Private equity (PE) activity in the construction industry is surging. Global construction M&A deal value reached $33 billion in the third quarter of 2025, according to the Construction Financial Management Association (CFMA) — driven in part by PE's "increasing interest in construction services."
If you're pondering your exit strategy or intrigued by a
potentially lucrative sale of your ownership interest, PE investments offer
enticing benefits. But you've got to know what you're getting into before
committing to a deal.
Distinctive approach
PE transactions tend to vary from traditional business sales in
one particular way. Under the latter approach, you'd typically sell your entire
ownership interest and exit the business at closing. But PE firms often don't
require — or may not prefer — the owner to completely cash out. Many would
rather buy a controlling
interest in the target business, generally funded with a combination of
investor equity and debt.
In other words, a PE firm will probably expect you to retain a
meaningful stake in your construction business after the deal is complete.
You'll essentially operate in partnership with it. However, bear in mind that
most PE firms' ultimate goal is to improve profitability and overall value so
the business can be sold again, typically in three to seven years. At that
point, if the value of your retained ownership interest has increased, you may
receive an additional payout on top of the original purchase price and any
earnouts (payments for achieving specified performance targets).
Pros and cons
Selling a controlling interest to a PE firm can give you access
to capital, expertise and other resources to grow your construction business
beyond what you could likely achieve on your own. And if you receive that
additional payout when the PE firm eventually sells the business, you may end
up with a greater overall gain than you'd get from a traditional sale.
However, as mentioned, PE firms are usually laser-focused on
increasing a business's value so it can eventually be sold. They often impose
rigorous reporting requirements to monitor performance and formalized internal
controls to reduce risk. Sometimes they implement significant operational
changes, such as layoffs, to cut costs and improve profitability.
As a partner, you'll likely have much less control over your
construction business than you've had in the past. The amount of influence you
retain will depend on the transaction's governance provisions, ownership
structure and other negotiated terms. And the business may have to carry more
debt than you'd normally be comfortable with — particularly if it's used to
finance the acquisition or a later expansion. You'll also need to consider how
a transaction would affect relationships with sureties, lenders, key employees
and other stakeholders.
Tax implications
In PE transactions, taxation generally depends on how the deal
is structured. This includes purchase price allocation and whether it's an
asset sale or an equity sale. Asset sales tend to be more beneficial for PE
firms because they provide a step-up in tax basis, which can generate
significant tax deductions. In contrast, equity sales typically carry over the
target business's existing tax basis, limiting the buyer's tax benefits.
For sellers, however, equity sales are often more favorable
because the proceeds may be taxed primarily at capital gains rates, whereas
asset sales may cause some portion of the proceeds to be taxed at higher
ordinary income rates. You'll need to work closely with your tax advisor to
determine whether a prospective PE deal can be structured to avoid unnecessary
or unacceptable tax exposure.
Primary targets
PE firms are particularly interested in "specialty and
service-oriented segments" of the construction industry, according to the CFMA.
That includes a wide range of businesses — from roofers and HVAC specialists to
contractors serving high-demand sectors, such as data centers and advanced
manufacturing facilities.
The reasons are fairly obvious: These types of businesses tend
to have wider profit margins than general contractors and the high growth
potential that PE firms covet. Construction businesses in certain geographic
regions with high building activity also attract greater interest for the same
reasons.
PE firms will scrutinize the degree of owner involvement, too.
This could pose a hurdle for an owner who's heavily involved in day-to-day
operations — unless there's a solid "second line" management team in place and
well-documented, independently functioning systems and processes. Additional
favored characteristics include:
- A stable
workforce, including skilled labor,
- Healthy cash
flows,
- Reliable
supply chains and subcontractors (if a general contractor),
- A lengthy
backlog of work,
- Strong bonding
capacity,
- Recurring
revenue, such as repeat customers or maintenance/service contracts,
- Rigorous
internal controls, and
- No red flags,
such as pending litigation, recurring safety issues or major project
disputes.
Financial transparency is critical. PE firms will typically
request at least three years of reliable financial statements and tax returns,
and they may require audited or reviewed financial statements or a formal
quality-of-earnings analysis.
No rush
Getting involved with a PE firm probably isn't an ideal exit
strategy if you want a full payout upfront from the sale of your construction
business, or you'd like to cut ties completely after closing. But there can be
strategic advantages to these transactions under the right circumstances.
The most important thing is not to rush into anything. Work
closely with your leadership team and professional advisors to explore all possibilities
regarding how you might either sell the business or bring in outside investors.
We'd be happy to help you evaluate whether working with a PE firm would make
financial and operational sense for your construction business.
