Remember that timing is everything
The worst time to start looking for a deal is when your business is in decline, because you’ll have limited options at best. If you can, approach this process with a long runway and a firm commitment to wait for the right deal rather than jumping at the wrong one out of financial necessity.
How Wipfli can help
We advise construction businesses on growth, technology, valuation and transactions. Let’s talk about your goals and whether the right deal can help you achieve them. Start a conversation.
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