Private Equity in Construction: Is Your Company a Fit?

Recent years have seen private equity investment in the construction industry accelerate. It’s a trend that’s presenting new opportunities for a generation of business owners beginning to consider their exit plans. As capital flows into the sector, construction companies — particularly those with proven financial performance and efficient operations — are increasingly finding themselves on the radars of all kinds of investors.

The construction industry’s steady growth has made it increasingly attractive to investors seeking stable returns. But not all construction businesses are equally positioned to benefit from private equity interest. Understanding what makes a construction company appealing to investors, how these transactions typically unfold, and what preparation is necessary can help owners make informed decisions about whether private equity might be right for their future.

For construction business owners weighing their options, private equity represents just one potential path forward. There are plenty of other transition planning options for construction businesses, including family successions, ESOPs or a sale to a strategic acquirer. The key is approaching these possibilities with clear information and strategic foresight to ensure the best outcome for all stakeholders involved.

Which Construction Companies Attract Private Equity?

Private equity firms aren’t interested in all construction businesses equally. Their investment strategies typically favor specific segments of the industry with characteristics that align with their growth and return objectives.

Specialty trade contractors have emerged as particularly attractive targets. This preference stems primarily from financial performance metrics — specifically, profit margins. While general contractors typically operate on thin, single-digit margins, specialized contractors such as plumbing companies, HVAC contractors and electrical companies, often command gross profits approaching 40%. This substantial margin difference allows for increased investments in growth and removes a degree of risk, both of which are attractive traits to private equity investors.

For investors pursuing roll-up strategies, specialty contracting businesses also present cleaner acquisition targets. By consolidating multiple local specialists under a single operational umbrella, private equity firms can leverage economies of scale, centralize administrative functions and potentially increase margins further through combined purchasing power and operational efficiencies.

This isn’t to say that general contractors and other large construction firms aren’t attractive acquisition targets for PE; many are. Construction is booming in states like Florida, and demand is strong across the industry, fueled by federal initiatives such as the Infrastructure & Jobs Act. With this demand comes pricing power, unlocking increased profitability that interests PE investors.

Related: Is Your Construction Company Ready for Change?

How Are Private Equity Investments in Construction Companies Structured?

Private equity investments in construction companies can take various forms. In a given transaction, the structure is driven by the goals of both the investor and the original business owner. Understanding the different models that exist is a prerequisite for any construction business owners considering this path.

Majority Buyouts

The most straightforward approach is a buyout. In this scenario, the private equity firm acquires the entire business and the owner exits completely with no ongoing involvement. This structure tends to work best when the business has a strong management team already in place and the owner is not critical to day-to-day operations (although this scenario is relatively rare).

A more common arrangement is a majority buyout in which the PE firm acquires a controlling stake, but the original owner retains some equity and remains in place through a transition period. This model helps preserve institutional knowledge and client relationships during the transition period while allowing the private equity firm to exercise control over the strategic direction of the business.

The original owner will receive part of their compensation for the sale through an earn-out agreement, in which they are compensated as the business hits certain performance milestones. In some instances, the owner may retain some equity until the PE investor exits the deal. At that point, they would realize another liquidity event commonly referred to as the “second bite of the apple.”

Roll-Up Investments

Private equity firms also pursue industry roll-ups, which is when they acquire multiple similar businesses across a region to create a larger, consolidated operation. This typically starts with a platform investment, to which smaller, complementary companies are added. For example, a PE firm might acquire a majority interest in a large roofing business, infuse it with capital, and then oversee the acquisition of smaller roofing businesses in new geographic markets to form a regional powerhouse.

Other Structures

Many other structures exist in addition to those described above. A PE investor may partner with an existing owner to recapitalize the company or provide growth equity. This gives the original owner the resources and capital they need to fuel growth. Other PE firms target struggling construction businesses that are ripe for a turnaround. And still others might pursue other creative deal structures that fit with their investment strategy.

The right structure for your business depends on various factors. Consider your plans for life after the sale, the extent to which your company relies on you to operate, and the private equity firm’s investment thesis. Different PE investors will have their own investment theses, and you should aim to understand these early in any conversations you have with them.

What Are PE Investors Looking for in a Construction Business?

Private equity investors typically evaluate construction companies with a specific set of criteria in mind. Understanding these factors can help business owners position their companies as attractive investment targets. Below is an overview of some of the key traits private equity investors seek.

Strong, Consistent Financial Performance

While it may seem obvious, investors value construction businesses with healthy profit margins, multi-year revenue growth and stable cash flows. Since the construction industry is known for cyclical fluctuations, companies that demonstrate resilience through economic cycles hold particular appeal. Recurring revenues, predictable cash flows and long-term contracts typically boost a company’s valuation, as does a strong backlog of work scheduled for the future.

Financial documentation and operational transparency significantly impact investor interest. Companies with audited construction financial statements, clear internal controls and well-documented procedures reduce perceived risk. Clean books and records demonstrate professionalism and make the due diligence process smoother, potentially leading to higher valuations and better deal terms.

Operational Efficiency

Companies that function as self-sustaining businesses rather than owner-dependent operations command premium valuations. If your business requires your constant personal involvement to function, it’s significantly less attractive.

A construction company with a strong management team, professional management structures, documented processes and systems that don’t rely on the owner’s daily presence represents the ideal acquisition target. This doesn’t apply solely to executive leadership; strong companies also possess a stable workforce, access to skilled labor and a rich network of subcontractors.

Growth Potential

Investors look for businesses in expanding markets with opportunities to scale. Companies operating in high-growth regions and those that specialize in in-demand niches will find themselves in a favorable position. Examples include companies engaged in infrastructure projects, those specializing in energy-efficient construction and more.

Additionally, businesses with competitive advantages — whether through proprietary methods, strong client relationships or unique market positioning — stand out from their peers. To boost their valuations, companies should be able to demonstrate that they have scalable, standardized processes that can be replicated as the company grows.

Limited Risk

Investors value businesses without significant pending liabilities or problems. Outstanding litigation, troubled major projects or other unresolved issues can derail deals or substantially reduce purchase prices. Addressing these matters before engaging with potential investors helps maximize the value of the business and streamlines transactions.

Potential investors will also carefully evaluate your audited financial statements, assess your internal controls, and determine your business’s compliance with various regulatory and licensing requirements. So it’s good practice to ensure your business has fulfilled its compliance obligations.

How James Moore Can Help

Determining whether your construction company is a strong fit for private equity investment comes down to its financial stability, growth potential and operational efficiency. If your business has predictable cash flow, a strong market position and clear scalability potential, it may be an attractive target.

At James Moore, our construction CPAs and specialists are well placed to help your company position itself for private equity investment. Our expertise in audit and financial reporting delivers the financial documentation investors expect during due diligence. We also assist with creating standard operating procedures, IT control documentation and other formalized processes that demonstrate your company’s operational maturity.

Our advisory professionals can help identify and address potential obstacles to investment interest, from resolving outstanding issues to identifying how you can improve the financial performance metrics that drive your business’s valuation.

Contact a construction advisor today to discuss how we can help prepare your construction company for potential private equity opportunities.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.