Defining Lower Middle Market Construction Companies
Lower middle market construction companies are an attractive segment for private equity investment. These companies typically have between $2 million and $200 million in annual recurring revenue. They are run by founders who generally have construction experience and domain expertise. A key characteristic of lower middle market companies is that the founders are interested in a liquidity event such as a sale or merger.
The lower middle market segment offers an opportunity for private equity firms to partner directly with founders to grow a business, without going through intermediaries. The founders are open to accepting external investment and sharing equity in exchange for capital to expand the business. With knowledgeable founders at the helm, these companies have potential for rapid growth. The eventual exit can provide strong returns for private equity investors in a shorter time frame than larger companies.
Why PE Firms Find Lower Middle Market Companies Attractive
Private equity firms are increasingly attracted to lower middle market construction companies for a few key reasons. Many of these companies are run by seasoned construction professionals who are also the founders. After years or decades of building up their business, these founders start looking for an exit strategy or source of liquidity. This aligns well with the goals of PE firms to invest in and grow a company over a 3-5 year period before a sale or IPO.
Additionally, PE firms appreciate being the first source of institutional capital for these lower middle market companies. Unlike larger corporations, these smaller businesses have likely relied on just founder investment and bank loans up until then. By being the first PE partner, the firms can shape the future strategy and direction.
Finally, the investment process for lower middle market companies tends to be much smoother and swifter compared to larger corporate deals. With the founder directly involved in discussions and negotiations, there is no corporate bureaucracy or layers of management to work through. This streamlined process allows deals to be completed much quicker.
Growth is Key to PE Returns in This Segment
Private equity firms acquire lower middle market construction companies with the goal of growing them rapidly to increase the chances of a higher valuation exit.
With the alignment of interests between PE firms and founders, the focus becomes scaling up the business quickly. PE firms want to grow revenue, improve processes, and expand into new markets in a short timeframe. The faster a construction company can demonstrate growth under PE ownership, the higher the valuation it can command when it comes time for an exit.
Rapid growth not only leads to higher exit valuations, but it also shortens the holding period for PE firms. Construction is a fragmented industry with lots of room for consolidation and expansion. PE firms use their expertise and capital injections to spur organic and inorganic growth. The quicker a portfolio company can scale up through this combination of strategies, the faster PE firms can realize their returns.
Construction Management Software Enables Growth
Construction management software provides numerous benefits that enable rapid growth for PE-backed lower middle market construction companies. By streamlining and automating key processes, it improves efficiency, provides data-driven insights, and allows for smarter decision making.
By driving efficiency gains and providing enhanced data, construction management software promotes faster growth through automation and improved performance. Companies experience gains that compound over time. The software pays for itself while accelerating expansion. For PE investors, this software-enabled growth is key to driving returns within their investment horizon. Adoption is therefore critical for lower middle market companies looking to scale rapidly.
KYRO’s AI Copilot Feature
KYRO’s software includes an innovative AI Copilot feature that provides instant insights and recommendations to users. This virtual assistant acts like a co-pilot, constantly monitoring company data and operations in the background. It then surfaces important insights, trends, and suggestions right when they're needed most.
Financial Planning and Analysis: KYRO’s Copilot can extrapolate forecasted regular and overtime hour splits at the client level. It is also able to calculate revenue and gross profit results at the employee or client level with a simple prompt. Additionally, the Kyro tool can report Unbilled Hours used to generate employee efficiency metrics.
Timekeeping and Expense Management: As a single source of input for all employee time and expense management, along project and HR related items (daily field reports, drawing mark-up, PTO etc.), KYRO helps companies reduce the number of apps required for their processes by providing all the required data within one app. KYRO’s Copilot then combines these data in real time, empowering line managers to quickly address over/under and unapproved time and expense errors.
Weekly Payroll Processing: KYRO’s Copilot can serve as your accounting team’s real-time timecard approval validation system. A simple prompt can generate a report that lists all timecards and expense reports pending field manager approval or any field employee who has not submitted a timecard. This allows companies to scale without adding additional back-office employees.
Accounting Pre-Close and Accrual Estimating: Our Copilot can quickly assist accounting staff in evaluating accruals and serve as a spot check on revenue and cost-of-sales calculations.
These data-driven insights cover all aspects of the business, from financials and project management to HR and operations. The Copilot helps uncover profit leaks, optimize resource allocation, streamline workflows, and boost productivity. Users don't need to go searching for answers or manually analyze data - the insights come straight to them. This allows leadership to make smarter decisions faster.
Better Data Enables Better Exits
For private equity firms, the end goal is a successful exit that maximizes returns. When investing in lower middle market construction companies, this means pursuing rapid growth to increase the company's valuation. With traditional manual processes, financial data is opaque and it's difficult to determine true performance.
KYRO’s AI Copilot changes that by providing instant insights into financial KPIs. The AI reviews data on revenue, profitability, cash flow, and more to identify growth opportunities. Business leaders can then take targeted action to accelerate growth.
Take control of your construction business's trajectory. With KYRO, you can maximize valuation for a faster, larger exit, thereby meeting your goals. Start for free today!
