What do investors look for in a construction business?

Woodall Homes is a well-respected house builder in Derbyshire and the wider region. It’s known for excellent build quality, across a range of different sites and types of property. It also has an excellent reputation with suppliers, a strong pipeline of projects, solid financial performance and a great management team. Across 2020 and 2021, we provided £4.25 million of growth capital into the business, to accelerate its growth. And it’s an excellent example of the kind of construction business we want to back.

When looking for new opportunities in the sector, our investors seek out businesses that are able to adapt to market change (or even better, get ahead of it). Even in traditional industries like house building, technologies are evolving quickly — we’re seeing gas being phased out of new builds, increasing use of renewable and sustainable technologies, and remote working and electric vehicles (EVs) all changing the blueprints of traditional house engineering.

We’re also interested in the supply chains that will support the growth of these new technologies, or change the way in which people buy and use products in the sector.

Ultimately though, businesses with big ambitions across the construction sector are what growth investors like us are looking for. And we can provide the capital, network and expertise to help you deliver on this ambition. Introduce yourself to our investment team or read on to learn more about what investors look for in a construction business:

1. Good with money! 

While it may sound obvious, construction is an industry that absorbs a lot of cash. At any point in time, you might have millions of pounds tied up in part-finished or unsold properties. Managers need to strike the right balance, so that they’re continuing to invest in future sites, still paying their overheads, but not running out of money. To do this effectively, management teams need to be driven by data, understand the appropriate levers, and be able to react to the market quickly.

2. Trusted subcontractors

A lot of construction businesses operate with subcontractors. These subcontractors ultimately determine the quality of the build and the margins that can be delivered. Ask yourself, will they battle to maintain your brand? Can they scale with you? The key to earning the loyalty of subcontractors is to treat them well (and honestly), pay on time, and offer predictable work. This is especially important when factors like Brexit have made it even harder than usual to attract and retain talented tradespeople.

3. Effectively navigating the planning process

The same piece of land could be worth £40k or £4 million, depending on whether it has planning permission or not. To navigate the planning process successfully, a business needs a strong technical team in place, who understands the needs of local communities, planning agendas, local plans, and suitable end products for the market. For this reason, we tend to back regional construction businesses that have the local knowledge required to get approvals, and to deliver projects that local communities need and want.

4. A healthy pipeline 

Unsurprisingly, our investors want to back businesses with the potential to grow. That means we’re looking for construction businesses that, on top of any current projects, have a land bank or project pipeline with planning permissions underway, or a clear path to growing output. Again, this comes down to having a strong technical team to find the right sites, acquire them at the right prices, and reliably convert.

5. Consistently strong margins

A good management team has a firm grasp of their business model, plans ahead for potential cost increases and other difficulties, and still delivers the right level of profit. Our investors want to see businesses delivering a consistent gross margin (revenue minus the cost of the build) of 20-30%. This is a good signal that a construction company is well-managed and knows what it’s doing, especially in a turbulent market or over a sustained period.

6. Cost control

Linked to strong margins, it’s essential to control costs. This applies to procurement and wastage, but also time. If a construction project is supposed to take six months, but ends up taking you seven, this could be a problem for the business – whether it be time availability, cost overruns, or cash management.

You don’t necessarily need a large central overhead base, but you do need effective people and systems, and a management team with the ability to pull everything together into a coherent view. To take house building as an example, there’s always a lag between setting the sales price and completing a sale – often with costs still to be incurred, which may be different to those initially forecast. In between those two points in time, a good house builder will do everything it can to protect its margin.

Parts of this article originally appeared in Construction News (July 2022).