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practices , new technology and utilizing welltrained trade professionals , profit margins have improved , with many companies now experiencing EBITDA margins well in excess of ten percent . As a result , buyers are now imputing significant goodwill value into their pricing of acquisitions . Today , construction companies ’ calculus for acquisition values is heavily weighted on consistent EBITDA margins and private equity sponsors are actively pursuing buy-and-build strategies .
Fortunately , the liquidity event process has become exponentially more commonplace and competitive for sellers in recent years . Private equity has emerged as a highly interested alternative , with many PE sponsors focusing on the favorable fundamentals in the construction services industry . This adds a robust resource for business owners seeking liquidity , in addition to the traditional options of selling to a competitor , structuring an installment sale to senior management , creating an ESOP , or some other creative approach to generate cash for business owners .
For many years , the construction business sector was viewed by many institutional investors as a lower-margin , commodity-type business model without much pricing power , where companies typically won work as the low bidder . This perception often led to low valuations in the marketplace . Construction companies were frequently sold at valuations equating to their net book value plus any excess working capital , without accounting for the value creation of a well-managed enterprise utilizing technology to better manage projects and increase profit margins . By implementing strong management
Ripe for acquisition
Historically , M & A activity in the construction services sector was dominated by larger companies with the balance sheets and bank relationships needed to fund acquisitions . Their interest lay in fueling top-line revenue growth , adding capabilities to capture a greater percentage of project spend , and expanding geographic coverage . In recent years , private equity sponsors have recognized the industry ’ s fragmentation and the need for consolidation . Their thesis is that by building larger construction companies through acquisition , PE sponsors can bring best practices to management , fund and employ more technology , grow top-line revenue , control project costs better and limit SG & A expenditures , and ultimately create higher margins through economies of scale .
To implement such a strategy , such as construction services , there needs to be a wide array of privately held companies ripe for acquisition . Enter the many baby boomer owners who need liquidity events for retirement , placing the construction services industry squarely in the crosshairs of private equity sponsors . And why not ? Construction services in the US account for over $ 2 trillion in annual spending , representing roughly 4.4 percent of GDP . The US economy employs over eight million workers in construction , and the total annual spend for construction has remained relatively consistent , creating a somewhat predictable revenue stream .
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