I found it interesting that the number of M&A deals from January through July 2023 is almost on pace with the record year 2021 for the same timeframe.
But it‘s curious, because I had heard several complaints by M&A professionals on the buy-side in construction-tech how painful the M&A process has become for them this year.
It’s clear: Doing strategic acquisition deals can be a huge value unlock for acquirers and founders. But they come with their own set of headaches.
So I set out to speak with 15 M&A pros on the buy-side at construction companies, software strategics, private equity shops, and tech unicorns, all of them active in acquiring construction tech firms.
Some recurring themes popped up on their pains and desired solutions.
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What acquirers hate dealing with in 2023
Limited access to the right targets, lots of noise
The biggest frustration repeatedly mentioned is getting access to solid targets, especially in the middle market. As one Head of M&A put it, “I’m out elephant hunting but all I find is shitty VC-backed deals.” Many strategics told me they feel like they see the same recycled deals from bankers over and over, not proprietary deal flow. They want pre-vetted targets curated specially for them.
Tied to this, I heard almost in every meeting that acquirers feel there is too much noise and just not enough quality companies in the market. With very colorful language, one long-time acquirer of construction software startups told me how there is too many low-quality venture-backed firms from the 2018-2021 vintage with high burn and nothing achieved, and this person felt products were too undifferentiated (“I have seen more than 10 construction project management software firms who pitched us to buy them, and their products were nothing to write home about”).
One PE had a tactic worth replicating: When they wanted access to the best firms in a specific space that they had a thesis for in a new geography, they just bought a small advisory firm that had served the space and its targets for a long time. Buy acqui-hiring that firm, they integrated the firm’s partners into the PE and gave their new team the job to speak to all targets they deemed high quality and build the deal access.
Inability to build relationships pre-sale
Strategics mentioned over and over again that they feel they are screwed if they first see a target when a banker or M&A broker starts a process. They expressly mentioned the requirement to have time to build relationships with owners and management. As another corp dev head said, “If we first see a deal from a banker, I know we’ll lose.” Early access is crucial. For example, experienced M&A professional said if strategics get a peek at deals 6 months before bankers auction them off, that allows time to build proprietary relationships with the founders.
One tech unicorn CxO who had been tasked with M&A opined that “The best start to an M&A down the line is to do business with each other. We always start with a pilot and then some business. It makes a deal so much more likely.”
Getting dragged into banker/broker-led processes, too much risk in too short time
Banker- or broker-ked force strategics to overpay, take on more risk, and close with less diligence. Make no mistake – the professionals on the buy-side know this. While prior to 2022 they couldn’t do much about it, this time is different. They scrutinize not just the target more – they scrutinize the process much more than two years ago.
But bankers and M&A brokers love running broad auctions. While the strategics and PE pros I spoke to crave proprietary, bilateral deals avoiding formal competitive bidding wars.
As one M&A leader said, “Anytime I told my boss a deal came from a banker, he said forget it and find a better deal.”
Another senior PE investor mentioned,”We have stopped doing secondary PE deals, where a [construction software] firm is offered to us by another PE. We hunt for proprietary stuff in this market.”
Diligencing non-core targets
This is specific to the strategics I spoke with. Big enterprises mentioned they often struggle diligencing and integrating acquisitions outside their core-core expertise. One M&A leader gave an example of his company having lots of competence in rolling up small business in their core business, but when it comes to a software that is just targeting their core business, their competence how to evaluate it drops to zero, making M&A there painful. Strategics seem to want help diligencing non-core targets.
Unrealistic expectations, misaligned with market
Strategics specifically felt that too many founders still have sky-high price hopes misaligned with strategic buyers’ realities. One professional specifically mentioned how they are baffled how many founders “haven’t gotten the memo that it’s 2023.” This person felt that founders’ bankers rarely position the deal well or explain why the strategic is the best acquirer, making higher valuation expectations even less likely.
One M&A leader in a large industrial who does a ton of M&A in construction-related spaces mentioned: “The best predictor if we end up doing that deal is whether in the first meeting the founder tells us why they think we will be the best owner. […] The reason is it makes us believe that they want this deal with us.”
