The construction industry is constantly growing, with hundreds of new construction businesses opening every year and many already existing companies being bought and sold.
In Canada, in particular, there is a lot of competition in the construction industry, and many of the construction companies that have been put up for sale do not successfully sell.
Read ahead for an overview of the construction industry in Canada and to get a better understanding of why so many of the construction companies that have been set up for sale do not end up actually selling and also really how many construction companies for sale are really there.
An Overview of the Construction Industry in Canada
According to Global Data., the construction industry in Canada was sized at $325 billion in 2021 and is expected to continue to see significant growth in the next forecast period up until 2026 with an average annual growth rate (AAGR) of over 2%.
This growth is mostly going to be fueled by increased investment in projects across the industry, including housing projects and transport and energy infrastructure projects. Additionally, the three-year growth plan set up by the Canadian government is a big reason for this significant growth in the industry.
As for the residential construction market in Canada, there was certainly some stagnation as the Covid-19 pandemic hit. However, residential construction has come out strong and is expected to remain stable.
An important aspect to keep in mind when considering the construction industry in Canada – as well as the rest of the world – is that the market level of competition is very high, and there are low barriers to entry. This means that hundreds of new construction companies are started every year, and hundreds of companies are bought and sold, as well.
A quick search online can let you know that there are multiple avenues to find construction companies for sale. N3 Business Advisors, for example, has several construction companies listed for sale. Other websites also offer long lists of companies that have been put up for sale and are available to buy. In some cases, the number of companies listed can go up to the high hundreds.
This leads us to the question of why there are so many construction companies for sale that haven’t been bought yet when we can see that the construction industry is doing so well and experiencing so much growth. Also, when looking at the number of construction businesses for sale, one should also consider construction equipment businesses for sale and also building supply business for sale, many of which go unsold due to variety of reasons. Let’s take a look at the next section to get a better understanding of the answers to this question.
Reasons Why Many Construction Companies Don’t Sell
Most construction company sales follow similar stages leading up to the sale: the decision to sell, preparing the company, marketing the company, receiving offers, due diligence, and finally, the closing of the sale. If a company does not end up selling, it is usually in one of these stages that problems arise.
As we saw in the previous section, the construction industry in Canada is valued at over $325 billion, and it is expected to continue to grow. We also know that there are hundreds of construction companies for sale every year and plenty of buyers looking to either buy companies or merge with their existing ones. Yet, many construction companies remain listed for sale, and the sales do not actually go through.
There can be a number of reasons why a construction company won’t sell or why serious buyers would refrain from buying certain companies. Here are 10 of those reasons:
1. The Company Location is not Ideal
When it comes to a competitive industry like construction, the location of a company can play a huge role in its success. If a company is located in an area with too many other competing companies, for example, it is less likely that buyers would be interested in that company.
Another example could be a commercial construction company located in a rural or very residential area where there aren’t a lot of commercial projects to work on. A buyer would have to relocate the company in such instances, which can be a big deterrent.
2. The Company Provides Very Niche Services and Therefore has a Limited Pool of Buyers
If a construction company provides very niche services, such as working on very high-end residential projects or working on green/sustainable projects, the market for such services is limited, and therefore, there would also be a limited pool of buyers for such companies.
Additionally, many niche services in construction require specialty licenses that are not very easy to acquire, leading to a lot of rep tape. In such cases, many buyers might hesitate in wanting to buy the construction company, and it could be a significant reason why the company does not sell.
3. The Company Has Low Capital, Revenue, and Cash Flow
First and foremost, the biggest asset that a construction company has is its capital. This includes fixed capital assets like heavy machinery and construction equipment. If a company for sale does not have capital, the new buyers would have to make very large investments, which could deter them from the sale. Additionally, buyers would also not risk buying a company with low revenue and cash flow, as that might signify that the company has not been doing well in the past and is not able to keep up with the market competition.
4. The Company Has a Very High Client Concentration
High client concentration means that a company has a few clients that make up the majority of its revenue and earnings. For example, a construction company might be working on one large project that brings in over 50% of its revenue. This can be a big red flag for buyers because there is a very high risk associated with this kind of client concentration. In case that particular project falls through or the client wants to end their contract early, the company would face falling revenue and be at risk of closing down. A majority of buyers would not prefer a single project or client to be responsible for more than 15% of the company’s revenue. In a very recent experience our team at N3 Business Advisors had with a construction supply business for sale was a very heavy dependent on a single home builder. Another instance where a construction equipment business for sale had a challenge in transferring the dealership rights.
