Although there continues to be much to be concerned about with the economy, we continue to see signs of life and increasing activity within the industry, including mergers and acquisitions. The major players within the industry have been active with acquisitions in a number of markets.
This month, in addition to detailing recent transactions, we have included a narrative that illustrates how planning and repositioning a business over time can improve its valuation and marketability.
A Tale of Two Business Owners
We are often asked by clients and potential clients what they can do to improve the valuation of their business when it comes time to sell or how they can make the process easier.
In this article, we contrast the experiences two different landscape business owners had recently when they decided to sell their businesses. I will call the first landscape business owner Alex. To be honest, Alex’s landscape business had been almost incredibly successful. Part of his success had surely been due to being in the right place at the right time. After all, he was located in one of the most high-growth, high-income areas of the country. It was also due to old-fashioned hard work. Alex did it all. He had a substantial commercial maintenance business and also had a design-build business that served both commercial and high-end residential customers. He had his own nursery and landscape supply business. Lately, he had been talking a lot about rainwater harvesting and, especially, green roofs. It was obvious to Alex and everyone else he had a great business – money was rolling in.
Like many of us when we hit our fifties or so, the pace of business had caught up with Alex. He was beginning to get tired, but more importantly, the business was beginning to stress him out. You see, Alex was a perfectionist, and he knew that one of the reasons he was so successful was that he personally made sure that all of his company’s work was up to his standards. The days were long since he was really the chief salesman, foreman and quality control person of the business. He began to have some health problems – he couldn’t sleep very well, and he had developed high blood pressure. His doctor and his family tried to get him to slow down. Alex couldn’t really disagree, so he started to think about selling the business. He had heard lots of stories about high prices that other landscape companies had gotten when they had sold out to the big boys, and since business was so good, he assumed that his business would generate a really high price and be highly desirable to a buyer.
When we sat down with Alex to discuss his business with him, we started with a few questions. We first asked how much of his business was maintenance versus design-build. He told us he wasn’t really sure, but he would estimate it at about 35% maintenance and 65% construction. He said he did all of the construction work he could do because it was much more profitable than the maintenance work and, besides, it was more fun. We asked him about the breakdown of his customer base between commercial and residential clients. Again, he said he wasn’t exactly sure, but he thought about 40% of his customers were residential. We were meeting in the middle of the summer, and I asked him if I could see his tax return and financial statements from the prior year. He told me he had a great accountant who would get me whatever I needed. When I asked about interim financial statements, he told me that the accountant would have them as soon as he filed last year’s tax return. They filed an extension, of course, and the returns would be ready sometime in August.
To be honest, I was pretty frustrated with those answers, and I didn’t understand why they didn’t bother Alex. I realized that the only real measure that meant anything to Alex was how much money was in the bank-and that there was a lot of it.
We did our best to market Alex’s business, but the results were not stellar. The “big boys” that Alex thought would be very interested were not interested at all. Several people got pretty excited when they realized how much cash the business was generating, but several dropped out when we were too slow providing additional financial information they requested. Some more potential buyers dropped out when we couldn’t answer some of their questions very well (the same questions we had first posed to Alex). The buyers that made it past those issues got kind of skittish when they realized that there wasn’t much in the way of management beyond Alex, especially for what was about a $3.5 million business.
The good news is that Alex’s business finally did sell. The bad news is that it sold for a price that was far below Alex’s expectations, and he never really understood why buyers couldn’t see the real value in his business. Surely the value he got for the business was not nearly enough for him to comfortably retire. He had, however, squirreled away several million dollars during the good years, so Alex is pretty comfortable now. A friend asked Alex about his experience in selling his business, and he was very candid: “If I had only known what makes a business valuable when I could have done something about it, the value of my business would have been much higher and the whole process would not have been nearly so painful.”
