2025 could be a big year for contractor acquisitions and consolidation

The world of mergers and acquisitions (M&A) has its own language.

“Dry powder?” That’s uninvested capital to you. “Animal spirits?” That’s emotional factors influencing business decisions.

And as Construction Briefing learned from speaking to experts in the field, there’s both plenty of dry powder ($2 trillion worth) and a maelstrom of animal spirits stirred up by the prospect of interest rate and tax cuts, when it comes to the US construction market in 2025.

This could mean elevated investment levels in construction companies by the likes of private equity companies who see the potential for attractive returns, as well as strategic plays by companies operating in the sector acquiring complementary businesses.

Why (certain) contractors are attractive to investors

Facility service companies have long been attractive investments, says Luke Smith, director of BaseRock Partners, a US-based investment bank serving the engineering and construction industry.

Luke Smith, BaseRock Partners

He notes increasing investor attention on contractors that perform longer-term projects like new builds, major upgrades, and expansions in the commercial, industrial and infrastructure subsectors.

In fact, the second half of 2024 already saw several significant deals (see box below).

But it’s not just any type of construction contractor that investors are going after, says Smith.

They tend to be drawn to specialist companies, rather than general contractors and those who don’t require substantial bonding or high levels of capital intensity to operate.

“For example, a heavy civil contractor is going to be less attractive than someone doing fire protection,” says Smith.

Specialist segments benefit from a combination of constrained labour and high demand, he points out, which makes for a strong backlog of work.

“In skilled trades like mechanical and electrical or plumbing, when you marry up constrained labour with areas seeing sustained demand, like massive data centre construction, a lot of reshoring of manufacturing, federal investment via the Infrastructure Investment and Jobs Act and the CHIPS Act, the energy transition – there’s a lot of interest in those firms from an investor perspective,” says Smith.

‘Flood’ of deal activity in 2025?

Brad Werner, national construction and real estate leader and partner at Wipfli, an accounting and business consultancy, cites succession planning as a major driver of ownership changes.

“Some companies do not necessarily have a next generation to transition the business to. And construction has historically accrued an awful lot of operational process and a technology debt that requires significant capital if they want to maintain market position,” he says.

Image generated using AI.

Potential buyers, particularly private equity companies, have the capital to invest to solve some of those operational and technological challenges, according to Werner.

“Buyers are seeing the potential to accrete significant value. Areas like mechanical and electrical contractors, plumbing, HVAC, and solar have been such fragmented industries. The acquisitive companies are seeing an opportunity to be the platform company, get vertically integrated, round up some of these smaller operations that tuck nicely into their business model.”

Smith expects to see more consolidation in the construction sector, driven by private equity companies but accompanied by some large strategic transactions as well.

“There’s much more on the way, and what we see is that when private equity buys a new platform like this, they tend to go out and add a bunch of smaller acquisitions on. And [other private equity companies] tend to look around at their neighbours, see what they are doing, and follow suit. So I would expect that many others are looking for a platform in this space as well.”

Werner notes that the volume of transactions in the construction market started to pick up late in 2023 and has accelerated through 2024. “There’s something north of $2 trillion of dry powder sitting on the sidelines. The animal spirits that are impacting the markets now in terms of interest rate cuts and how that might unleash a flood of deal activity – if you combine all those factors…that’s going to continue to drive volume.”

Assessing risk

Of course, construction contracting and be notoriously risky and profit margins are often tight. Prospective investors will therefore look at the financial metrics of the companies they are targeting – things like revenue, profitability, and cash flow.

But the characteristics of the business model will also be important. “[A company undertaking] fixed-price projects will be less attractive than service work that is on a time and materials basis,” says Smith. “The relative proportions of that within a company is one way to assess risk.”

Dustin Bass, BaseRock Partners

Meanwhile, companies that are securing contracts directly with the owner of a project, versus those who are subcontracting will also be considered a less risky investment, Smith adds.

And finally, those firms that have robust leadership, succession plans, a strong safety record, a diverse customer base, and a deep talent bench will also tend to look more attractive to buyers.

“Buyers, both strategic and financial, are becoming much more sophisticated and disciplined in their approach to making acquisitions,” says Dustin Bass, co-founder and partner of BaseRock.

Precisely what the volume of transactions within construction is likely to be this year is not yet clear, according to Werner. Towards the end of 2024, there was plenty of positive sentiment about a fall in interest rates and a reduction in taxes ahead of President-elect Trump’s inauguration. But exactly what happens on these fronts remains to be seen.

Nonetheless, Werner is positive about the prospects of increased deal activity. “I would safely predict that we will see an uptick now, although I don’t think anyone knows what the general state of the economy is going to look like in 12 months,” he adds. “As we get more clarity around the economy, interest rates, and tax policy, you’ll get a more definitive idea of where transaction volumes land.”

Employee ownership

Another attractive route for contractors looking at succession planning is the employee ownership route via an Employee Stock Ownership Plan (ESOP).

“The fastest-growing segment in ESOP formations over the past couple of years has been in the construction industry,” says Bass. “As an industry, most owners really care about their people and the culture. They want to see a perpetuation of the business name. And there are certain segments where it makes quite a bit of sense because there is not a vast buyer pool.”

As ESOPs have grown in popularity, so they have also become better recognised by the surety community and underwriters, which is driving their popularity further, he points out.

“For some of our clients there is a real value in remaining independent, controlling their own destiny, and sharing in the long-term growth with their employees,” says Werner.

Valuation multiples

The valuation multiples that buyers end up paying for a business can vary significantly, according to Smith.

Brad Werner, Wipfli

Strategic buyers targeting another company tend to involve deals of a significant scale, with the transaction multiple reflecting that scale.

But, he warns, the multiples that you see in large, public transactions are unlikely to indicate what you can expect for a smaller private company.

These smaller deals may involve the disclosure of a limited amount of detail. That may occasionally include a transaction multiple. But it may not always tell you that much because most transaction multiples are based on EBITDA. EBITDA is a measure of profit that does not follow generally accepted accounting principles (GAAP) and so can exclude large, non-cash expenses like depreciation and amortisation. It also evaluates a company independently of its financing decisions and taxation. That can leave those metrics open to a certain amount of distortion, he contends.

Taking those intricacies into account, Werner concludes by highlighting the fact there is no one-size-fits-all solution for contractors wishing either to buy or sell.

“I would love to say we could give you a winning roadmap but just isn’t the truth,” he says. “Everything’s bespoke because every client is at a different part of their business life cycle.”