So You Want To Buy A Construction Business?

If you’re an entrepreneur looking to apply your skills in a low-tech, high-opportunity field, the construction industry may be your next big move. With approximately 41% of the current construction workforce expected to retire by 2031, the door is wide open for new blood to acquire well-established businesses.

In this first of a two-part series, I’ll share insights drawn from my personal experience shopping over a dozen companies and eventually acquiring a 40% stake in Liebo Builders (liebobuilders.com).

Whether you’re eyeing your first acquisition or expanding your portfolio, this article will equip you with a few practical lessons to navigate the complexities of buying a construction company in today’s market.

Here are my top 5 takeaways:

1) The Key-Man Problem

One of the biggest challenges in acquiring a construction company is addressing what’s commonly known as the “key-man” problem. In most construction companies the owner does everything. He does the sales, he runs the crews, he inspects quality control. And once they leave, valuable institutional knowledge may walk out the door with them.

You’ll also be dealing with blue-collar workers who may not have the same familiarity with business metrics or things like key performance indicators (KPIs), many of them still have a flip phone. No joke. And you will be their boss.

The solution? Make sure the previous owner stays on for a sufficient earn-out period to mentor you through the ins and outs of how the business operates.

2) The Importance of Clean Books

In my experience, nearly 50% of the companies I reviewed had poor financial records. This can be both an opportunity and a risk. On the one hand, it allows you to potentially negotiate a lower valuation. On the other hand, it makes it harder to evaluate cash flow and overall business health.

Cash flow is the lifeblood of any business, but it’s especially critical in construction because project speed depends on it.

This can cripple even the most successful-looking businesses. (I’ll dive deeper into the cash flow challenges specific to construction in a future article.)

If you’re serious about buying a construction business, you need to be well-versed in accounting basics. Look beyond the financial statements, which may not always reflect reality, and dig into bank statements to understand actual cash flow trends. Compare these trends with the company’s reported financials to get a clearer picture.

3) Lead Generation: A Double-Edged Sword

When evaluating a business, consider how it generates leads. Many older construction companies rely heavily on referrals and word-of-mouth, which can be a blessing or a curse. While a solid referral base can keep the business afloat, it can also be a liability if it disappears when the owner steps away.

In my experience nearly all of the target companies I looked at had little to no lead generation and no social media presence at all. If you’re good at marketing and you know what you’re doing on social media, this presents a huge opportunity. If not, you should learn.

Either way, you’ll need to build a more robust system over time. Keep in mind that as soon as the original owner leaves, the long-time customers he golfs with every Sunday will start shopping around. To mitigate this, assess the company’s marketing and lead generation systems during due diligence. And learn marketing.

4) Avoid Overly Complex Construction

For first-time entrepreneurs, the construction industry can be overwhelming due to the vast number of niches and specialties, the technicality and the culture. If I had to do it over again, I’d recommend starting with a simpler, service-based model.

Look for businesses where the jobs are relatively short in duration, such as HVAC installations, roofing, or plumbing services like tankless water heater installations. The shorter the project timeline, the easier the operation is to manage. Avoid becoming a general contractor who builds homes or takes on large remodeling projects right off the bat—there are too many variables that will most likely lead to failure.

5) Seek Recurring Revenue Streams

Another key lesson I’ve learned is the value of recurring revenue. Service-based businesses like pest control, gardening, or pool maintenance offer consistent cash flow and are often easier to manage than larger, project-based companies.

Once you’ve stabilized a recurring revenue stream, you can consider layering on construction trades that complement these services, such as minor repairs or installation work .

In the end, buying a construction company can be a lucrative opportunity if done right. Unlike a tech startup or almost anything else, you can make revenue day one. In fact you should have revenue day one.

But it’s essential to approach it with your eyes wide open. From understanding the “key-man” problem to getting a handle on financials and lead generation, software, every aspect of the business needs careful consideration. My advice is seek help from someone who understands the business before you jump in.

If you are thinking of buying or selling a construction business, feel free to book a no-obligation call with me. I am happy to help fellow construction entrepreneurs.

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