As an active consultant looking to help contractors transition their businesses, I have extensive exposure to mergers, acquisitions, and succession planning activities. These activities tend to correlate to certain cycles in the economy and whether you call it a recession, a slow-down, or just uncertainty, this is a very different market from where we stood on January 1, 2020.
Economic cycles are not new to business owners. Whether the changes are at the macro or micro level, the business world will continue to ebb and flow no matter what the circumstances. This one however, is different. Experts see this period as a medically driven slowdown vs. an economic hit, so pundits believe the recovery will be faster because sitting on the sidelines are trillions of dollars in federal spending programs, and the FDA is fast-tracking vaccine solutions.
The market for selling a business has shifted as well. Many construction companies have felt the pain of work stoppages and delays over the last few months and, depending upon the health of your funnel, region and sector, there may still be more pain to feel in the near term. But hope remains ever-present, and the industry has a powerful opportunity to grow.
SMACNA members are in a unique position. Strategic and financial buyers are showing significant interest in the HVAC and related mechanical industries; they are looking for roll-up options and recognize the opportunity presented in this temporary downturn .
In addition to the typical strategic and financial buyers, we see an uptick in individual private buyers. Buyers are looking for distressed assets and the opportunity to purchase businesses at a discount to what would have been the value of a company six months ago. Back then, pre-COVID unemployment was low, finding good people was hard, and executive-level skilled buyers were almost impossible to find.
Private buyers tend to be people in the industry. Today, hundreds of companies have furloughed employees some of which have given executives generous severance packages, and some of these executives are not ready to leave the industry.
These same executives are now looking to buy a company instead of work for someone else. They still have equity in their homes, banks want to loan, and as long as the business has positive cash flow, then there are conventional financing options that allows them to compete with other professional buyers.
The challenge most owners have in selling a construction business whether it be to strategic or private buyers, the deal often comes down to their people with the quality of their senior management being key.
This is a service-based business, so buyers want to know who is left at the end of the deal. Owner/operator (private) buyers take this significant stumbling block out of the transaction. They know the market already and typically use conventional bank financing with SBA backing. SBA typically funds 70–90% of the sale price at close and stipulates that the business owner must leave after one year.
Unlike private buyers, strategic buyers need to find a CEO (your replacement) post-close for you to train. This process often sees a transition time of usually more than a year. Professional buyers often complicate the deal structure by asking the seller to invest a portion of the sale into the new entity, or seller-carry some type of financing over two to three years.
Looking to the Future
The market is definitely unstable due to uncertainty about the future. As sellers, this uncertain market is difficult, and some construction companies are feeling more squeeze than others. Some are doing better, others are doing about the same as the previous year, and some are barely hanging on, but no one can say they feel fully confident about the future. That’s what gets us up to work, that’s why we are last to go home, and in between, is what motivates us the most and causes us to make the sacrifices we do.
This pandemic-caused economic episode too shall pass, and the next normal will require adaptation and creativity. The new generation is coming up the ranks and will be ready and able to take it on. The good news is that the M&A market for SMACNA members is alive and well.
Should you be considering your exit options, the question comes down to: ‘When do I leave? Should I wait until I’m ready, until the business is ready, or when the market is ready?’ That part you can control — the decision is yours.