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Is Buying a Construction Company a Smart Business Move?

Buying a Construction CompanyBuying a Construction Company
min read
August 21, 2023

The construction industry is projected to grow by 4% between 2024 and 2027—which means that buying a construction company has the potential to be a lucrative investment.

But in order to successfully buy a construction business, you need to understand the process. For example, how do you know if construction is the right industry for you? How do you evaluate whether a particular company is a good investment? And if you do find a company to buy, what are your options for funding the purchase?

Let's take a look at everything you need to know about buying a construction company.

How Much Do You Make as a Construction Business Owner?

One of the most motivating reasons to buy a construction company? The potential financial opportunity.

Construction company owners are typically well paid, making an average salary of just under $100,000. However, some of the larger companies in construction make well over $1 billion in annual revenue—so, depending on the size and scope of the company you buy (as well as how you manage it), the income potential for a current owner could be much, much higher.

What is the Most Profitable Construction Company?

While profitability depends on a variety of factors, in general, residential construction companies are the most profitable type of construction companies, including new builds and renovations. 

Bonus tip: Improve your cash flow by using Hourly, which ensures you get accurate workers’ compensation premiums down to the penny. That way, you can avoid getting slammed with a huge audit bill. And running payroll is as quick as pressing a button.

Is Owning a Construction Business Hard?

Between managing bids, working with contractors and architects, and growing your company, owning a construction business (or any business, for that matter!) can be a challenging experience. But it can also be a rewarding one—especially once your company finds success.

Why Should You Consider Buying a Construction Company?

Before you make any moves to buy a company in the construction space, you need to make sure that buying a construction firm is the ideal investment for you.

There are a variety of reasons to consider buying a construction company, including: 

A New Way to Make Money

Whether your current business is adjacent to construction and home improvement or completely unrelated, expanding into a new business can be a great way to make more money. When you own businesses in different sectors of the market, it helps secure your portfolio and minimize risk. 

For example, maybe you own an interior design firm—and want to buy a new business in the construction space to expand your service offerings for your clients. Or maybe you own a retail business—and want to branch out, expanding into a new market so your income isn't tied to a single industry. 

Get More Clients

For business owners of any kind, growth is always a great goal. After all, if your business is growing and expanding, it's a sign that you're doing well financially. And buying a construction firm could help deliver the growth you're looking for.

For example, let's say your landscaping business has been steady for the last few years. You've been doing well and are financially stable—and you have some extra cash to invest in a new opportunity. Since you're already in a trade-based industry, buying a company in the construction space can help you expand your business and better serve your current clientele. 

Gain More Control

Many businesses source parts and/or labor from a third party. But when you're working with an external partner to serve your business needs, you don't have much control over the production, timeline, or costs associated with the supplier. If your business relies on third-party construction companies in order to function, buying a construction company could give you vertical control. 

In this situation, "vertical control" (or vertical market control) refers to one party owning all the means of production—which means you control all pricing and processes. For example, if you currently own a property management business or real estate firm, buying a construction firm would mean that you eliminate the middleman by running more of the process. 

Financial Opportunity

One of the biggest reasons to buy a construction company? The potential financial opportunity. Construction company owners are typically well paid, making an average salary of just under $100,000

However, some of the larger companies in construction make well over $1 billion in annual revenue—so, depending on the size and scope of the company you buy (as well as how you manage it), the income potential could be much, much higher.

How To Buy a Construction Company in 7 Steps

Buying a company in the construction space is a big investment—and, as such, it's important to really weigh all the different factors involved to ensure it's the right decision for you. (The last thing you want to do is rush into a purchase!)

Some things you'll want to consider before buying a construction organization include: 

1. Determine What Type of Business You Want to Buy

Different types of businesses in the construction field offer different benefits and challenges. So, before you start looking for a construction firm to buy, it's important to understand what types of companies are available to you and the potential benefits and challenges of owning that business—and then use that information to narrow in on the type of business you want to purchase.  

Some options include:

  • General contractors: General contractors oversee the entire construction process and are responsible for hiring subcontractors (like plumbers or roofers) to complete specific tasks. 
  • Architectural firms: As an architectural firm, you're involved with the project from start to finish. Duties involve planning and drafting the build, as well as collaborating with contractors to get the job done.
  • Structural engineers: Structural engineers ensure that a building's structure is durable, safe, and functional. 
  • MEP (Mechanical, Electrical, and Plumbing): Because this type of contracting involves three different trades, it allows customers to get multiple needs met by working with one company—which can be a major selling point. 
  • Building materials suppliers: Building materials suppliers stock and sell building materials. Many specialize in a specific type of material—like lumber, plumbing supplies, or cooling/heating equipment. 
  • Construction equipment manufacturers: A construction equipment manufacturer makes the equipment you need to get the job done—like excavators, cranes, and bulldozers. 

