Getting New Capital for Tomorrow’s Construction Enterprises

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Wednesday, April 1st, 2015
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Once through the start-up phase, construction companies will immediately be confronted with the challenge of maintaining their early momentum and growing.

It’s at this juncture that determining how to narrate a business’s defensible competitive advantage and how its value proposition may be presented to customers, future employees, the contractor’s suppliers, its financiers and eventually new investors or buyers will need to unfold. These join the “way-in” and way-out” dots.

Over time, one of the most vexing questions for construction business founders will be succession and how their years of effort in guiding and sustaining the enterprise might be valued.

Again, I hear the constructor class of 2015 asking why is this relevant now.

The reality for most construction businesses is that they suffer from a “me too” market positioning that makes it difficult to distinguish them from competitors. Australia’s 207,000 construction companies wrestle with this every time they put a tender together or try to sell their products or services to customers.

Over the last 20 years, I have been involved in a number of project and business recovery engagements. They all have many common features but two questions that always present are:

  • Is this a business or project, what describes them and why are they viable?
  • What ongoing business or project diagnostic systems are in place?

Budding constructor entrepreneurs from the class of 2015 should be mindful of these questions early in their careers. Many established companies were started years ago when some of these criteria did not seem important. It just looked like a good idea to copy what others were doing. It didn’t seem to matter if the business was in hole digging, bricklaying, house building or project management. Industry associations always welcomed new members to their flock and the criteria for joining were generally pretty low. That’s why we have so many “me too” construction businesses in Australia.

Many of Australia’s construction businesses survived in what was known as the black or cash economy until 2001 when the Howard government introduced the Goods and Services Tax (GST). This was, in my view, a major turning point for construction as GST brought on the need for quarterly financial accounts, reporting and payment of the new tax. Unfortunately, most businesses saw this as more red tape and a drag on their just getting on with business. In many cases, competent financial management has been a forced business bolt on and has not done a lot to change the culture of those enterprises. It partly explains why some 25,000 construction businesses fail each year.

The construction entrepreneurs borne of the class of 2015 should not be burdened with any of this baggage. They will want to be distinctive and best of breed from the outset. They will not have to adapt old business systems and practices into a new information age where the tools of business to business dealings, business diagnostics and continuous disclosure are now main stream. There are now a plethora of apps and online products that can be selected by modern enterprises to provide efficient information hubs which will allow entrepreneurs to get on with doing what they do well.

Importantly, these tools will be just as applicable to financial management as they will be to safety, quality, scheduling, waste management and supply chain integration. This is part of my reasoning which anticipates new construction business models that can aggregate their supply chain inputs to offer collaborative best practice products such as extended warranty insurances and after-construction services that are not yet contemplated by traditional construction businesses.

The excellent news for budding construction entrepreneurs is that the cost of these tools are now negligible, they are becoming simpler to use and mainstream. They are just as available to start-up tier 4 and tier 3 businesses as they are to their tier 2 and tier 1 peers. These construction tools and how to apply them to enterprise implementation should be a new and early course at both technical colleges and universities in the very near future. The eventual dividend for early exposure to these tools will be the ease at which third parties will be able to appraise a business and consider its worthiness for investment. A further dividend should be fewer business failures.

Constructors from the class of 2015 will want to assess the businesses they want to work for or start-up with a considered insight of why projects and businesses fail. That will help reposition new construction businesses as a more worthy investment class. Modern constructors will need to embed a business culture of fair dealing and openness as the way of doing business from the outset. This will overcome one of the biggest challenges that have confronted construction in Australia: how do construction businesses grow and have access to adequate capital and funding?

This conversation will not attempt to discuss the nature of construction market opportunities that are open to tomorrow’s construction game changers. These need detailed business cases and implementation strategies. This conversation simply applies itself to the challenges of growth, business investment and value creation. I will say that “me too” construction businesses are not the answer. They are neither sustainable over time nor attractive to new investors.

Australian construction cannot sustain 207,000 construction businesses operating at the margin. A viable construction enterprise will grow in value by demonstrating a distinctive and defensible market positioning, competent management, skilled staff, repeat supply chain engagement, steady earnings, a sustainable growth strategy, a recognised brand and good governance. The attractiveness of these businesses to new investors or future purchasers will turn on these criteria.

That said, scale and earnings are important in the valuation of construction businesses as they grow and mature, and there are a few realities on the pathway to attracting new investors or in selling construction businesses. A construction enterprise will only attract a modest recognition of its earnings potential in its formative development phase. More value can be ascribed later.

The constructor class of 2015 must be early adopters of a new approach to attracting new investors and finance. Investors are not the enemy and they will expect more than a minimalist engagement. With that engagement will involve shared governance, some shifting of delegations and control. This is not an unreasonable rebalancing of the enterprise founder and new stakeholder interests.

Tomorrow’s construction entrepreneurs should maintain a constant watch on emerging trends and technologies from around our immediate trading regions and beyond to ensure they are at the forefront of how future construction will be organised and delivered. These considerations are particularly important for those constructors and entrepreneurs from the class of 2015 who will form life-long friendships and business collaborations with colleagues from around the Pacific Rim during their education and formative industry experiences.

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