Private equity as a financing and exit alternative has only been available to construction companies in recent years. In the past, the construction sector did not attract private equity firms because construction projects are seasonal or cyclical; firms often carry high debt, and there are usually no succession plans in place.
However, this has changed. The financial success of many construction companies is enticing private equity investors to invest in the industry. As a construction business owner, you may want to look at partnering with private equity investors and how to make your firm attractive to private equity firms.
Understanding Private Equity
Business owners make private equity deals to boost their capital to accelerate growth or expansion, acquisitions and address succession issues while adding to the owners’ retirement coffers. In addition to providing liquidity for selling shares of the business, private equity deals do put additional debt on the books.
Private equity can be an ideal interim step for owners not ready to sell the business yet, but wanting to build more value for a larger sale down the road. There are two ways equity investors make money from their investment: The first is through dividends funded by their share of profits. The second and ultimate return on investment is when they sell their shares, which is why the focus for many deals is fueling growth and enhancing value.
Besides money, private equity firms also bring deep business experience to the endeavor. Companies who attract equity funds should expect a partnership going forward with the equity firm leveraging its business connections and expertise to help the company reach its goals.
They understand the overall market, applicable business models and potential regulatory impacts to ensure the business is positioned appropriately to meet goals.
Attracting Equity Investors
Businesses of all sizes may need capital infusions to achieve their well-planned goals. However, obtaining investment from a private equity firm generally requires that your firm is well run and can undoubtedly use the cash infusion to grow in value in the foreseeable future.
Here are six steps involved in attracting private equity funds to your firm:
- Craft a compelling story about your business. You sell potential customers on your firm, and you need to sell it to potential investors too. They need to believe your firm has been successful, is financially strong and will continue to be. Larger, more diversified companies are more attractive to potential investors than smaller ones. Companies working in a prime capacity drive more value than those working in a subcontractor capacity. Other factors that weigh heavily on buyer interest in any industry are taxation rates in the markets served, potential labor or supply issues, and regulatory compliance burdens. Remember, private equity firms want to bring additional value to the business beyond just the capital infusion, such as industry expertise and strategic relationships that could cut costs or add more business. So, your story needs to whet their appetite to look further into your firm.
- Present your finances transparently. If you are thinking about equity funding in the future, get prepared now. Investors will be seeking meticulous, preferably audited financial records for at least three years. (Validation of your numbers by a respected accounting firm helps your valuation.) Potential investors need to have confidence in your numbers and company. Additionally, they expect the owners to know their company thoroughly and be knowledgeable of industry trends. Transparency means no surprises on critical business information.
- Be strongly profitable and show predictable earnings. Since construction firms are typically project-based businesses, they may have greater volatility in revenues than companies in other fields. Investors view anticipated, recurring revenues much more favorably than transactions executed annually. So, you need to demonstrate tight financial controls and solid, steady income. It is critical to show that your firm hits goals and does not exceed your annual budget, before and while working on an equity arrangement. Additionally, construction industry firms should take a hard look at ways to boost bottom-line margins. This may be through better supply sourcing and purchasing. For example, some firms use analytics-driven negotiations with suppliers for better pricing. Every dollar you eliminate in costs adds to profit and value. Showing careful financial control-and maximizing cash flow-demonstrates your internal controls and makes your company more attractive to equity firms.
- Put an exceptional, seasoned management team in place. Company leadership is one of the greatest concerns of most buyers. After all, they are investing in your people and their expertise when they invest in your firm. They will want to see that a strong, established team will continue running the business. Accordingly, they will want to know about the management team’s strengths, expertise and retirement timelines. This is critical nowadays when estimates indicate over half of today’s construction firms will change hands in the next decade due to retirements. The businesses that will successfully attract private equity attention and an ideal valuation will be the ones that have been building a solid team that will be there for the foreseeable future.
- Have a strong growth potential and achieve growth milestones. Propelled by optimism in the economy and significant headroom for construction growth, recent years have seen consolidation at various points in the value chain, which helped bolster profitability. While demand for new homes and infrastructure investment are positive signs, concerns over tariff and trade wars have some businesses wary. So, potential investors need to be confident your firm has advantages over others vying for their attention. That may mean you operate or are expanding operations in a region experiencing healthy economic and population growth. Additionally, just like the need to meet budgets, achieving growth goals year in, year out shows your firm takes advantage of the opportunities presented in your market. Ideally, this is reflected in actionable strategic plans updated annually. You should also demonstrate that your business adeptly responds to high-growth smaller markets that arise, such as the need for reconstruction in areas affected by natural disasters. Showing you plan and set (and meet) growth milestones demonstrates that your compelling story is a compelling reality in the construction market. The more potential your company has in an investor’s eyes, the higher the valuation will be.
- Identify a liquidating event in the future for investors. In most private equity deals, the investors only take over a percentage of the business. They fund growth and revenue improvements to enhance the value of the business when they want to recoup their investment and profits. This secondary sale will ideally generate far more money than the first equity transaction. Consequently, there should be an established timeline in your planning for reaching valuation goals, liquidating their shares and possibly liquidating an even a greater portion of the enterprise. Identifying a goal, time period or event to trigger a resale establishes exit options and, more importantly, ensures the leadership and investors are on the same page.
Patience And Planning
Private equity firms can bring a lot of value and business acumen to construction businesses besides a capital infusion. To best attract investors and take advantage of their expertise, you should plan well in advance to seek private equity investments.
Take time to get your finances and planning together before striving to raise capital. Be aware that the fundraising process can take six months or even longer as potential investors scrutinize your firm and its records.
Seek expertise from advisors who have experience in helping businesses plan for growth and garner investments. A private equity firm like HJR Global can assist you in reviewing and preparing your business to appeal to new markets or attract investor monies.
The right partner will work with you to develop and implement a strategy to make your business more profitable for you and them. For more information on private equity investment opportunities at HJR Global, click here.