The other landscape business owner I will call Cal. Cal’s business had grown in a very different way than Alex’s, and that was very much on purpose. Early in his career, Cal had worked for another landscape business. He listened and learned a lot. When he started out on his own, he had a plan and he worked it – very hard. Much like Alex, at one point, he had managed “opportunistically,” but Cal knew that it was likely that he would one day want to sell his business. He began to pay close attention to what he saw in the marketplace. He paid attention to industry businesses that seemed to be successfully sold, and he began to pattern his business on them. He focused on the kind of business they were looking for – commercial maintenance – and limited his construction work to about 20% of his business. He still did some residential work, but it was mostly for the owners of his commercial clients.
Just over five years ago, I got a call from Cal. I had met him at the Breakfast of Champions during the Green Industry Conference. He asked me to come visit his business for a day, observe his business and just talk. I jumped at the chance. I remember that day very well. Cal had a great business, but there were plenty of things he hadn’t thought about. For one thing, his books were not much better than Alex’s. I told it to him straight – if he didn’t improve in that area, he would not get top dollar for his business when the time came. He arranged for the two of us to have a conference call later with his outside accountant to brainstorm changes that could be implemented to improve his information. Cal was definitely a people person. He genuinely liked and cared about his employees, especially those who had been with him for a long time. He was especially proud that two of his foremen had been with him ever since he started the business over fifteen years ago. I asked him what his succession plan looked like – who among his employees could take over in his absence. He told me he had not really ever thought about that, but that he would give it some thought. We talked about it several times later, and ultimately, he promoted one of his foremen to assistant manager. I remember when he called to tell me that he had taken a vacation – the first real vacation since he started the business. He told me that the only way he could have done it was because he’d promoted and trained Sam as his assistant manager. Since I had suggested the idea and even told him I thought he should take a hard look at Sam as an assistant manager and possible eventual successor, he invited me to come along for a few days’ fly-fishing in Colorado. Cal and Sam worked hard on creating and documenting systems and procedures for the business – not just the operations side, but sales, too. It really paid off.
Cal knew when I first met him that he expected to sell his business just about now. He didn’t have all of the answers about how to do that, but he set out to learn as much as he could, talking with people he trusted, like his accountant, his financial planner, his attorney and me. When the time came, the sale couldn’t have been easier. He didn’t get everything he wanted out of the deal, but he got most of it. Cal’s Landscape Maintenance is now the local branch of a national company. The trucks look a little different, but they don’t really look any sharper than they did under Cal’s management. I think what Cal is most proud of is that Sam is now the branch manager, running the same business that Cal worked hard to build.
I will be going fly fishing with Cal again soon. This time he won’t have to worry at all about who is minding the store in his absence because it isn’t his store anymore, even if that still feels a little funny.
Amid the challenges of day-to-day operations, it is really hard to take time to plan for the future, but those who do will often be rewarded. If you think you one day will be wanting to sell your business, it is vital to stop and take a look at just how desirable your business will look to a potential buyer, who may see it quite differently than you do. If you take the time and deliberately set out to mold your business to be desirable to buyers, you will likely be rewarded with a higher valuation and a much smoother transition than can otherwise be possible.
We would be happy to talk with you about developing a plan to make your business more valuable and salable. We are also available for fly-fishing.
The Brickman Group, Ltd. recently announced the acquisition of First Class Lawn and Landscape of Indianapolis. First Class operates two branches in the Indianapolis area and will operate under the name First Class Lawn & Landscape, a Division of Brickman, until the end of 2010 when it will be integrated under the Brickman brand. Brickman has six existing locations in the Indianapolis market and the acquisition will solidify its leadership there. Brickman has been the most acquisitive of the large companies in recent months, having acquired The Green Plan in Colorado earlier this year and D. Foley Landscapes in Boston late in 2009.
ValleyCrest Landscape Maintenance has acquired Waverly Landscape Associates, Inc. of Belmont, Massachusetts. Waverly operates four branches and has been a market leader in the metro Boston area. ValleyCrest reported that after the acquisition, they serve more than 300 customers in metro Boston and have combined sales of approximately $45 million.
