Why the M&A Boom? How Construction Companies Can Take Advantage

By James Miller and Bill Clark of CBIZ

We have learned a lot about the increased appetite for mergers and acquisitions (M&A) within the construction market through meeting with our construction clients nationwide and our relationships with investment bankers and private equity groups. The construction industry has historically been viewed as a “risky” investment, with construction companies only as good as their last construction project. Since the COVID-19 pandemic, the average number of deals in this space per year has more than doubled, with this trend continuing through 2025. Why the increased interest in construction? In this article, we will discuss key areas driving the M&A boom in the construction market, and how construction companies can prepare ahead of time to maximize this opportunity.

Why the M&A Boom?

Increased Demand

There has been a significant increase in the demand for overall construction, primarily due to the continued emphasis for increased legislation surrounding government infrastructure programs to stimulate the economy, critical utility and infrastructure improvements and upgrades needed, and increased demand for housing. This opportunity has attracted the interest of private equity and other capital investors, creating the appetite to invest in the construction industry.

Manage Shortages and Resources

The COVID-19 pandemic exposed what was already a growing issue within the construction industry — shortages in the supply of both skilled labor and materials, both resulting in rising costs. While this created internal challenges for individual construction companies, larger construction companies saw opportunities to consolidate and help secure and build their skilled labor force and enhance material purchasing power. Private equity and other capital investors saw opportunities to create platform companies to build from and grow through additional acquisitions. A significant focus has been on specialty trade contractors that require highly specialized, skilled labor. New technology and increasingly complex project requirements have increased the level of skill required and added more pressure to an already stressed labor market.

Different View of Construction Operations

The operations of a construction company have historically been viewed as non-recurring and project-based, creating significant challenges in the predictability of the ongoing success of a construction company. Private equity firms have since realized that most large construction projects are won through client relationships, with much of the work containing or leading to recurring maintenance, repair, and other ongoing service type arrangements. Construction companies providing a service component, especially specialty trade subcontractors in roofing, mechanical, HVAC, plumbing, and electrical sectors, continue to draw significant interest from buyers seeking to establish platforms and plan for future growth.

Geographic Expansion

Geographic expansion is not a new concept and is a growth strategy used by many construction company owners. A significant population of aging construction owners with no succession plans has created significant expansion opportunities for investors through consolidation, and many times private equity is employed to provide the necessary capital.

Rise of Technology

The construction industry has historically focused on high-quality, on-time project delivery. Less focus has been on processes and making investments in a company’s technological infrastructure, which provides significant immediate value-add opportunities for private equity investors that increase the appetite for investment.

What Should Contractors Do?

Strategic planning should begin now, regardless of when construction company owners anticipate exiting. The reality of today’s market presents two primary options: grow or sell. Skilled labor and talent will gravitate towards growing companies, which will present significant constraints for construction companies that choose to stay idle.

Exit Strategy – Planning an exit strategy includes the type of exit (succession, sale, merger, etc.), and the consideration (exit “price”) required to entertain if/when an opportunity is presented. Meet with a team of advisors to discuss after-tax scenarios, any legal constraints, and other areas that can be improved now. Additionally, work with other external parties, including the bank and bonding company, and team up with a strong investment banker that knows the industry and has a good network of potential interested parties that the company can be marketed to.

Enhance Enterprise Value – Work with advisors to determine key drivers in the valuation of the construction company. Increase focus around growth strategies, both in customer relationships and attracting and retaining skilled labor, equipment, and materials sourcing partnerships. In addition, know your business, including the market, key competitors, key performance indicators (KPIs), specialized expertise, location advantages, and what the company’s market “reputation” is, with its customers, vendors, third party service providers, and in some cases competitors. In addition, get an understanding of comparable transactions, the key financial measurements and multiples used to value and build the purchase price for these transactions to help develop an expectation if an opportunity is presented. Key indicators impacting the value of a company include revenue stability and growth, profit margins and earnings before interest, taxes, depreciation and amortization (EBITDA), cash flow, and the strength of the balance sheet (net tangible working capital).

