In the middle of an extended construction industry expansion across West Michigan, most contractors are focused on running their businesses, rather than transitioning them to new ownership.
But the current booming market that’s boosting companies’ balance sheets could provide the ideal conditions for owners to sell and maximize their return on investment.
“In terms of selling at the peak, right now it would be selling at the peak of profitability,” said Max Friar, managing partner of Grand Rapids-based M&A firm Calder Capital LLC. “A lot of these people are really just killing it from a profit perspective. They’re probably not selling at the peak of multiples. I think that’s passed.”
In the last few years, Friar’s firm has worked to sell a handful of subcontracting companies, largely in the electrical and landscaping industries.
“Construction company owners are making great money, but they are increasingly tired,” Friar said, adding that construction firms and subcontractors present some unique challenges when it comes to transitioning to new ownership. “Construction firms are harder to sell because it’s project-based.”
Andrew Longcore, a partner with The Business Law Group in Grand Rapids, agrees that the cyclical nature of construction, in which contracts can drop to zero based on changes in the economy, tends to create some challenges for acquirers.
“Buyers aren’t buying a job,” Longcore said. “They’re buying future cash flow.”
MAKING THE TRANSITION
Nonetheless, construction firms large and small across West Michigan continue to change hands.
For example, Grand Rapids-based general contractor Wolverine Building Group Inc. transitioned to its fifth ownership group in January when long-time executives Aaron Jonker and Curt Mulder completed their acquisition of the 79-year-old company.
The two were named co-presidents in 2016. Wolverine Building Group had revenues last year of about $227 million.
In an interview with MiBiz, Jonker acknowledged that transitioning during an expanding construction market did create some challenges, since they worked out the details of the deal while also running the day-to-day business.
“(Transitions) add another thing to the mix,” Jonker said. “It can be a time that’s quite disruptive.”
Wolverine’s ownership transition worked because the process played out over approximately 18 months, giving the sellers and buyers enough time to discuss a wide variety of terms and prepare the company’s 145 employees for the change, he said.
“It’s an awesome way to do it if you can,” Jonker said of the extended transition process. “Anytime there’s an abrupt leadership change, that’s disruptive.”
A TIME TO SELL
While abrupt leadership changes might be disruptive, they’re also far more common than the Wolverine model of a slow transition process, according to M&A consultants.
That’s because many owners of small companies — and particularly family-owned businesses — lack any formal succession plan.
It was a scenario that played out for many of the smaller contractors that engaged with Calder Capital in recent years, Friar said.
“A lot of the guys we’re working with … they were previously swinging hammers or doing the jobs themselves,” he said. “That’s just how they grew their business. A lot of them are not wired to work on the business; they’re wired to work in it. And it just so happens that working in it has been very good.”
Even with some of the unique challenges for transitioning a construction firm as the industry nears its zenith locally, the overall market for the industry remains solid, according to a report from global consulting firm PricewaterhouseCoopers (PwC).
Deals in the sector for 2017 totalled $93 billion globally, down 3 percent from the previous year after a slow start to the year, according to the PwC report. The company projected that 2018 should also be a “strong” year for M&A, “fueled by increasing demand for both domestic and cross-border new market opportunities, combined with existing housing and infrastructure demands globally.”
That strong M&A market is good news for Jonathan Siebers, an attorney and shareholder at law firm Rhoades McKee PC in Grand Rapids.
Siebers told MiBiz he’s currently representing two potential buyers of separate contracting firms in the area. A lack of hard assets on the part of many smaller construction trades companies makes for a frequent challenge, he said. Sellers often will need to offer up some sort of financing to bring a deal to completion.
“You’ve got seller financing in most of these deals and when you’re selling at the peak of the market, you’re probably getting the peak price as well,” Siebers said. “Both the buyer and seller need to think about how they’re going to handle it if the construction industry starts to dip. Everyone knows it will.”