Green Merger News – June 2012

We hope that you are having a successful season.  Preliminary indications are that this will be a very good year for many lawn and landscape businesses.  For some, it may be the strongest season in four or five years.  The positive industry outlook seems to be extending to a higher interest in merger & acquisition transactions.  How it all turns out will probably depend on both how the economy as a whole fares this year as well as the political climate heading into the elections.

This month, our feature article addresses acquisition strategy in the green industry.  We explore what kinds of acquisitions may make sense in different situations.

We are also sponsoring a webinar entitled Creating Wealth –  Building a Landscape Business That Runs Itself.  We are bringing you this webinar in which I will be interviewing Jeffrey Scott, a noted industry consultant and peer group facilitator, to reinforce some important ideas for you to consider, especially in connection with developing exit strategies.

We will be offering additional webinar opportunities in coming months, including several that will include guest presenters.
As always, if you are interesting in pursuing an acquisition or contemplating the sale of your business, currently  or in the future, we would welcome the opportunity to speak with you.

-Ron Edmonds

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It is a popular belief that all businesses, including small businesses, must grow to thrive.  While many of our beliefs about business have been challenged over the past four years and only a few businesses have been able to sustain growth during the Great Recession, growth is a major objective for many, if not most, businesses.

There are multiple reasons for the “growth imperative”, all of which apply to businesses in the green industry: growth is often a factor in creating long-term value for the owners of the business; sustained and projected growth is a major factor in creating a sellable business as part of an exit strategy; growth can be necessary to create opportunities for the team and allow the business to recruit and retain top talent; and pursuing a growth strategy encourages innovation and helps keep the business ahead of the evolving competitive landscape.

There are a number of ways to pursue growth.  The “growth strategy matrix” which follows is one way to analyze the possibilities for pursuing business growth:

The growth strategy matrix breaks down growth opportunities into two broad categories, market expansion and service (or product) expansion.

Market expansion is further broken down into increasing market share within existing markets and entering new markets.  Service expansion can also be further broken down into adding services or products within existing markets and adding services or products in new markets.

Arithmetically, that about does it for strategies to increase revenues.

Each of the four strategies illustrated on the matrix can be attempted either organically or using acquisitions.  Organic  growth is often considered to be desirable, especially if there is an opportunity to achieve it within the time and resource constraints of the business.  Using acquisitions as a tool to achieve growth can also be highly attractive for a number of reasons.  A company can often reduce the risk of either market or service expansion by using strategic acquisitions that allow the company to add services or products or new markets without incurring losses during the expansion period.

Let’s look at some examples of how the four growth strategies can involve acquisitions.

Increase Market Share

Acquisitions made for the purpose of increasing market share tend to work best for companies that have a high proportion of recurring revenues, such as lawn care and landscape maintenance businesses.  An acquiring company in these cases has a shot at retaining a significant portion of the recurring revenue of the acquired business after the transaction is completed, thereby increasing its market share.  It still isn’t easy, of course, but there is a definite opportunity.

Companies that do not have a high proportion of recurring revenue are usually not candidates for acquisition if the goal is building market share. This would be the typical situation for a landscape design-build company.  In the typical case, once the acquired company’s identity is folded into the acquiring company, its position as an alternative provider of the service may be expected to fade away.  The acquiring company would likely pick up some new business resulting from the acquisition, but much of it would likely be split among competitors.  In a simple case in which there are five competitors in a market and each as a 20% market share,  if one competitor buys another one, it might expect their market share to approach 40% (20% for the acquiring company plus 20% from the acquired company).  In reality, they might end up with as low as a 25% market share with the acquired company’s new business split roughly evenly among the four remaining competitors.

Enter New Markets

Acquisitions made to enter new markets can make a lot of sense for both recurring revenue and non-recurring revenue businesses.  This can be described as selling services to an expanded market, either geographically or defined some other way, such as residential versus commercial.

If a landscape services company acquires a similar business in an adjacent market, there is a greater opportunity to retain customers, since essentially the same business will continue under new ownership.  The main difference after the acquisition is likely to be that the combined company may be able to realize some cost synergies as duplicated services are eliminated.  The combined company may also be able to bring a stronger service line to the combined business.

Add Services or Products

Adding services or products is often called service expansion. Suppose a landscape services company acquires a complementary business in the same market, perhaps an irrigation company or a fertilization and weed control company.  The outlook for customer retention may improve dramatically. In addition, there may be a real opportunity to generate even more revenues through the synergy of the two companies.  The acquiring company will have access to the target company’s irrigation customers and may attempt to sell other landscape services to them.  They can also attempt to sell irrigation services to their existing landscape services customers.  This same phenomenon can easily occur if a landscape services company acquires a design-build company or vice versa.  There are lots of other possibilities.  For example, recently  we have seen a number of landscape companies who have an interest in acquiring swimming pool construction or service businesses.

Add Services or Products in New Markets

The strategy of adding services or products in new markets is sometimes called diversification.  One green industry example of this strategy would be a landscape design-build company acquiring a landscape maintenance company in another market.   Diversification strategies have some opportunity for synergies, but in most cases, the synergy opportunities are, at least initially, more limited.  Over time, the acquirer could explore cross-selling options, but it would likely take a longer time to execute than in the case of an in-market acquisition.

As we have illustrated in this article, there is a role for growth through acquisitions in addition to organic growth.  While acquisitions can definitely play a role in reducing the risks associated with a growth strategy, few would argue that planning on growth through acquisitions is not a risky strategy, too.  The risk, however, varies a great deal with what the acquiring company is attempting to accomplish and how the acquisition strategy is executed.   A plan to grow through acquisitions requires some strategic thinking, but the opportunities are great.  Within the landscape industry, there are opportunities for all kinds of businesses to grow through acquisitions.  The key is developing a strategy based on an understanding of exactly what you are trying to accomplish and then executing that strategy in a deliberate fashion.

Editor’s Note:  The Growth Strategy Matrix illustrated in this article is adapted from the Ansoff Matrix, developed by Igor Ansoff, which first appeared in print in the Harvard Business Review in June 1957.

Here’s the monthly recap of publicly announced merger & acquisition transactions in the green industry:

Greenscape, Inc. of Holly Springs, North Carolina, has acquired Raleigh-based Francis Landscaping.

Atlanta, Georgia-based Arrow Exterminators has acquired Al Hofer’s Termite, Pest & Lawn of Melbourne, Florida.

Sarasota, Florida-based Arrow Environmental Services has acquired Sur-Shot, Alert Termite & Pest and Cape Coral Termite and Pest Control of Naples, Florida.  Arrow provides lawn and tree care in addition to pest control.

Earlier this year, Virginia Green Lawn Care of Richmond, Virgina, acquired Beaver Tree and Lawn Service.

Stewart Engineering of Raleigh and Durham-based HadenStanzale are merging, creating a 115 employee engineering and landscape architecture firm, which will be based in Raleigh and have a substantial presence in Charlotte.

Colorado Springs  engineering and planning firm Matrix Design Group, Inc. has acquired Design Studio West, Inc., a Denver landscape architecture firm.

Homestead, Pennsylvania-based GAI Consultants, Inc. has acquired Orlando, Florida-based landscape architecture firm Bellomo-Herbert and Co. Inc.

Building a Landscape Business That Runs Itself

Wednesday, June 27, 2012 – 12:00 Noon Eastern Daylight Time

Click here to register.  Space is limited.

Every contractor dreams of creating wealth and building a business that runs itself, that he or she can eventually sell or semi-retire from. However, many contractors are confused on the steps required.