This fact will be repeated many times on this web site and blog–construction companies are hard to sell. If you are in the business, I don’t have to explain that to you, and if you are in the market to buy, you understand that this industry is the place where you can start with a hammer and a pickup and end up with an empire.
Why are they hard to sell?
- Perceived risk
- Need for capital (sometimes)
- Unusual language and practices
- Specialized skill sets
There are more, but let’s examine these first:
Risk: the perceived risk is greater than actual, but the fact remains that entity failure is high in the industry. The business cycle contributes, bidding mistakes take their toll. But with proper management, these risks are not inevitably fatal.
Capital: Let’s consider an extreme example, the demolition contractor. Time line: The job is awarded, the first on the job is the demo guy, he finishes his work in 3 days by completely removing anything on the third floor of the office building down to “gray walls.” Say that is completed on the 25-28 of March.
He bills, according to the contract, on the 20th of April. Say the job is $100,000, and say the general contractor is really attentive and includes his bill to the owner on the 20th of May. And say the owner is attentive and pays 30 days later, on the 20th of June. The general pays in 15 days, less the 10% retainage, and the demo guy gets his money on the 5th of July, three and one-half months after the job was completed…and he gets 90% of his payment and maybe waits a year for the rest.
This is if it all goes well. Say he had a 60% gross margin, he paid his guys $40,000 to do the work, waits several months and gets his money. But the overhead goes on, and let’s say that is 30%, he has to come up with $70,000 and wait for the $90,000…and wait some more for the last $10,000 of retainage. That is why you need capital.
Unusual language and Practices: We just discussed one, retainage, the practice of holding back payment until the job is done to insure that the contractor has incentive to complete tasks, the so-called “punch list.”
Here’s another practice, based on a huge sense of mistrust endemic to the industry, payment. In order to get paid, you have to execute a document and prove that all the vendors and subs that you used have been paid. “Lien releases” assure the owner that he won’t have to pay twice because the vendors and subs have the right to file “workmen’s liens” against the property and the payments if they have not been paid. Good system, but a bit more complex than regular merchants.
There are more.
Specialized skill sets: If you are buying a mechanical contractor, you need to have someone on staff who qualifies for the particular skills required in your jurisdiction. Amazingly (sarcasm!!), the city or county wants to make sure that the water and sewer are installed properly for the health of the citizens. It’s important. Likewise, if you are building a bridge, it needs to be done right.
NOW WE GET TO THE HEART OF THE ISSUE: Why would someone who has the money but not the skill set want to do this? Why would someone with the skill set and the money want to buy when they can just form their own. All of a sudden, the universe of buyers gets much smaller, and it is often defined as people who have skills but not enough money.
SOLUTIONS: Over many years and lots of experience has led me to devise several plans to get the best price for the owner, a good deal for the buyer. More on that in future posts.