When deciding what type of business to buy, weigh the pros and cons—and how each business aligns with your ultimate goals. For example, if you buy a residential construction business, you'll likely work with architects on new construction projects, as well as with realtors and home purchasers. 

Many of these building projects will require city permits and inspections. Commercial construction, on the other hand, includes public buildings like schools, hospitals, and offices. These types of jobs usually have a competitive bid process and require building permits at local and state levels. 

Also, consider how difficult running each type of business might be. For example, a small renovation contracting company or a specialty contracting business that focuses on smaller HVAC jobs can be easier to manage—especially if you're new to the industry. 

On the flip side, a larger construction organization will likely be harder to manage—but offers more income potential.

2. Research the Market and Competition

As with any industry, researching the market and your competitors is key in construction, as market research can give you insight into demand and growth potential—while also helping you better understand your customer base. 

It can also help you determine if construction is a strong industry in your area and how many other similar businesses you might have to compete with.

So how, exactly, should you be researching your market?

  • Collect local information: Review business info provided by local media and government agencies or join a professional organization or local group to have a better pulse on construction trends. 
  • Send a survey: Gather opinions of local residents and/or business owners—who could one day be prospective customers. Sending a questionnaire or a survey is a low-cost way to gauge their thoughts and opinions on construction in their neighborhood—as well as identify the projects that potential customers might be interested in.
  • Check out competitor reviews: Read what customers are saying about the services your competitors provide, as it will give you a better picture of what your customer base values and what the market is missing. For example, if customers are leaving rave reviews about a competitor's unparalleled client service, you know that communication and response time are important to them. On the flip side, if you see negative reviews around turnaround time or high prices, you know that by providing fair prices and efficient timelines, you can stay competitive in the market.
  • Send an inquiry: Put in requests with a few competitors to get an idea of how quickly they respond and what their turnaround time is. If they're booked up and take a while to get back to you, it could be a sign that there's more than enough work to go around—while, on the flip side, an immediate, eager response could mean that there isn't a ton of opportunity in the market. An inquiry can also give you a better idea of a competitor's pricing.
  • Find your niche: Speaking of inquiries, contact some competitors about a very specific job or product. If you have a hard time finding someone who specializes in a certain project or construction type (for example, high-end kitchen renovations or commercial construction), that could mean there's a gap in the market—making it an ideal niche to target.

3. Understand Your Financing Options

Buying a construction business can be an expensive endeavor. And depending on how much cash you have upfront, you'll likely need a loan and/or an investment partner to successfully buy the business.

Luckily, when it comes to financing, you have options. Some potential funding options for buying a construction firm include:

  • SBA 7(a) loan: If you're interested in buying an existing construction business or acquiring a competitor, you might consider an SBA 7(a) loan. Backed by the Small Business Administration and the federal government, the SBA 7(a) lender loan program gives up to $5 million with low-interest repayment terms of up to 25 years. To be eligible, the company you're purchasing must have fewer than 500 employees—and you, as an individual, will need to have a good credit score.
  • Use your own capital: If you have the necessary funds, consult with your accountant or financial planner to see if buying a business in the construction industry is the right move for you—and a smart way to invest your money. 
  • Find a partner: Buying a company with a partner can be great for more than just financial reasons—especially if you bring someone on who has a different skill set or years of experience. Work with a lawyer to draw up a partnership agreement and decide how you'll divide up the payments.
  • Explore seller financing: Some sellers might actually agree to finance the purchase of their company. In many ways, seller financing works similarly to securing a regular loan; you apply a down payment to the purchase price and pay back the remaining balance at an agreed-upon interest rate and payment terms—but instead of repaying the bank, you repay the seller. 

4. Research Companies for Sale

Before you can decide if you want to buy a company in the construction space, you need to know what construction companies are available to buy.

