Private equity (PE) firms focus on finding value and investing in it. Over the last decade, more PE firms are recognizing what contractors have known all along: home construction businesses are essential to the economy and a safe investment, and offer positive returns over the long-term.
As private equity becomes more invested in the construction industry, it’s important to understand its impact on your own businesses and the industry as a whole.
What are the benefits of private equity? How do you choose the right PE firm for your business and take advantage of the partnership to fuel growth? Here are five key takeaways from our recent webinar.
Understand how the objectives of a PE firm might differ from your own.
As an individual contractor, building a business is about creating near-term income and long-term value for yourself and the people who work with you. Private equity firms focus on creating value for their shareholders. Instead of investing in public markets, PE firms invest in the private sector. They buy businesses, help them grow, and then sell them for more than they paid – returning the equity and profit back to their investors.
Not all private equity is the same. Do your due diligence.
There are good and bad PE partners for any business. Most PE partners will buy 100% of the business and typically roll back proceeds from their investment back into their fund.
Before you accept any investment, do your homework. Talk to people. Take the time to ensure it’s the right match for your business. Understand their model. Get answers to critical questions like:
- Do they understand the nuances of your business and the fundamentals of success?
- How well do they know your industry?
- Do they intend to “sunset” you and bring in new leadership?
- Will they leave decision making at the local level or choose a strategy of centralization?
- Will they preserve the local feel and culture of the company?
“Spend time understanding who you’re getting into bed with and who’s going to run the company,” added Josh Sparks, CEO, Infinity Home Services. For example, IHS works with its companies to keep local decision-making and leadership continuity – things that are important to many contractors.
In addition to capital, PE firms can offer other positive benefits to your business.
Well-respected private equity firms have a proven model where they invest in a business, grow it successfully, and increase its value. Successful contractors also have a proven model. They deliver expertise and service, understand their customers and community, and care about their people.
Not all entrepreneurs, however, have the executive leadership skills needed to scale a business. An experienced PE firm can provide critical thought leadership, a strategic vision, deep resources, and industry analysis. Choosing the right PE firm allows entrepreneurs to focus on what they do best, and let those with proven track records grow the business to the next level.
PE firms look for solid businesses with great metrics.
While every PE fund is different, most are looking for companies with a historic pattern of stable revenue and EBITDA. Typically, the “sweet spot” is between $8 to $60 million in top line revenue and $1 million in EBITDA, with 8-20% percent margins. PE firms want to invest in companies led by people with the right intentions, who have strong character and have built good cultures.
Before you explore a strategic partnership, be ready to answer key questions like:
- What’s your historic growth? Has it been stable?
- How strong is your leadership? Do they have the skills to scale your business?
- What’s your total addressable market?
- What’s your safety profile?
- What’s the longevity of your staff? Do they have opportunities for upward mobility?
- How loyal are your customers?
PE investment isn’t for everyone.
With the private equity wave hitting construction, many contractors are worried about remaining competitive. Not every business, however, is ready for or needs PE investment.
Concluded Josh, “Don't be pressured into selling your business to private equity. Show up on time, do great work. Be reliable and charge a fair price. If you do that consistently over time, you'll develop a large referring customer network, and PE can never take those folks away from you.”