What acquirers find helpful
Proprietary access to off-market targets
Early looks at companies not openly for sale seems to be seen as a huge value. It is difficult especially for strategics, as founders rightly maintain information asymmetry. Strategics prefer preemptive access before bankers run wide auctions. A 6+ months heads-up lets strategics build relationships with founders-owners directly, thus making deals more likely. One corp dev head said a monthly preview of soon-to-be-for-sale companies would be clutch.
Diligence help on businesses they haven’t dealt with historically
Strategics struggle diligencing non-core targets. One M&A-experienced General Counsel said this is where external help adds tons of value, while they need little assistance on core deals. Outside expertise who can diligence non-core targets provide big utility.
Insights on founders’ mindsets
Understanding what drives a founder beyond money helps strategics craft better fitting offers. Learning founders’ priorities early lets strategics creatively structure deals using non-financial incentives important to founders. For example, one PE investor had cases where deep insights into startup founders’ motivations enabled better deal resolutions for both sides. Another corporate M&A head told me how one founder really wanted their name to be shown in their software for eternity, and how knowing this early can help both sides focus on what matters to them.
Funding startups to buy competitors
One move that some (especially software) acquirers seem to love is to lead funding rounds in startups whose products they deem competitive, or hugely synergistics, thus gaining access to the startup’s governance. Backing startups as a buyer, de-risking deals by leading rounds, and supporting rollups provides big value (to some strategics). One corp dev leader emphasized this strategy as extremely useful.
Well guess what, founders and existing investors of the best startups know this tactic all too well. I’m personally not convinced that this works for the top startups and category leaders in a space, but it actually leads to adverse selection in hot spaces.
Take-aways for acquirers in construction-tech
- Do more business with the startups and scale-ups you have on your target list, starting with pilots and first contracts. Become important to each other
- Build partnerships with VCs who can give you the lay of the land, and curated access to the top founders, instead of shallow and fast-paced banker auctions. The good VCs won’t tell you everything, but they know which founders are beginning to prepare an exit and if these founders want to speak to the strategic
- Reference-check founders with their investors to find out if a founder cares about more than money, eg. autonomy, impact, prestige etc. and discuss deal terms accordingly
- The devil’s tactic (not endorsed !!!): Proactively fund and take board seats in your name in key startups to support executing a buy-and-build strategy. I personally made the experience this is a surefire way to get into adverse selection problems and actually NOT get access to the best founders and firms, but hey, you do you. It has been mentioned by one buyer, so for completeness I am listing it here. I just think it’s an error-ridden tactic executed by some well documented strategics
Take-aways for ConTech startup founders
Note that the following conclusions refer to the insights specifically from 15 interviews I mentioned at the top, and are not exhaustive.
More importantly, they apply mostly to construction-tech startups plateauing in growth and margins.
For those able to sustain very rapid growth (2-3x+ revenue growth yearly) while achieving best-in-class margins, not all of these principles apply and usually you will find it more useful towards a bigger liquidity event down the line.
But for most construction tech ventures with an eye to a trade sale exit in 2-3 years, these seem to work:
- Research an acquirer’s strategy and craft a thesis on why you’re the perfect fit for their goals, and then say that out loud in the first meeting
- Give 6+ months ability to preferred acquirers to work with you, ideally through business, but at least through meetings. Make them comfortable with you as the owner and operator
- Share your financial and non-financial motivations early in the process and get creative structuring deals to optimize for autonomy, impact etc.
- In my personal opinion, avoid banker-led / broker-led processes unless you are a rockstar firm who can be a no-brainer deal for a large group of acquirers. If you are not, based on the shared learnings above, you seem actually less likely to strike the right deal in a banker-led process
- Also personal opinion: Absolutely DO NOT ACCEPT THE DEVIL’S TACTIC above. It kills your optionality and moves all leverage to that one potential acquirer
The best deals come from invested relationship-building and proprietary processes focused on specific acquirers’ needs. With the right moves, founders can find the ideal strategic partner or private equity buyer and unlock life-changing value for themselves.