As a construction attorney with decades of legal experience and years serving in-house as senior executive and general counsel to a large construction firm, upon returning to private practice, Dan Rosenberg has developed a niche assisting companies in buying or selling construction and design companies. He also regularly works with private equity clients in their evaluation of acquisitions and funding considerations for construction projects.

Dan is often posed questions by clients about M&A activity in the construction industry and private equity’s continued move into the industry. Below are some of the most commonly asked questions and Dan’s points of view on the matter.

Overall, M+A activity has slowed down. Is it slowing in construction?

Yes, but not to quite the same extent as some other industries. First, it is worth noting that construction has seen a steady stream of transactions over the years. Some of those transactions relate to consolidation and industry growth; some of them relate to new acquirers coming into the market.

In terms of today’s marketplace, companies that self-perform work, particularly in the heavy highway, industrial and infrastructure sectors, remain in demand. We are seeing more cash or all equity deals, with lower multiples—or sales prices—seemingly as a result of the higher cost of lending.

What makes construction and design acquisitions unique?

There are a few key differences that make construction and design acquisitions unlike any other deal. For starters, working in the field requires understanding its unique vocabulary and approach to problem-solving. But more importantly, the industry has a host of unique risks, both legally and practically, just by the nature of the work. Work aside, construction contracts are often lengthy and can drastically shift risk and reward. Additionally, the industry is more heavily unionized than many other industries today. And the legal rules applicable to construction trade unions are unique in many different aspects compared to other industries’ unions. A deal involving trade unions requires specialized business and strategic legal approaches [differing from a non-union construction company]. Similarly, insurance and bonding plays such a major role in the industry and understanding how insurance for the industry works and what risks can and cannot be insured is often vital to evaluating a deal.

There seems to be a growing trend of PE firms buying up construction or construction-related companies. What’s the deal?

Over the last decade, particularly in the last three to five years, private equity firms have been acquiring construction, design and development companies at a higher rate. Historically, family-owned construction companies only had limited options to transition ownership of their company, either by passing it on to a family member or selling it to employees. These days, the acquisition route provides an alternative for successful companies to profit from their business. For the right firm, selling to a third party is much more of a realistic possibility than it once was.

What makes construction businesses attractive to PE companies looking to acquire new industries?

PE firms are always hunting for the next industry that’s going to promise returns. With construction’s recent boom in certain key locations, such as Nashville, Austin and Miami, or sectors such as infrastructure and industrial, PE firms are looking to cash in on the growing opportunity. One of the ways private equity is so successful is in its mastery of economies of scale or bringing together smaller pieces to make for a more profitable larger company. My feeling is that PE sees construction as ripe for such consolidation and profitable growth through capital infusion and application of certain controls and process improvements.

Now, what’s an attractive investment? These PE firms are looking for companies that have unique capabilities, markets and strengths. Examples include having a significant presence in a fast-growing market or having a skilled and loyal workforce capable of actually building sophisticated structures, which is getting harder to find. As anyone who really knows the industry will tell you, at the end of the day, it’s a people business. Companies that have good people with unique skills are the most in demand.

If a construction or design company is interested in being acquired, what are a few things they should do to prepare for that step?

As the seller, preparation is key. In the short term, cleaning up profitability is essential to selling at the right time and getting your best price. Financial statements should tell a positive story.

More broadly, a buyer will have lots of questions, and ensuring there are answers to all of them is crucial. Questions will vary from case to case, but they’ll always need to know as much historical information and typically need to see a variety of documentation, including key contracts, union collective bargaining agreements [if applicable] and employee data. A seller needs to have as much of the documentation about its business organized and ready to be provided as possible. Anticipate what questions you may be asked as a seller and have answers ready to go.

Buyers are trying to best understand the people and projects that make up a selling construction business. Understanding ongoing client relationships and projects, as well as the extent and history of union presence and, most importantly, a company’s key personnel, are all key to a successful transition and sale.

What are the most common barriers preventing these types of deals?

On the seller side, it’s overvaluing your company first and foremost. We have seen this repeatedly, so having advisers that will provide realistic assessment to you is important. Next, I have seen several sales fall apart or get delayed because a seller failed to fully and completely assemble the information the buyer was looking to understand. Another common issue is that many construction businesses are part of a family’s or owner’s identity, and giving up control of that company can prove difficult.

For acquirers, besides the inability to agree on price, it’s getting a handle on the complete understanding of the company and associated risk. If a buyer cannot understand the risks it is taking in closing the deal, the deal is not going to close. This is when things get sticky and having the right knowledgeable industry partners—investment bankers, lawyers, accountants etc.—is helpful in getting a handle on what one plans to buy.