Lawn Dawg, Inc. of Nashua, New Hampshire, which was acquired last year in a private equity-backed recapitalization, announced its first acquisition, Weed & Feed Professional Services of Plymouth, Massachusetts. Lawn Dawg plans to relocate its existing Bridgewater branch to Plymouth for a more centralized location in the growing market. Lawn Dawg indicated that the acquisition will expand its commercial services and customer base. Weed and Feed Professional Services was owned by Robert Mann, who acquired the business in September 2000. He has more than 30 years experience in the lawn care industry. He will be working to improve Lawn Dawg’s commercial presence, enhance its training programs and continue its industry involvement at the local and national levels. Lawn Dawg’s existing branches are located in Portland, Maine; Litchfield and Nashua, New Hampshire; Woburn, Bridgewater and Hudson, Massachusetts; and Albany and Poughkeepsie, New York.
Ron Edmonds of The Principium Group was quoted at length in an article in the June 2010 issue of Landscape Management. The article, entitled “M&A Upsurge,” is included in the special supplement detailing the LM150, the 150 largest companies in the industry. Here’s a link directly to the article.
According to Landscape Management, the revenues of member s of the LM150 fell an average of 7.64% in 2009 versus 2008. Revenues grew at 33 of the companies, were flat at 18 and fell at 99 of the top 150 companies. The special report details the growth strategies being followed by some of the most successful companies in the industry, including in some cases, considering an acquisition strategy.
One thing we have noted with our clients is that just because revenues are down, it does not mean profits are. Many companies have aggressively and successfully managed through the recession, using such tactics as more aggressive purchasing controls and eliminating unprofitable business.
The SBA lending incentives first included in last year’s American Recovery and Reinvestment Act, which have been extended several times, have once again been exhausted. Although the Administration backs further extensions, given the size of the deficit and the current political climate, any further extension is uncertain.
According to published reports, Scott Brickman, CEO of The Brickman Group is now a partner in Monumental Sports & Entertainment, which owns the NBA Washington Wizards, the NHL Washington Capitals and the WNBA Washington Mystics, along with Washington, D.C.’s Verizon Center sports venue.
Brad Johnson of LawnAmerica in Tulsa is off on his 2,176-mile Appalachian Trail trek from northern Georgia to Mt. Katahdin in Maine. He hopes to finish by the end of September. You can follow his progress at www.AT2010Tulsa.com and on his Facebook page. The expedition is a fundraiser for a variety of charities – you can donate at the website. As of June 23, he has made it 388 miles with only 1,788 to go!
About The Principium Group
The Principium Group provides mergers & acquisitions and business brokerage services to a variety of middle market and small businesses, with a focus on the green industry. Put more simply: We help people buy and sell green industry businesses. Our professionals have assisted buyers and sellers in hundreds of transactions. For buyers, Principium provides assistance and counsel in strategic planning, identifying potential acquisition targets, due diligence and planning for successful integration of acquisitions. For sellers, Principium provides assistance and counsel in evaluating strategic alternatives, identifying and negotiating with potential acquirers and assisting with transactions from due diligence through the closing process. We understand that the decision to buy or sell your business is a profound one, and we pledge to work with you in a professional and confidential manner while we help you navigate this often confusing process. Whether you have immediate plans to buy or sell a business or may sometime in the future, we would welcome the opportunity to talk with you about your business.
The information included in this newsletter is derived from publicly available sources. Our intent is to give a perspective on the industry taken as a whole. The inclusion of a transaction in this newsletter does not imply that The Principium Group acted as an advisor to either of the parties to the transaction. It is the policy of The Principium Group always to maintain the confidentiality of its client relationships. For those transactions in which The Principium Group did play a role, the information included herein is still limited to that available through public sources.