What I look for in a construction business

Trusted subcontractors, cost control, and a healthy pipeline are some of the things BGF investor Aaron Baker looks for in a high-potential construction company.

7 July 2022

Aaron Baker is an investor in BGF’s Birmingham office. He has invested in construction businesses such as Woodall Homes.

1. May sound obvious but, good with money! 

Construction is a business that absorbs a lot of cash. At any point in time, you might have millions of pounds tied up in part-finished or unsold properties. Managers need to strike the right balance so that they are continuing to invest in future sites, still paying their overheads, but not running out of money. To do this effectively, the management team needs to be driven by data, understand the appropriate levers, and react to the market quickly.

2. Trusted subcontractors

A lot of construction businesses operate with subcontractors, and they ultimately determine the quality of the build and the margins that can be delivered. Will they battle to maintain your brand? Can they scale with you? The key to earning the loyalty of subcontractors is to treat them well and honestly, pay on time, and offer predictable work. This is especially important when factors such as Brexit have made it even harder than usual to attract and retain tradespeople.

3. Can navigate the planning process

A piece of land could be worth £40k or £4 million depending on whether it has planning permission. To navigate the planning process successfully, a business needs a strong technical team who understand the needs of local communities, planning agendas, local plans and suitable end products for the market. Lots of people are involved in planning – committees, councillors, local people. We tend to back regional businesses because they have the local knowledge needed to get approvals, delivering schemes and projects that local communities want.

4. Healthy pipeline 

I want to back businesses with the potential to grow – it is what we do at BGF. That means that on top of any current projects, they have a land bank or project pipeline with planning permissions underway, or a clear path to growing output. Again, this comes down to having a strong technical team to find the right sites, acquire them at the right prices, and reliably convert.

5. Consistently strong margins

A good management team has a firm grasp of the business model, plans ahead for potential cost increases and other difficulties, and still delivers the right level of profit. I look at gross margin, which is revenue minus the cost of the build. A business that delivers a consistent gross margin of between 20-30% is well-managed and clearly knows what it is doing, especially in a turbulent market, or over a sustained period.

6. Cost control and management

Linked to the last point, it is essential to control costs. This applies to procurement and wastage but also time. If a project is supposed to take six months but it takes seven, you might have a problem – whether it be time availability, cost overruns, or cash management. You don’t necessarily need a large central overhead base, but you need good people and good systems, and a management team with the ability to pull everything together into a coherent view. To take housebuilding as an example, there is always a lag between setting the sales price and completing a sale – often with costs still to be incurred, which may be different to those initially forecast. In between those two points in time, a good housebuilder will do everything it can to protect its margin.

Woodall Homes is a housebuilder with an excellent reputation with suppliers, a strong pipeline of projects, solid financial performance and a great management team

Which BGF investments are a good example of the kind of business you look for?

Based in Derbyshire, Woodall Homes is a very well-respected brand in its region. It is known for excellent build quality across a range of different sites and types of property. It also has an excellent reputation with suppliers, a strong pipeline of projects, solid financial performance and a great management team. Across 2020 and 2021, we have invested £4.25 million to help deliver growth in the number of houses it can build, and ultimately sell, each year.

Looking ahead, are there any sectors that you are excited about investing in?

Even in traditional industries such as housebuilding, technologies are evolving quickly, with gas being phased out of new builds, increasing use of renewable and sustainable technologies, remote working and electric vehicles all changing the blueprints of traditional house engineering. Businesses willing to adapt to market change, or even better, get ahead of it, excite me – as do the associated supply chains that will support the growth of new technologies, or change the way in which we use or buy product in the sector. Of course, those businesses with big ambition across the sector are the most exciting for me, and BGF, providing the tools, and the capital, to deliver on this ambition is what BGF is all about.

Parts of this article appeared in ‘Six tips for firms to attract growth capital’, published by Construction News on 7 July 2022.

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