Retiring builders, private equity fuel M&A activity
From Penza Bailey Architects to WBCM to Bunting Door & Hardware, various BC&E member companies have been parties in merger-and-acquisition (M&A) deals in recent years. And the pace of those deals seems to be increasing.
Market watchers say several factors are driving heightened M&A activity in the construction industry: growing private equity interest in the sector, the drive to create more robust and profitable companies through expansion, and a growing number of business owners looking to sell and retire.
That has resulted in several BC&E member companies becoming part of larger, dynamic companies.
Penza Bailey Architects became a Studio of Prime AE, an architecture, engineering and construction management company with offices in 23 markets across the country. This summer, Bunting Door & Hardware was acquired by The Cook & Boardman Group, a leading national distributor of commercial entry solutions and integrated security systems. Earlier this year, the consulting engineering firm WBCM was acquired by TranSystems – a firm that specializes in planning, designing and building transportation systems and other infrastructure. In turn, TranSystems was just acquired this summer by Gannett Fleming, creating a $1.3 billion firm with more than 5,000 employees.
Negotiating and executing M&A deals is rarely a pain-free experience. But a successful deal can generate robust benefits for buyers and sellers.
SteelFab’s acquisition of Baltimore Fabrication spurred rapid growth for the Maryland firm, both in sales revenue and production capacity.
“Prior to our acquisition by SteelFab, we had to organically grow our infrastructure,” said Scott Foreman, Executive Vice President of Baltimore Fabrication. “If the team sold a large job, we would have to fund equipment and resources with our own cash flow which was always a struggle. Having the financial support of SteelFab allowed us to climb a couple of rungs of the ladder, even skip a couple of rungs. If we sold a $10 million job and needed a $1 million piece of equipment, as long as the financials made sense, we could get that equipment. That catapulted us forward.”
That situation enabled Baltimore Fabrication to move into bigger quarters, invest in robotics and other major equipment, and expand its workforce.
The average size of its miscellaneous metals contracts grew from about $250,000 previously to nearly $3 million currently, said Mark Rich, President.
For both Baltimore Fabrication and SteelFab, the acquisition delivered one other competitive edge.
“The customer would prefer to have a sole-source contract when it comes to metals. By partnering with SteelFab, we could offer a turnkey package of structural steel, miscellaneous metals and ornamental metals,” Rich said.
“This was really eye-opening to me,” said Chris Gregory, Executive Vice President of SteelFab. “I realized we could really set ourselves apart by offering this package deal. It has allowed us to sell ourselves more on service — more so than focusing on price.”
Gregory, who has participated in multiple acquisitions at SteelFab, and Foreman and Rich, who oversaw Baltimore Fabrication’s acquisition of a York, PA company earlier this year, have all embraced one practice when it comes to integrating the acquired company into their operations.
When working with the acquired staff, “you try to couple any change that would cause discomfort, like policies that push people outside of their comfort zones, with a change that brings excitement, like a new machine or wage increases,” Foreman said.
To meet its long-term growth goals, Bala Consulting Engineers Inc. has completed has completed four acquisitions to date.
“We are always open to acquisitions and there are a lot of smaller companies that are looking to be acquired for succession-planning reasons,” said CEO Kimberly Burkert.
Bala seeks out companies that have similar values and culture, a desirable geographic location, expertise that could expand Bala’s service offerings, and impressive talent. The deals, Burkert said, enable Bala and the acquired companies to offer a broader range of services and streamline their business processes and expenses by combining back-office operations.
Some acquisitions open doors to work in new locations or with sought-after clients. For example, Bala’s acquisition of Spears Votta and Associates enabled the company to partner with major architecture firms in Baltimore that do work nationwide, she said.
To facilitate that ongoing process, Bala has assembled a strong acquisitions team, including representatives of every Bala department and accountants and lawyers who specialize in M&A. It has developed checklists covering every step of the process.
On the surface, all that M&A activity presents interesting opportunities to company owners looking to sell.
“Private equity has been getting more and more traction over the last couple of years in the construction industry,” said Mike Gentry, Director at KatzAbosch. “Private equity is definitely interested in any company that has recurring service work. They love that revenue model. So, we have seen some plumbing companies acquired recently, some home renovation companies and some electrical contractors.”
But that doesn’t mean company owners can coast to a lucrative sale.
“This is a painful process,” said Chad Prinkey, CEO of Well Built Construction Consulting.
To begin, “your company is not worth anything close to what you think it is,” Prinkey said “And just like anything with supply and demand, the more companies that are exiting, the more options there are for buyer, the worse your valuation gets.”
“Some owners have their own valuation done ahead of time to know what they are potentially worth and ensure that they are getting the right deal,” Gentry said. “This might be money well spent. Owners always think their business is worth more than it is, so valuations can be disappointing. It is better to get that emotion out of the way up front rather than getting mad at a potential buyer for offering a price you think is way too low.”
Furthermore, “selling your company does not necessarily mean you can retire,” Prinkey said. “I have a lot of uncomfortable conversations with owners who say they’re not ready to sell because they don’t want to hang it up for another five years. Guess what. If you want to hang it up in five years, you want to sell today. When you sell, the terms will likely require you to stay on five years. You don’t get to just hand over the keys.”
The due diligence involved in selling a company is intense and shocking to many owners. Consequently, experts recommend owners begin compiling all their due diligence materials a full year before they plan to consider a sale.
Owners also need to carefully assess the financials of a sale, Gentry cautioned. Owners need to determine if the sale will be taxed as ordinary income or capital gains and realize that the tax will apply to the full sales price, regardless of how much debt the company is carrying. For example, a company with $500,000 in debt sells for $1 million. Under that deal, the departing owner would have to both pay off the $500,000 debt and pay taxes on $1 million in income.
Prinkey urges owners to make even longer-term preparations for an eventual sale.
“Start running your business like you are getting ready to retire way sooner than seems reasonable,” he said.
To facilitate a lucrative sale and set the groundwork for an easy exit, owners need to develop their staff to successfully run the business without them.
“Trust your people, empower your people and see what they can do. You need to start getting the ball out of your hands and into theirs,” Prinkey said. “That will put in you a position where you have options on when to depart and you will get dramatically better valuations. What a company is worth if you have done really well and are highly prepared dwarfs what your company is worth if you are stumbling into a situation where you need out.”