Success factors for commercial due diligence in the construction, construction supply and infrastructure sector
What investors should pay attention toBut what characterises good commercial due diligence specifically for the construction sector? Here are the key aspects that we believe investors should consider, as it goes without saying that a CDD must be clearly structured, of high analytical quality and bankable. At the same time, however, after the initial identification of possible red flags, it is crucial to focus on value creation - and thus answer questions regarding valuation, strategy, buy & build and the exit logic of tomorrow.
1. MARKET ANALYSIS: The key to understanding supply and demand
Market cycles are particularly pronounced in the construction industry. Demand for construction services can fluctuate greatly, depending on factors such as economic cycles, government infrastructure investment or the property market. However, this applies to a limited extent or not at all to many of the finely structured niches in the construction industry. A good CDD provides in-depth insights into the relevant markets and the real volume and price dynamics in which the target company operates.
Important questions for investors:
How is demand developing in the relevant regions and segments (residential construction, commercial construction, infrastructure) and what is the impact of the switch from a focus on new single-family home construction to multi-storey construction and, above all, refurbishment?
Are there industry-specific trends such as sustainable construction and renovation, BIM (Building Information Modelling) or new legal requirements that will have a lasting impact on business?
Is the relevant company really influenced by the classic construction cycle or is it in a market segment that is isolated from it?
Are there price potentials in neighbouring market segments in addition to volume potentials or is there a price risk resulting from decisive changes in the market?
2. COMPETITIVE ANALYSIS: Positioning in the market
The construction industry is highly fragmented, with many small and medium-sized companies as well as some large players. A precise competitive analysis is essential to understand the position of the target company in the market.
Important questions for investors:
Which companies does the asset compete with and how strong is the competition in the company's core markets?
What differentiating features does the company have that set it apart from the competition (e.g. technical expertise, cost structure, customer relationships)?
How does the asset perform in relation to the key differentiating factors compared to the core competitors and where is there potential for optimisation (benchmarking)?
What changes are imminent in the competition and how will these influence the asset's volume and price potential?
3. CUSTOMER ANALYSIS: Retention and diversification
An important aspect of any commercial due diligence is analysing the customer structure of the target company. In the construction sector, it is crucial to check the diversification of the customer base in order to minimise the risks associated with dependence on a few major customers.
Important questions for investors:
How diversified is the company's customer base?
Are there long-term contracts or framework agreements that secure future sales?
In which sectors are the main customers located (e.g. public clients, private developers) and what are the success factors in market cultivation?
How does the asset fulfil these key performance criteria (KPC) in market cultivation?
4. PROJECT RISKS AND ORDER STRUCTURE: Quality over quantity
The type and structure of an asset's current projects in the construction and infrastructure industry have a major influence on the valuation. Not every project is equally profitable, and some can harbour high risks - especially in terms of timeframe and budget.
Important questions for investors:
How is the contract structure characterised (short-term vs. long-term projects, churn, dependencies and profitability differences, etc.)?
Are there any complex major projects where there are risks such as cost overruns or delays?
Does the company have a successful history of on-time and on-budget project realisation?
5. SUSTAINABILITY FACTORS: ESG criteria and green construction projects
Sustainability is becoming increasingly important in the construction industry. Many investors are increasingly emphasising compliance with ESG criteria (environment, social, governance). A construction company that focuses on sustainable construction practices can not only exploit new market opportunities, but also minimise regulatory risks.
Important questions for investors:
To what extent does the company rely on sustainable construction practices and energy-efficient technologies?
How well prepared is the company for upcoming ESG requirements?
Are there any certifications or awards for environmentally friendly construction?
6. FINANCIAL PERFORMANCE AND BUSINESS PLAN: Realism versus optimism
A central element of any due diligence is analysing the financial performance and evaluating the business plan. In the construction sector in particular, factors such as project delays, material price increases and liquidity bottlenecks can have a major impact on the financial situation. A thorough examination of the assumptions in the business plan is therefore essential.
Important questions for investors:
Are there historical fluctuations in volumes and prices that cannot be explained by correlating developments on the market side?
Are the target company's financial forecasts realistic in view of the current market situation?
Are there significant cost increases that have not been sufficiently taken into account in the planning?
7. FUTURE GROWTH OPPORTUNITIES: keeping an eye on trends and innovations
Good commercial due diligence not only identifies potential risks, but also opportunities for future growth. The construction sector is on the brink of change: topics such as sustainable construction, digitalisation and automation are playing an increasingly important role.
Important questions for investors:
How well prepared is the company for forward-looking trends such as the use of environmentally friendly building materials or smart building technologies?
Are there opportunities for growth through geographical expansion or by tapping into new market segments?
Do the organisation, processes and systems meet the key requirements of customers and will they allow strong organic / inorganic growth in the future?
What potential exists in market development, portfolio management, pricing, etc.?
Your contact person
Christoph is a founding partner of S&B Strategy GmbH and is responsible for strategy development and implementation.
He has 17 years of experience as an officer, strategy consultant and managing director, gained at PwC Deals Strategy, smaller consultancies and the German Armed Forces. He studied Political Science and Economics at the University of the German Armed Forces in Munich and completed an MBA at WFI.