Using Commercial Due Diligence to Build Solid Foundations for Growth

The built environment touches every aspect of our lives, and the sector has an exciting role to play in shaping our future and delivering a more sustainable world. The construction industry is forecasting a strong return to growth in 2024 and will require 2.7 million workers by 2027, according to the latest Construction Skills Network report. 

However, in the short-term, the built environment is being challenged by economic uncertainty, supply chain shortages, inflation, rising interest rates and growing ESG legislation. 

Despite these challenges, the private equity industry retains a strong appetite to invest in successful, well-run businesses in the sector.  And in these uncertain times, private equity firms can offer businesses more than just additional funding – they also provide access to a wealth of experience, proven best practices and a network of experts with specialist knowledge. 

Of course, uncertainty means that private equity firms are scrutinising potential investments more closely than ever – and anyone looking to secure investment should prepare for the due diligence process thoroughly.

GRAPH – a boutique strategy consulting firm that works with leading UK investors – has worked on a series of deals over the last 18 months in the built environment, ranging from cost information services and building management software to ESG consulting and energy-efficient system installations. With this, we’ve witnessed how business owners can best use commercial due diligence to drive investment success. 

How can a business use due diligence effectively? 

Commercial due diligence is a widely accepted and key part of the investment process, and most prospective investors will expect work to have been commissioned by a business seeking investment. 

Well-executed commercial due diligence offers a source of proprietary insight to answer the most critical questions facing a business, delivering strategic clarity and confidence to move the business forward at pace. 

To make the most of a due diligence process and attract investment, SMEs in the built environment should consider five key factors: 

  1. The critical questions – Any commercial reports need to assess the core fundamentals of a business – for example, a review of the market size and prospects for growth, and a map of the competitive landscape. However, simply focusing on “ticking a box” can mean that the work lacks meaningful insight. Instead, management teams should focus on pushing to scope work that meets their particular needs, to ensure that the final output captures the essence of a business and delivers real value for its teams.

  1. Gather the best inputs – Publicly-available market research reports provide a valuable foundation for understanding a sector. However, more detailed investigations involve conversations with relevant stakeholders across a business, including past, future and current customers, as well as competitors and channel partners. To be most helpful, these interviews should happen at a meaningful scale to truly gauge market sentiment.

  1. Carefully define the market you are sizing – Commercial due diligence reports almost always quantify the size of the market that a business plays in. Most often, materials will reference an enormous total addressable market (TAM), which can be irrelevant for fast-growing SMEs. A tightly defined sizing, which accurately reflects the serviceable market for ‘sweet spot’ customers is more valuable, allowing management teams to precisely discover where growth will come from and articulate a more compelling value creation story for investors. 

  1. Recognise and value people – Ambitious, talented people drive success and good investors recognise this. Where private equity firms were once concerned entirely with market demand and potential, they now assess the potential to recruit, retain and build talent within businesses more closely than ever. This means commercial findings must assess the potential of the talent pool and if SMEs can attract and retain enough talent to meet the potential demands of the market.

  1. Welcome improvement opportunities – Perfect businesses don’t exist, – and any commercial report that claims otherwise will lack credibility in the eyes of investors. A valuable commercial report will attend to all shortfalls as well as successes, identifying the root causes and offering plans to address them in the next phase of growth. 

It’s no secret the built environment has been subject to major pressures in recent years following Brexit and COVID-19. However, the opportunities now presented to SMEs within the sector are huge.  

By assessing their current position and using findings to form future growth strategies, SMEs stand the best chance of attracting external investment, benefiting not just themselves, but the wider supply chain too.  

Access the full article published in UK Property Newsdesk here.