By Hamish Martin, Partner at LAVA Advisory Partners

The construction industry is poised for a huge increase in M&A activity over the next year, having already grown 66% YOY to May 2024. This is driven by several factors including economic recovery, infrastructure projects, the push for sustainable construction, and the competitive need for companies to scale and diversify. For construction firms considering M&A as a growth strategy or exit opportunity, now’s the time to prepare.

Government initiatives:

• Positioning the UK as a clean energy leader
• Planned investments in wind, solar, and green hydrogen would require significant infrastructure development, so companies able to operate in this space could become highly valuable.
• 10-year infrastructure strategy
• Designed to provide stability for large-scale projects, this aims to solidify investment in transport, housing, and digital infrastructure and would provide an ongoing pipeline of sizeable projects and long-term profitability.
• Extending devolution
• Empowering local authorities with more control over transport, housing, and economic development, along with multi-year funding to support regional infrastructure projects mean regional firms could reap the benefits of local knowledge, community reinvestment, and job creation.

Sustainability

The government’s infrastructure strategy emphasises sustainable social housing, so companies specialising in low-carbon construction, energy-efficient buildings, and sustainable materials are becoming attractive acquisition targets.

Firms with strong ESG stances are also attracting interest from larger companies looking to secure government contracts. A lack of ESG credentials can hamper even the most promising deal, so now’s the time to ensure you have visible, actionable ESG goals across your entire ecosystem.

Resilience

The ongoing challenges of increasing costs, supply chain concerns, and increased regulation are driving consolidation as firms seek to combine resources, streamline tasks, reduce costs, and improve operational efficiency.

As regulation becomes more complex, construction firms are acquiring Testing, Inspection, Certification & Compliance (TICC) companies to integrate into their operations, ensuring projects meet all necessary standards from the outset.

Similarly, we’re seeing more companies prioritise working with local contractors for a variety of reasons from knowledge of regulatory or planning processes, to local job creation incentives, which means regionally-focused firms are becoming very attractive to large players with gaps in lucrative areas.

What to do next?

If you’re considering a fundraising or exit strategy in the next couple of years, there are some steps you can take right now to set yourself up for success:

• Clarify your objectives
• Are you aiming to expand your offerings? Enter new markets? Understanding these objectives will streamline finding suitable acquisition targets or potential buyers.
• Prep your data
• Due diligence is critical in any M&A transaction, be prepared to provide details of financials, operations, contracts, and legals.
• Prioritise risk management
• The industry is inherently risky, with potential issues from project delays to regulatory challenges. Firms with robust risk management including insurance, health and safety, and contract management are more likely to succeed in M&A
• Evaluate cultural fit
• Establish your non-negotiables early to better assess the compatibility of potential partners and consider how the integration process can be managed for the best result.

With the sector expected to experience a busy year for M&A, good preparation is essential to navigating this landscape.

By clarifying strategic objectives, strengthening financial health, enhancing operational efficiency, and prioritising risk management, firms can position themselves to capitalise on the opportunities ahead.