5. The Company is too Dependent on the Owner
Another reason why a construction company might not sell is if it is too dependent on the owner. This overdependence on the owner can deter new buyers as they would have to take on the responsibilities of the previous owner. Overdependence on the owner of a company can also point towards underlying problems like a very high staff turnover rate, untrained staff, and poor management structure. Because of all of these problems, a company might not sell.
6. The Company’s Financials are Inaccurate
During the due diligence process, many buyers might pull out from a sale if they find that the construction company’s finances are inaccurate or not in order. Potential buyers are interested in a thorough financial history of the company and might ask for information like annual financial statements for the past 5 years, company budgets, financial statements for personal expenses and staff salaries, and so on. If a company fails to provide all of the relevant financial information and documents, it can be difficult to move forward with a sale.
7. The Company is Growing Too Fast
While it might sound like fast growth is a good thing, a construction company that is growing too fast might not sell on the market. This is because a lot of problems can be associated with fast growth, such as not having enough resources or the know-how to successfully keep up with company growth. Potential buyers will look for a company that is growing steadily and has a strong growth plan that they are going to follow. Without a strong growth plan and too much unexpected growth, it can be difficult for a company to sell.
8. A Lack of Preparation by the Company in the Transition Period
Before selling a company, there has to be a lot of preparation. This includes things like gathering all of the important documentation, coming up with a strong growth plan, ensuring that all insurance is in place, keeping equipment and machinery maintained, ensuring a strong management structure, and so on. All of this prep is essential to ensure that the construction company will sell and will be able to get through the transition period without any major problems arising. Without significant preparation, a construction company is not likely to sell or attract many buyers.
9. The Potential Buyer and the Seller Have Personal Conflicts
While there may not be any actual problems with the company relating to revenue, preparation for sale, or growth, a construction company might not sell simply because of personal conflicts arising between the buyer and seller. These kinds of problems usually arise when a sale has almost been closed and can be a huge disappointment for both parties involved. A buyer and seller might meet and have a hard time coming to a conclusion on any particular issues, leading to the sale falling through.
10. The Seller Did Not Want to Finance the Sale
In many cases, a buyer wants to buy a company but is unable to secure the funds to do so. A very popular form of financing used in the buying and selling of construction companies is vendor take back – also known as vendor financing or seller financing. This is where a seller helps the buyer finance the sale of the company and is paid back by the buyer over a specified period of time.
So, for example, if a buyer is able to secure 50% of the selling price, the seller can help finance the remaining 50%. However, if a seller is not willing to help finance the sale, many potential buyers would be forced to back out of the sale, meaning that the company would not sell. In the past we wrote an article about creative business finance structure using vendor takebacks and earnout. Please click on the link to see how sometimes sellers and buyers can use creative deal structure to complete the sale of the construction business.
While these 10 reasons why a company would not sell are very significant reasons, there are also many other reasons to consider. Some of the reasons that we have not spoken in depth about include a very high asking price, a lack of financing options, involvement of the owner’s family in the company, very high dependence on specific employees, and so on.
The Bottom Line
As we have seen, the construction industry in Canada is significantly large – valued at about $325 billion in 2021 – and there are a sizeable number of construction companies listed for sale every year. However, not all of these companies always sell. There are various reasons why a construction company might not sell, including problems such as low revenue and cash flows, inaccurate finances, a lack of preparation during the transition period, or very high client concentration.
If you are the owner of a construction company in Canada and are looking to sell your company, it would be a good idea to get in touch with professional business advisors in the Construction Industry that can help you get a good idea about the state of the market for construction companies in your area. Nevertheless, we can say business owners should always start with the end in mind which in many cases is selling a construction company. With the services of a business advisory company, you will be set to properly prepare your company for a successful future sale.
N3 Business Advisors – Construction Industry Mergers & Acquisition Advisors
If you are looking for a team of experienced and professional business advisors to help you sell your construction company, N3 Business Advisors is the company to help you.
No matter what company goal you are hoping to achieve, be it company growth, merging or acquiring, preparing your business for sale, valuating your construction company, carrying out due diligence, or meeting any other company goals, we have a qualified and diverse team that can help you out in selling a construction business.
N3 Business Advisors has over 30 years of experience working with companies in the construction industry. Our team is made up of lawyers, due diligence experts, valuation experts, business advisors, accounts and financial advisers, and other professionals can help you achieve your company’s goals.
If you would like to set up a confidential consultation with N3 Business Advisors, visit our website, or call us at 647 967 4222.
N3 Business Advisors is based in Ontario, and our office is at 55 Village Centre Place, Suite 200, Mississauga, ON L4Z 1V9.