The Engineering and Construction industry is comprised of construction, design-build, engineering & design firms, and general contractors catering to residential, industrial and commercial clients. Key suppliers include metal manufacturers, lumber and wood product suppliers, concrete and cement manufacturers, heavy equipment rentals, architects and accounting and software companies.
Clients include larger corporations and residential and commercial real estate owners. The industry is in its mature stage and is characterized by moderate and steady growth and consolidation. The industry is moderately regulated with most regulations focusing on health and safety standards for employees and workspaces.
The construction industry is heavily influenced by macroeconomic conditions including interest rates, government spending and foreign direct investment. The industry generally thrives in an environment of low commodity price volatility and low oil & gas prices. As a result, key drivers for the Engineering and Construction Industry are the Value of residential and non—residential construction, corporate profits, commodity prices, and interest rates.
The Value of Non-residential and Residential Construction – Increases in value of residential and non-residential construction indicate new investments into construction and engineering projects. New construction and engineering projects constitute 70% of industry revenues, thus a change in this metric has large implications on expected demand for industry services.
Corporate Profits – Higher corporate profits indicate growth for many businesses, requiring expansion of business services and location to meet growing demand. This expansion represents increased demand for industry services, as companies create or expand facilities, production centers, new store locations, or automate processes.
Commodity Prices – Given their position in the supply chain, construction and engineering companies spend a significant amount on raw or slightly processed materials. As a result, commodity price movements have a significant impact on profit margins and quotes for projects.
Interest Rates – Lower interest rates decrease the cost of financing, incentivizing business owners and decision makers to borrow capital to fund new engineering and construction projects. Thus lower and stable interest rates produce long-term demand and growth for industry services.
Recent Construction and Engineering Transactions
Selling a Construction and Engineering Company
The construction and engineering industry has several risks associated with it due to the nature of operations and cyclicality of the industry. High industry specific risk and the technical nature of the roles involved emphasizes the need to find the right buyer who can successfully take over operations and ensure long-term growth. As Canada’s leading private market M&A Advisory firm, Beacon Mergers and Acquisitions understands that selling a business is an important decision. A dedicated business owner not only seeks to extract maximum value from the sale of a business but also seeks to sell the business to a competent buyer who can continue the company’s legacy. Beacon has worked on over 100 valuation and M&A advisory mandates in this space, bringing extensive experience in deal negotiation to the table. Our experienced advisory team will assist your business in navigating the entire sell-side M&A process.
As an entrepreneur or business owner who is exploring a potential sale, it is important to understand some key factors specific to the construction and engineering industry that might impact the likelihood of a potential sale. These are factors that determine business attractiveness for potential buyers and investors.
Revenue Volatility – Businesses in the construction and engineering industry often experience high revenue volatility on an annual basis due to the contractual nature of operations. Large one-time projects from a single client can lead to strong growth in sales and profitability in any particular year, however, buyers like to see consistency. High revenue volatility and high revenue concentration are both red flags for buyers. One strong year might not warrant a higher multiple and to extract value from this growth spurt, a seller must be able to prove without doubt that this trend is likely to continue. Often buyers will ask for historical invoices, existing pipeline reports and other documentation to confirm the company’s growth trajectory. Organizing these reports before a sale will reduce the burden on due diligence in late-stage negotiations.
Cyclicality – Companies with exposure to the construction industry or diversified manufacturing and industrial production, experience cyclicality. This means that such companies may bear an impact on revenue and profitability depending on the health of the economy and macroeconomic factors including interest rates, commodity prices, construction spending, disposable income, and business sentiment. If a buyer is selling a business in an economic downturn, it is important to understand certain risks associated with the company’s business model and industry. Such risks can be minimized by diversifying the company’s product and service portfolio. By doing so, companies can reduce exposure to a particular industry. In addition, having secure long-term contracts and agreements with clients can also be beneficial in maintaining consistency in revenue and profitability.
Machinery and Capex – The construction and engineering industry is capital intensive. Machinery breakdowns and failures can lead to high maintenance costs, and project delays. In extreme situations, this could even lead to loss in revenue, reputational damage, and loss of clients due to failure to deliver. A company must always maintain enough liquidity to be able to tackle short term capital obligations. During a sale, it is important to ensure that a new buyer will not require significant capital expenditure upon taking over the business. In addition, any redundant assets that do not generate income might not help the business in increasing value. Consequently, it is advisable that business owners liquidate such redundant assets and machinery and reinvest the proceeds in growth to extract more value from the sale of the business.
Track Record – No buyer wants to acquire a company with a poor record and a history of accidents. Not only does this impact the company’s ability to secure new contracts and generate revenue, but also leads to higher insurance costs and difficulties in retaining skilled labor. These factors can have a major impact on profitability which ultimately impacts the business in two way. Firstly, a lower baseline profit leads to a lower valuation. Secondly, a lower baseline EBITDA also leads to multiple compression which can further reduce the value of a company. During due diligence, buyers often call customers before putting in a final offer. Poor reviews from customers could cause a deal to fall through. Consequently, the company must be at peak performance and productivity during prior to and during the sale process.
With 40 years of combined experience serving businesses within Toronto, Ontario, and abroad, the Beacon transaction team has extensive knowledge and experience successfully working for several construction and engineering companies. Whether it be a valuation or sale, our team can provide expertise and resources found only at larger corporations, paired with the personalized touch of our M&A Advisory team. Contact us today to get in touch with one of our advisors.