Mergers and acquisitions (M&A) in the construction industry present unique challenges and opportunities. Unlike other sectors, these transactions involve assessing long-term project contracts, fluctuating market conditions, regulatory requirements, and the value of tangible assets like equipment and property. Whether buying or selling, business owners must conduct thorough financial analysis, ensure operational efficiency, and address potential risks to maximize value. This guide outlines key considerations at each stage of an M&A transaction, providing insights and expert resources from The Bonadio Group to help navigate the complexities of the construction industry.
1. Preparing for a Business Sale or Acquisition
- Preparing for a business sale or acquisition in the construction industry requires careful planning to maximize value and ensure a smooth transition. Owners should focus on maintaining accurate financial records, assessing project pipelines, and addressing any legal or operational risks. Buyers must conduct thorough due diligence to evaluate contracts, assets, and liabilities. A well-prepared sale process can lead to better deal terms, reduced disruptions, and long-term success for all parties involved. Early planning and expert guidance are key to a seamless transaction.
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2. Understanding Business Valuation in Construction
- Determining the value of a construction company involves assessing factors like profitability, cash flow, and market trends. Owners should consider financial performance, industry risks, and company-specific strengths when evaluating worth. A strong management team, stable revenue, and accurate financial records can enhance valuation, making the business more attractive to buyers or investors. Understanding these key drivers ensures informed decision-making for sales, mergers, or succession planning.
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3. Financial Analysis and Transaction Readiness
- Financial analysis and transaction readiness are crucial for construction companies preparing for a sale or investment. A Quality of Earnings (QoE) analysis provides a detailed assessment of revenue, profitability, and potential risks, offering buyers and sellers a clear picture of financial health. Understanding cash flow stability, project profitability, and operational efficiency can enhance valuation and transaction success. Proper financial due diligence ensures transparency, mitigates surprises, and supports informed decision-making.
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4. Post-Acquisition Considerations
- The transaction closing is just the beginning—especially in the construction industry. Under ASC 805, Business Combinations, acquirers must recognize assets and liabilities at fair value on the acquisition date, even in partial equity purchases. But before diving into accounting entries, companies must determine whether the transaction qualifies as a business combination or asset acquisition—each carrying significantly different implications. Additional complexities include identifying the accounting acquirer, determining the acquisition date, and valuing consideration transferred, tangible and intangible assets, and goodwill. Industry-specific factors such as real estate holdings, lease structures, and in-place contracts further complicate the process. Understanding and applying ASC 805 correctly is critical to post-acquisition success and long-term value creation.
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Let’s Connect!
I hope that you found this information helpful. If you have any questions or need assistance, I would be happy to schedule a complimentary call to discuss your needs. Feel free to reach out to me directly at ncox@bonadio.com or (716) 580-1601. I also welcome the opportunity to connect with you on LinkedIn where I frequently publish thought leadership content related to the construction & real estate industry that may interest you. Thank you for your time, and I look forward to connecting with you soon.
-Nancy Cox, CPA, Industry Leader, Construction & Real Estate
