Sectors
Buying an electrical or M&E contractor, and how lenders look at it
This is the hardest of our seven sectors to fund, and it is worth saying so plainly. Mechanical and electrical contracting carries real contract risk, money is held back by customers as a matter of routine, and the cash is tied up in work you have done but not yet been paid for.
None of that makes it unfundable. It makes the choice of lender matter more here than anywhere else on this site.
What you are actually buying
An order book, a maintenance base, and a balance sheet full of other people's money
Most electrical and M&E businesses are some mixture of three things, and the mixture decides everything about how the purchase is funded:
- Project contracting. Fit-outs, installations, new build and refurbishment. Won by tender, priced tightly, delivered over months, and paid in stages with money retained until well after practical completion.
- Planned and reactive maintenance. Recurring, contracted, and behaving much more like the HVAC or facilities management businesses on this site. This is the part a lender is most comfortable with.
- Testing, inspection and compliance work. Fixed wire testing, emergency lighting, periodic inspection. Driven by regulation and insurance, so it recurs, and it is genuinely valuable.
A business that is eighty per cent maintenance and compliance is a service business with some project work attached. A business that is eighty per cent project contracting is a contractor, and it will be valued and funded as one. Buyers get into trouble by paying the first price for the second business.
The two numbers that dominate
Retentions and work in progress
Retentions are sums the customer holds back from each payment, released partly at practical completion and partly at the end of a defects period that can run a year or more. They sit on the balance sheet as money owed to the business. Some of it will never arrive, because the customer disputes defects, or goes insolvent, or simply never gets round to releasing it.
Work in progress is work done and not yet billed. It is real value, and it is also the easiest number in contracting to be wrong about, because it depends on an assessment of how complete a job is and how profitable it will turn out to be.
A lender will discount both, sometimes heavily. A buyer who has paid full book value for retentions and work in progress, and then finds the lender will not advance against them, has funded the gap out of their own pocket without meaning to. Read working capital and invoice finance together before agreeing how those items are priced.
What carries value
The things that move the number
The recurring share
Maintenance, testing and compliance income is the part that behaves predictably, and it carries most of the value.
Order book quality
Signed contracts with known margins, not a pipeline of opportunities. Ask what has actually been won and on what terms.
Accreditations and approvals
Competent person scheme registration and client approved-list status are what let the business bid at all.
Customer mix
Main contractor work carries payment risk that direct end-client work does not. Two businesses with the same turnover can have very different cash profiles.
Estimating capability
The person who prices the work is often the most important employee in the business. If that is the seller, that is a structural issue, not a staffing one.
Contract terms
Payment terms, retention percentages, liquidated damages and whether the business signs up to onerous amendments to standard forms.
The lender's view
What lenders look at, and what makes them nervous
What gives a lender comfort
- A substantial, evidenced maintenance and compliance base.
- A contract by contract review of the order book with margins.
- A history of completing jobs at or near tendered margin.
- Debtors and retentions that age normally and get collected.
- A buyer with contracting experience and an estimating function of their own.
What makes a lender nervous
- Aged retentions nobody is actively chasing.
- Work in progress that has grown faster than turnover.
- One or two contracts making up most of the order book.
- Exposure to a main contractor in difficulty.
- Losing the estimator, the contracts manager or the approved-list status on completion.
Deal shapes
The structures that actually get funded
Stacked facilities. More common here than anywhere else in our seven sectors. A term facility for the goodwill, an invoice or contract finance line for the working capital, and asset finance for vehicles and plant. Read stacking facilities, because getting the ranking right between them is the difference between a workable structure and a stuck one.
Asset purchase leaving the contracts behind. Sometimes the right answer is to buy the maintenance base and the people and leave the project liabilities with the seller. Cleaner, cheaper to fund, and it loses you the order book.
Share purchase with heavy warranties. Where approvals and contracts cannot be novated, buying the company may be the only route. Expect the lender to want indemnities against contract disputes and defects. See share purchase versus asset purchase.
Paperwork
What you will be asked for
- Three years of accounts and current management figures.
- Contract by contract order book with value, stage, tendered margin and expected completion.
- Retentions schedule with ages and release dates.
- Work in progress with the basis of valuation.
- Debtor ageing, and who the debtors are.
- Maintenance and compliance contract schedule.
- Accreditations, scheme registrations and approved-list status.
- Any live contract disputes, claims or defect liabilities.
- Staff list with roles, especially estimating and contracts management.
Traps
The ones that cost buyers money
Paying book value for retentions. Some of that money is not coming. Price it on collection history, not on the ledger.
Buying a contract you cannot deliver at the tendered price. A job priced by an estimator who is leaving, on materials costs that have moved, is a loss you have bought.
Missing the main contractor exposure. If a large part of the order book runs through one main contractor, you have taken their credit risk as well as your own.
Assuming approvals transfer. Approved-list status with a large client is often granted to a business and reviewed on a change of control. Check before completion.
Underestimating the working capital swing. Contracting consumes cash as it grows. Buying one and then winning more work can put you under pressure at exactly the moment things look like they are going well.
Why us on this one
This is the sector where the wrong lender costs you the deal
The part that is hard to buy is knowing which lenders are comfortable with retentions, work in progress and contract risk, and which will look at the same balance sheet and decline it.
Tell us the split between contracting and maintenance, the order book and the retentions position. We go to the people who fund contractors and come back to you with who can fund it and what they will want to see.
We introduce buyers who are acquiring through a limited company or a NewCo. If you are buying personally, as a sole trader or as a partnership, we will point you to an authorised firm directly instead.
Tell us the split between contracting and maintenance
That split decides who we go to, because they are funded by different people. Send us the order book and the shape of the deal.