Construction as a target sector for SF

May 21, 2020
by a searcher from SKEMA Business School in Dubai - United Arab Emirates
Hi, I wanted your thoughts on the construction sector as a target industry for a search fund. I don't often see this sector as a target industry, and I was wondering why?
From my perspective, it is a large, fragmented, and growing industry, and while cyclical, some niche subindustries can be considered resilient. I am thinking of the roofing contractors, the framing contractors, the road-building contractors. Most of them enjoy margins above 15% and have excellent growth prospects. There are also very few technological obsolescences and plenty of targets in the size range.
Any thoughts?
in Portland, OR, USA
That said, roofing seems like a great niche within the construction industry to target, and you have a growth strategy. Search Fund Accelerator had one of their searchers acquire Legacy Roofing in Akron, Ohio not long ago. I assume the acquisition was put through a lot of scrutiny by the accelerator board, so it shows you there are companies out there in construction that are good targets.
from SKEMA Business School in Dubai - United Arab Emirates
1) more systematic control of each project: a lot of the company I saw between US$5m and US$30m revenue are still tracking their costs and WIP on a yellow pad.
2) I agree with Jason that labor and materials are the main costs. I guess by internalizing some of the production, particularly on metal roofing, you can save one or two bp of gross margin.
3) Increase services to increase your recurring clients and improve your working capital structure. Few small roofers are offering services such as roof asset management services or solar micro-grid network management. Not only you invoice on service, but you preempt bid competition when they need installation or reroofing.4) Lastly, I agree with Jason on the cost per unit. It will not change as you grow because you won't get economies of scale on labor and material. I, however, feel that your overheads won't grow as fast as your top line. So I believe you can expect some EBITDA margin improvement as you increase revenue.