Self Diligence – Perform “sell-side” quality of earnings analysis, essentially performing self due diligence to expose areas of risk and exposure, including positive and negative factors, and anomalies that may indicate unstable financial and operational performance, deficiencies in controls over financial reporting, and any other internal barriers or deficiencies. The goal is to determine the “normalized” going-forward income model of the construction company, removing one-time/non-recuring items. Normalization adjustments include removing excess compensation, one-time legal expenses, one-time/non-recurring changes in contract estimates/performance, and any other changes in the operations of the company that will not be part of the going-forward business model. The more consistent the historical financial performance of a company is, the more predictable the financial projections will be, and the more understandable the corresponding pro-forma financial model will be. This makes the company a more attractive target from a buyer’s standpoint. Being proactive in identifying these items will help to reduce a buyer’s concern regarding additional infrastructure investment being needed post-transaction, which could reduce the valuation and ultimate purchase price. As mentioned above, working with an investment banker will also help properly market the company to a target group of potential interested parties, and help manage the process to maximize the goals of the exit strategy.

“Qualify” Backlog – A strong backlog of signed contracts further supports the consistent and predictable nature of the contractor’s operations and is the clearest indicator of a contractor’s stability and growth potential. Conversely, contractors that have record high backlog may create concern from a buyer’s perspective, including the lack of history the contractor has in performing and completing contracts at this volume, creating a “one-time” anomaly in backlog that often is discounted by buyers in evaluating the contractor’s enterprise value. Qualify the backlog, including the timing of completion, resources, and expertise needed, and the quality of the customers (long-term relationships vs. one-time projects).

Know the Buyer/Investor – Most of the focus and diligence during the M&A process is the buyer/investor getting to know the selling company. The seller should also perform diligence on the buyer/investor, including their financial strength, ability to obtain financing for a proposed transaction, and understanding the terms of such financing. Consider how much of the transaction will be seller financed, where the risk of performance and ultimate payout of the purchase price is on the seller. Has the buyer had other acquisitions, and how successful were they? What is the onboarding plan post-transaction? Understanding these items upfront will help minimize surprises down the road.

Additionally, how much experience does the buyer/investor have within the construction industry? A contractor’s bonding program is based on historical results and the relationship the contractor has with the surety and bonding agent. M&A transactions resulting in a change in ownership could create concerns with the surety working with new ownership. Including the surety and bonding agent in the M&A process is essential to ensure a smooth transition and continuity of the contractor’s bonding program.

The construction industry has experienced increased attention due to its successful relationships and specialty niches, which in turn have created significant M&A opportunities. The M&A transaction cycle could be long and tedious, and can, at times, be unsuccessful in the end. It is never too early to start planning, even if the exit is not imminent. Utilizing a proactive and adaptable approach, combined with proper planning, preparation and execution, and the engagement of experienced professionals, can help you overcome challenges and create opportunities for the achievement of successful, value-creating M&A transactions and drive growth by establishing competitive advantage in a rapidly evolving market.

James Miller, CPA, CCIFP, is an integral part of the CBIZ National Construction Industry group (www.cbiz.com) and is located in the New Haven, Connecticut office. He has more than 22 years of experience compiling, reviewing, and analyzing financial statements for construction contractors and other allied companies. Miller has considerable experience with construction claims matters and has provided them with litigation support service. He has also been involved in high profile and sensitive engagements regarding fraud and litigation support. He can be reached at [email protected] or 203.781.9749.

Bill Clark, CPA, is a Managing Director in CBIZ’s (www.cbiz.com) Assurance Services Division and the Construction Industry Group Leader for the Nashville, Tennessee office. He has more than 29 years of experience in public and private accounting for construction contractors. Clients rely on him to supervise audits, reviews, and other engagements. Clark also consults with them regarding contract costing, fixed asset purchases and financing, taxation issues, and strategy and continuity planning. He regularly assists clients in the implementation and evaluation of systems of internal control and with opportunities to improve bonding, licensing, and prequalification capacities. He can be reached at [email protected] or 615.245.4040.