Buying an M&E contractor

Decide which business you are buying

The first decision in an electrical or mechanical contracting purchase is not price and not structure. It is what proportion of the business is contracting and what proportion is maintenance, testing and compliance, and whether you actually want both.

The parent sector page explains why the two halves are valued and funded differently. The practical consequence is that buying the whole thing is sometimes the wrong answer. A buyer who wants a recurring service business can occasionally buy the maintenance base and the people and leave the project liabilities with the seller, which is cleaner and cheaper to fund and loses them the order book.

Reviewing the order book properly

An order book is not a number. It is a set of individual commitments, each with its own margin and its own risk, and it has to be read contract by contract.

For each significant live or won contract, establish the contract value, the tendered margin, the cost incurred so far, the cost still to come at today's prices rather than at the prices used when it was priced, the programme position against the agreed dates, and whether any variations are being carried in hope rather than in writing. Then ask the question a lender will ask: if this business won nothing else from today, what does the next twelve months look like?

Pay particular attention to who is on the other side. Work run through one main contractor puts that contractor's credit risk on your balance sheet as well as your own, and it is worth knowing their payment record and their financial position before it becomes yours. See customer concentration.

Why construction contracts resist an asset purchase

In most sectors an asset purchase is the cleaner route, because it leaves the past behind. Construction resists it.

Construction contracts commonly restrict assignment, and moving one properly requires novation, which needs the agreement of the employer or main contractor as well as of the two parties to the sale. That is three signatures per contract, obtained from a party with no particular reason to help and every opportunity to renegotiate. Collateral warranties given to funders, purchasers and tenants add further consents.

Approved-list and framework status is the same shape of problem. It is usually granted to a business against assessed capability, and it is reviewed on a change of control rather than transferred with a set of assets.

That is why a share purchase is so often chosen here, despite carrying the history, the disputes and the defects exposure with it. Expect a lender to want indemnities against contract disputes and defect liabilities in return. See share purchase versus asset purchase.

Bonds, guarantees and insurance

Three things that sit outside the accounts and can move the deal.

Performance and retention bonds. Where a surety has issued bonds, its appetite depends on the covenant of the entity it assessed. A change of ownership can prompt a review, and a surety that withdraws leaves the business unable to take on the work it was bonding. Establish what is in place, with whom, and what their position is on the transaction.

Parent company guarantees. Where a seller's wider group has guaranteed obligations, those guarantees usually leave with the group. Somebody has to replace them, and that somebody is the buyer.

Professional indemnity. Any business with design responsibility, which includes most design and build packages, needs cover that responds to claims made in future about work done in the past. Because that cover is written on a claims-made basis, the run-off position for the seller's past work has to be evidenced rather than promised.

The estimator is a structural issue

In a contracting business the person who prices the work is frequently the most valuable employee, and often the seller. Pricing is where the margin is made or lost, and it is not a skill a buyer can assume they will find in the market at short notice.

Deal with it as a term of the transaction, not as a staffing matter after completion. That usually means a defined period of continued involvement, a handover during which the outgoing and incoming estimators price the same jobs and compare, retention or bonus arrangements for key people, and covenants that would survive being tested. The same applies to the contracts manager who holds the client relationships.

Employment and the workforce you inherit

Contracting workforces are often a mixture of employees, long-standing subcontractors and labour engaged through the construction industry scheme. Where the arrangement amounts to a transfer of an undertaking, employment obligations follow the people whether anybody intended that or not.

Separately, where people described as self-employed are in practice working like employees, the exposure that creates does not disappear on a change of ownership. It is a diligence item with a real number attached, and it belongs in the warranties.

Structuring it

Contracting deals rarely work as a single facility. The usual shape is a term facility for the goodwill, a working capital or invoice line sized for the cash the order book consumes, and asset finance for vehicles and plant, with the ranking between them agreed rather than assumed. See stacking facilities and asset finance.

Be careful with earn-outs here. Margin in contracting is a judgement about uncompleted work, which makes it easier to influence than a fee book or a monitoring base, and an earn-out measured on profit can create an argument about how contracts were valued rather than an alignment of interests. Measures tied to cash collected, or to specific contracts completing, tend to survive better. See deferred consideration and earn-outs and contract retentions and work in progress.

Who you take it to

This is the sector where the identity of the funder matters most. The balance sheet of a decent electrical contractor contains items a generalist lender cannot value and will therefore discount to nothing, and the order book requires somebody who can read a tendered margin. The same file gets opposite answers depending on who opens it.

We know this market and we know specific people who are comfortable with retentions, work in progress and contract risk, and who will look at an order book properly rather than treating it as a pipeline. Tell us the split, the order book and the retentions position, and we 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.