Buying a Construction Company

BUYING A CONSTRUCTION COMPANY

Contracting is high risk, high reward.  I have a client who has generated net worth in excess of $10 million, no debt, in less than a decade.  He started with very little except his experience and a lot of debt.

That same road is littered with the carcasses of those who didn’t make it.  But you will not be among them if you follow a few guidelines.

Never run out of money

Cash makes a difference in so many parts of our lives, but money really makes a difference in the construction business.  Make sure you have adequate net worth and a bank that understands the business.  Expect that 10% of your billings will be held back (“retained”) until the job is finished meaning that you, the subcontractor, may be done with your work in June but the rest of the job doesn’t complete until September and the owner doesn’t pay the General Contractor until December.  Your retainage comes to you six months after completion.  Make sure you determine whether you will qualify for bonding BEFORE you buy the business if this company works in a bonded environment.

Practice good management

The employees are the heart of the contractor’s business.  You can buy the best bathroom lavatory in the world, but if you are unable to install, you have no business.  Personnel practices in the industry are, in my experience, poor.  “Management-by-yelling” is the most common method of managing employees, so if you can employ policies and procedures that treat employees as valuable partners in the business, you have an advantage over your competitors.

A proven way to monitor employee productivity is the "revenue per day" metric. A good plumber bills over $1,000 per day from his own efforts. It gets more complicated when working on a crew and with prolonged jobs, but you get the idea.

Pay attention

This is not a business that can be put on “auto-pilot.”  While most of your competitors will have “come up from the trade,” meaning that plumbing companies are run by plumbers, etc., there is a size at about $5 million in revenue, say $250,000 in cash flow, $500,000 to $750,000 in price, that knowledge of the trade is less important than knowledge of business.

You absolutely need to know or learn the key function of your business. If you are a fireproofing contractor, you need to know how to bid a job. That involves knowing how to "take off" the job, understand the nuances of regulations that are so important to this business and how to translate that into a competitive bid. While someone else may do parts or all of the work, you cannot be in a position where a negligent or stupid estimator could get you involved in a loser.

Learn or hire

The owner/seller and, perhaps, other key people, will need to be replaced.  Make sure you can either replace the owner or hire someone to do so.  For instance, if the owner was the only estimator, you will either have that skill going in or you will need to hire an estimator.  They are available! Remember, though, that estimating needs to be watched and supervised or it can get you in trouble. If the owner is the accountant/bookkeeper, same process.  Determine your skills and see if they fit with the business.

You will have to learn the fine art of complaining.  One client asked, “Why would anyone get into this business?  It is so bad.”  He said this as he was counting the $45 million he received for selling his medium-sized company.

Construction will use all your business skills—estimating, project management, financing, personnel, reporting and others.  In return for doing those well, you are paid handsomely.  It is my firm belief that the price you pay for a contractor (within reason) is not nearly as important as how well the requirements of the company fit your skill set and how determined you will be to perform the tasks at hand.

Get ready to learn a new language, retainage, mechanics liens, surety bonds, and get ready to learn a new culture.  Then, get ready to build a valuable asset with excellent current income.

CAN YOU NAME ANOTHER INDUSTRY WHERE YOU CAN START WITH A HAMMER AND A PICKUP AND BECOME A MILLIONAIRE?