There are a few places to look when starting your search for a construction business, including:

  • Online listings: Some construction companies will list themselves for sale, so it's worth keeping an eye on commercial real estate sites like LoopNet or Crexi.
  • A business broker: Business brokers work with businesses to help them find a qualified buyer. So, if you're looking to purchase a construction company, business brokers can be a great resource. However, if brokers have a company for sale, they generally use their network to find a qualified buyer—so you'll want to network with commercial brokers to ensure you hear about relevant companies for sale. 
  • Your own broker: Business brokers don't just work with business owners that are selling companies; they also work with potential buyers looking for companies to purchase. Or in other words, you can hire your own business broker to work on your behalf to find the right company for you. Your broker would tap into their network to learn about upcoming construction companies for sale and represent you as a pre-qualified buyer.
  • Word of mouth: You never know who might be selling a company in the construction field or who has a friend of a friend planning to sell their company. Continue to connect with your community and let people know what kind of company you're looking to buy; this will help you build a broad network and stay in the know about potential opportunities. 

5. Evaluate Potential Options

In addition to knowing where to look when buying a construction firm, you also need to know what to look for. Here are some things to keep in mind during your initial search.

  • Reputation: Is this company well-known and respected in your community? If you decide to keep the existing name, you want to buy a business that has primarily positive associations and a great reputation.
  • Organization: The most profitable construction businesses are the most organized ones. Upon your request, their management team should have financial statements and documentation ready to share with you. This ensures that you're buying a well-oiled machine that's set up for success, even with a new owner.
  • Timing: How long has the construction business been for sale? If it's been sitting on the market for more than a year, there could be serious issues with the business itself—or the asking price could be over-valued. 
  • Readiness: Is the business turnkey, or will it take significant time, effort, and resources to get it up and running—for example, retraining staff or investing in new equipment? Does much of the equipment need repairs? Construction equipment and repairs are expensive, so make sure to review all the assets in the sale price and make sure any equipment is in working condition. If a piece of machinery is on its last legs, it won't be useful to you for much longer, and the contract of sale should be adjusted accordingly.

6. Do Your Due Diligence

You'll need to do your due diligence to determine the business valuation of a company before making a purchase. There are a few ways to do this, including:

EV/EBITDA Multiple

The EV/EBITDA (earnings before interest, taxes, depreciation, and amortization) calculation is commonly used to evaluate businesses, as it allows you to evaluate and measure a company's value vs. potential profitability. 

Generally, An EV/EBITDA multiple below 10 is considered healthy.  

For this calculation, you'll need two things: the company's enterprise value as well as the company's EBITDA, which you can typically find on its balance sheet.

To calculate the EV/EBITDA multiple, divide the company's market value of equity (i.e., the enterprise value) by the EBITDA for the previous 12 months.

Here's what it looks like in formula form:

Enterprise value / EBITDA = EV/EBITDA multiple

So, let's say you're considering buying a construction firm with a market value of $50 million and an annual EBITDA of $10 million. In that situation, you're looking at an EBITDA multiple of 5—which indicates the company is financially healthy.

50 million / 10 million = 5

Net Asset Value

Another way to value a construction firm is to look at its net asset value, which accounts for the company's assets and liabilities, giving you the company's net worth—information you need to ensure the company's asking price is aligned with its actual value.

You can calculate net asset value using this formula: 

Value of company = (Total assets minus total liabilities) x Multiplier

So, if a construction firm has $600,000 in assets and $125,000 in liabilities, and you're using the industry average multiplier as 3.6, their business valuation is $1,710,000.

Value of company = ($600,000-$125,000) x 3.6

Value of company = $1,710,000

7. Take Care of The Legalities and Logistics

As with any major commercial purchase, you'll have to navigate specific legalities when buying a new company—including in construction. Some of the logistics and paperwork you'll need to take care of before and/or during the sale include:

  • Licenses: Confirm that the license status of the company you're buying is in good standing in whatever state(s) it operates in. In some states, the contractor's license isn't immediately transferable—so make sure you take the necessary steps to continue the existing license or apply for a new one before the sale.
  • Bill of sale: Obtain a bill of sale to prove the actual sale of the business—this shows that ownership has been transferred to you.
  • Insurance: A commercial insurance policy doesn't automatically transfer when a business is sold. Chances are, you won't be able to take over the previous owner's policy unless the insurance company specifically approves the change. Either way, you'll want to make sure that you have insurance set up starting the day of the sale.
  • Vehicle documentation: If the construction business you're buying comes with any vehicles, you'll need to transfer ownership with the DMV. Make sure you have all the paperwork completed by the time of the sale. 

Opportunity Awaits

Whether you're a general contractor looking to take your business to the next level or an entrepreneur looking for your next great investment, buying a construction company can be a great move in terms of financial and growth potential. 

And now that you know everything that goes into burying a construction business, all that's left to do? Get out there and find the right construction business for you! 

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