What determines the value of your construction or real estate company?

A market in a new phase

The Dutch construction and real estate market has been consolidating for ten to fifteen years. Housing associations and major property owners increasingly wanted to be relieved of concerns by a single party able to provide multiple disciplines. Sustainability accelerated this development, and private equity firms discovered a sector that had long lagged behind industry, business services and IT.

Initially, the logic was mainly vertical: an installer acquired an installer, and a roofing contractor acquired a roofing contractor. Those who acquire a company for four or five times EBITDA and build twenty comparable companies underneath it over a number of years can sell such a group on at a considerably higher multiple. VDK is a striking example of this. Over recent years, the group has acquired more than one hundred installation companies, ten of which we advised on their sale to VDK.

In recent years, a new phase has been added: horizontal integration. No longer merely combining similar businesses, but bringing together adjacent disciplines. A roofing contractor acquiring a façade builder, or a maintenance company adding an installer. The underlying idea is to bring adjacent disciplines together under one party. On the outside of a building, this may include roofing, façades, window frames and maintenance. On the inside, security, installation and cleaning can be combined, while we see similar combinations on the infrastructure side. This strategy requires buyers with in-depth sector knowledge and, for the managing shareholder, results in a broader and more interesting buyer pool than five years ago.

Value-determining factors for buyers

In practice, a buyer does not consider all value-determining elements at once, but assesses them in a fixed order. It starts with two questions that determine whether a party comes to the table at all: is the type of work a good fit, and is the size sufficiently interesting?

It starts with the activity. What type of work does the company carry out exactly? Does the company install heat pumps or construct charging infrastructure? Flat roofs or pitched roofs? Property maintenance, window frames, concrete, foundations or installation technology? Many buyers have firm preferences or, conversely, exclusions. In a recent sale in the installation sector, we approached twelve parties, held nine discussions and received seven competing bids. Those who are less familiar with the buyer landscape often still reach the right parties, but need to make more approaches to do so and do not always have all relevant players clearly in view. This takes additional time, and there is a risk that the most suitable buyer is missed. A targeted process involving carefully selected parties provides greater negotiating scope in the final phase.

Next comes size, with the absolute level of EBITDA as the most important measure. Below a certain threshold, a large group of buyers has little to no interest and acquisition financing is more difficult to secure. This puts pressure on the multiple. At a higher EBITDA level, larger strategic platform builders and international parties come to the table with greater financing capacity. Smaller companies with a strong dependency on the owner almost invariably face lower multiples.

In other words: a suitable type of work and sufficient scale determine who comes to the table and at what level the conversation starts. The other five elements – the quality and willingness of the management team, the embedding of knowledge, the balance between own employees and hired-in labour, customer diversification and information provision – refine how far a buyer is willing to go in its bid. Companies that enter a process without being well prepared on these elements give buyers more scope to ask further questions in the final phase.

Selling to a strategic buyer or private equity?

Behind the valuation lies a second decision that few entrepreneurs consider beforehand. When selling to a strategic buyer, you generally sell one hundred per cent and exit in the short term. When selling to private equity, you often retain a minority interest, stay on for a next phase of growth and management co-invests. A “second bite of the cherry”, referred to in M&A terms as a second liquidity event, follows several years later.

In an initial conversation, we always ask a managing shareholder about their horizon. Those approaching sixty without an internal successor often find what they are looking for in a direct sale to a strategic buyer. Those who are forty and still want to grow but lack the knowledge or capital to do so are better suited to a private equity process. The route that suits you is therefore more of a life question than a valuation question.

This explains why platform builders have built such a strong profile in this sector. The model they offer family businesses combines change with continuity. The acquired company generally retains its own name, location and culture. In the background, the benefits of scale are introduced: joint purchasing, shared ICT and overhead support. For a managing shareholder without a successor, this is an attractive combination of transfer and certainty. A managing shareholder who still wants to grow and make acquisitions will generally deliberately choose the other model, with an investor that brings capital and room for growth.

What you can do in one to four years

Over a period of one to four years, you can work purposefully on a number of areas. The greatest impact lies in margins and therefore in EBITDA. In addition, you can build a second management layer, secure long-term contracts with key customers and diversify your supplier risk.

One element that is often overlooked in practice is working capital management. Tighter management of debtors, creditors and work in progress results in significantly higher working capital. We regularly see entrepreneurs who pay their creditors within one day. Those who pay the same invoices in accordance with the agreed thirty-day term can quickly realise an additional half a million on the balance sheet when annual creditor balances amount to several million. This is an illustrative example: in the run-up to a sale, value creation often lies in these types of concrete measures, not only in the larger strategic decisions.

Taking control

Entrepreneurs in this sector are frequently approached. A phone call from abroad, an unsolicited approach by a private equity firm, a conversation over coffee that develops into a serious indication. It is tempting to follow such a funnel. At the same time, you can remain in one place and see who passes by, or you can go somewhere yourself to see who you find. The difference lies in control, and control ultimately determines the outcome.

Those who consider in good time what they want to achieve, what role they wish to play after the transaction and which type of buyer suits this, structure the process on their own terms rather than simply undergoing it.

Would you like an initial indication of where your company stands on these elements and what this could mean for your valuation? Contact us.

About the author

Wouter Jolie is a partner and Head of Construction & Real Estate at Rembrandt M&A. He has been with the firm since 2011 and has focused exclusively on mergers and acquisitions in the construction, installation and real estate sectors for the past seven years. Following fifteen years in elite sport and participation in the Olympic Games, he joined Rembrandt M&A via his own company and Rabobank. Wouter is in continuous contact with the largest platform builders, strategic buyers and private equity firms active in this sector, and has advised on dozens of transactions in the sector in recent years.