Why SMEs in construction should consider M&A

Why SMEs in construction should consider M&A

Mergers and Acquisitions (M&A) might just be the key for construction leaders looking to navigate the headwinds in their sector.

Amid a plethora of geopolitical issues, comprising rising raw material costs, inflation, war in eastern Europe, Brexit and the hangover effect from the pandemic, the industry is in the middle of a perfect storm and many companies need solutions. Paradoxically, SME owners may find they are asking themselves the wrong question: instead of strategising how to grow as a company, they are figuring out how to survive.

Smaller construction companies might consider a merger as a way not just to stabilise, but ultimately be a successful business in the short to medium term. This is largely down to the pulling power, or indeed lack, of a company’s earnings. Indeed, smaller businesses face two issues. Firstly, those with earnings lower than £5 million are exposing themselves to a significantly greater risk of missing out on projects compared with bigger competitors (i.e. those with earnings greater than £5 million). And secondly, smaller businesses face difficulties in securing funding through traditional lenders as banks have demonstrated a reduced appetite to support SMEs. Therefore, scale is very important.

As a rule of thumb, if a company’s earnings are around £2 million, they should certainly consider the potential benefits of a merger with another business (often a known competitor of the company in question) of a similar or slightly larger quantum, to push the figure up towards the £5 million mark. If a business reaches this number, not only are they in a better position to navigate through the aforementioned headwinds, which are continuing to squeeze margins, thanks to the greater financial power they possess, but they are also better placed to win those elusive but lucrative contracts.

The UK obviously has some major ongoing construction projects, including the government-run HS2 and Hinckley Point C developments. Due to the increased level of scrutiny these projects attract, the government’s most pressing concern is often simply getting the job done, rather than negotiating a price with a company. In many instances larger companies stand a greater chance of securing such contracts due to their size as a counterparty to a contract, which often requires bond arrangements favouring more resourced players. Larger firms also have better access to the market and thus greater procurement capabilities. Projects often overrun in terms of cost, but the most important aspect for the government is the security of knowing that it will be completed. Amid rampant inflation, securing projects and running them on time is going to be increasingly challenging.

In order to adapt and remain competitive, companies need to ensure they remain adaptable, creative, and willing to network. Mergers not only enable a company to grow in size but also provide access to a broader portfolio of business, ensuring said company becomes more rounded and balanced, with a larger footprint and brand, helping it succeed. As with any business, it’s important to take a strategic approach to understand what’s missing and subsequently address that accordingly.

For further financing options, companies should always think about an all-of- market approach, covering both traditional and alternative lenders. Using an experienced corporate finance adviser can be a sizeable advantage, as the funding market is very broad and a company, on its own, might not know which lender is best suited for their needs and how to deal with them.

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