Tips for Buying a Construction Business
The COVID-19 pandemic has had a substantial impact on the construction industry. An October 2020 survey by the Association of General Contractors (AGC) reported that construction companies were having trouble finding construction materials and skilled labor. The AGC also noted that 75% of contractors have had projects delayed or canceled.
As the vaccine is distributed and the virus subsides, economic activity will increase. Delayed projects will start again, and the number of customers looking for bids on new construction may ramp up. Well-managed construction firms will benefit in a post-pandemic environment, and some companies will be attractive to purchasers.
Before buying an existing construction company, you need to understand how the industry works, and the unique challenges that owners face.
How Construction Firms Operate
Residential and commercial construction firms may operate differently, and these differences impact how an owner generates profits.
Operating a Residential Business
A residential construction business may generate the majority of sales through referrals. A customer may interview several firms to build a new home, or to complete an addition or remodeling job.
Construction owners work with architects on design, and must also get city permits before construction begins. Building projects also require city inspections during construction. Residential jobs may also require a number of change orders, because the customer may not have a solid vision of the project when construction starts.
Managing a Commercial Business
Commercial work includes office buildings, schools, and manufacturing facilities. These jobs typically require a competitive bid process, and owners must submit proposals based on specific guidelines.
The client will have a formal process for receiving and evaluating bids. Commercial job requirements may be more specific than residential work, and there may be fewer change orders. These projects also require building permits and compliance with local and state regulations.
All construction businesses must manage a number of factors to succeed over time.
Key Issues for Construction Businesses
Successful construction companies do an effective job at managing each of these variables, in order to generate sales and profits.
Investment in Fixed Assets
Construction companies invest in machinery, equipment, and tools to operate, and these fixed assets must be repaired and maintained over time. A buyer should review the fixed asset listing, to confirm the remaining useful life of the large assets owned by the seller.
Pricing and Bidding on Work
Experienced builders can accurately estimate the true costs of a particular job. They can forecast the amount and price of materials, and the labor hours required. The best companies find and hire reliable tradespeople, who work productively and perform quality work.
Construction businesses also incur overhead costs, and these indirect costs are assigned to projects. One large cost is insurance, including general liability insurance and workers’ compensation coverage.
Owners use all of the cost information to price the project, based on a profit margin. Profit margin is the amount of profit generated for each dollar of sales, and margins in the construction business vary greatly. If costs are not estimated correctly, or if the work is poorly managed, costs may exceed the bid estimate, and the builder may lose money.
Managing Job Sites
Construction projects must be closely supervised, and managers (whether the owner or project managers) should be on the job site each day. Owners manage employees, part-time contractors, and subcontractors. Effective supervision helps the business meet construction deadlines.
If you’re looking for a construction firm to purchase, find a business that has a good reputation and treats their employees well.
Finding a Great Construction Business
Construction customers invest a large amount of time and money, and satisfied customers are likely to provide a strong referral. The best construction companies develop a solid reputation and drive referral business.
Many successful builders thrive by choosing a niche, such as high-end residential homes, school construction, or simply, kitchen remodeling. The owner can develop more specific expertise in a niche, and estimating costs becomes easier. A niche business owner can also turn down projects that will not be profitable.
Profitable construction businesses are organized. They generate and monitor financial statements, train staff, and document the procedures required to complete a job on budget. A company with a strong management team can keep the business on track.
A great construction company focuses on safety at the job site. Owners train their workers on safety issues and communicate how people and equipment should enter and leave the job site. Safety measures reduce the risk of injury or property damage during construction.
To make a more informed buying decision, work with a business broker with experience in the construction industry.
How a Business Broker Can Help
The business brokers at Raincatcher have worked with buyers and sellers for over 30 years, and they have helped thousands of business buyers in a variety of industries.
Raincatcher’s staff has an extensive network of accountants, attorneys, and other professionals, and they can help you find an attractive business for purchase. Once you find a company, you’ll spend a great deal of time on the due diligence process, and your broker will keep the process on track.
If you’re purchasing a construction company, work with Raincatcher to find the right business and close a successful purchase.
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