Green Merger News – November 2010

Commentary

The Green Industry Conference was a great success this year.  Published reports stated the attendance at GIC was up 20% over last year and overall Expo attendance was up 7%.  The weather was great and so were spirits.

A few of the highlights from our perspective included presentations by David Minor, CEO of The Landscape Partners in Fort Worth and Executive-in- Residence at Texas Christian University, who spoke on How to be the Star Performer in Your Industry and Creating a World Class Culture and  Joel Korte’s presentation on The Keys to Growing a Successful and Rewarding Landscape Company.  David built and sold a landscape services business in Dallas-Fort Worth and is again leading a company in the industry.  Joel sold his company, Urban Environments, Inc., to The Brickman Group in 2004 and is still with Brickman today.

A particular high point for me was the GIC keynote speaker, Mount Everest climber Jamie Clarke, who spoke on Above All Else:  The Power of Passion.

We also enjoyed the opportunity to participate in the Breakfast with Champions program each day.  The program was well-attended, we learned a lot and made lots of new contacts.

This month, we continue our series on topics related to exit planning.  Our feature article this month is Understanding the Value of Your Business.  Beyond a doubt, this is one of the most confusing, yet critical topics that business owners face as they contemplate the sale of their business.

We plan to attend Planet’s Lawn Care Summit in Atlanta in December and the National Green Centre (formerly the Western)in St. Louis in January.  If you will be attending either of these events, we’d be happy to meet with you.  If you would like to schedule a time to meet, just give me a call at 901-351-1510 or email me at [email protected]

Ron Edmonds

 

Understanding The Value  of Your Business

This is the third in a series of articles on the topic of Exit Planning in the Green Industry.  This article focuses on understanding the value of your business. 

Understanding the value of your business is a key component of the exit planning process because it defines the defines the business that you will be exiting at some point.  It is the beginning step in determining how to preserve and enhance the value until the planned or unplanned need to transition the ownership of the business.

Few topics are as poorly understood as business valuation.  Despite common misperceptions, it is a complex topic that can not be boiled down to simplistic formulas or rules of thumbs.

One often hears green industry business owners talk in terms of business valuation in terms of multiples of revenues or cash flow.  In these scenarios, cash flows may mean several different things:

  • EBITDA (earnings before interest, taxes, depreciation and amortization),
  • Free cash flows (EBITDA  less capital expenditures) or
  • Seller’s Discretionary Income (EBITDA plus the seller’s compensation and perks which have been expensed through the business)

While it is absolutely true that offers for the purchase of a business, especially a recurring revenue business like lawn care and some lawn maintenance businesses may be made in the form of a price per dollar of revenue, that offer is actually the result of the buyer’s analysis and evaluation of the cash flow it can expect to generate from the acquisition.

In evaluating the cash flow that a buyer expects to generate from an acquisition, there are many factors to consider, including:

  • The size of the business
  • Historical profitability
  • Record of growth
  • Extent and condition of vehicles and equipment
  • Service  pricing
  • Customer retention patterns
  • Type of customer (residential, commercial, governmental)
  • Revenue mix (recurring vs. nonrecurring)
  • Customer concentrations
  • The strength of the management team and employees
  • The importance of the owner/seller’s involvement in the business to its ongoing success
  • The age of the business
  • The geographic territory served
  • The competitive environment

These factors will affect how the buyer evaluates the business and the risk associated with the buyer’s ability to achieve the expected cash flows from the business.  The greater the perceived risk, the higher the discount rate or risk factor that seller will use in evaluating the cash flows and the lower the multiple of cash flow it will be willing to pay.

Some illustrations of this concept are as follows:

  • A landscape services company with an aging fleet may receive a lower multiple than one with  a newer fleet because the buyer will factor into its assessment of cash flows the need to update the fleet.
  • A landscape company with a greater percentage of construction revenues will usually command a lower multiple because its revenues will be largely nonrecurring.
  • A lawncare company with pricing lower than the market and lower than that charged by the buyer will usually receive a lower multiple.
  • A lawncare company with a small number of relatively high dollar commercial accounts will usually command a lower multiple than a similarly sized company with a large number of small dollar residential customers because of the risks associated with the concentration.  Losing one or two large customers may undermine the value of the potential acquisition.
  • A company that has higher margins because it pays below-market compensation and benefits will command a lower multiple than one that pays similarly to the potential buyer

Some buyers will evaluate the business based solely on how it performs on a stand-alone basis, while others will evaluate it based on how it expects to integrate the acquired operations into its own.

These factors partially account for the wide range of business valuations. In the lawn and landscape industry, the majority of transactions have been somewhere in the range of two to five times cash flow.  That is a pretty wide range and some transactions fall outside that range, particularly on the low end.  It takes a very strong business to command a multiple at the high end of that range.

Ultimately, the market will value a business for sale.  After all, fair market value is defined as “the price at which a property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, and both parties have reasonable knowledge of relevant facts.”

It is often desirable in the exit planning process, however, to obtain a business valuation or market assessment.  The purpose of such a valuation is to estimate how the market will value the business when the time comes to sell.  (There are other reasons to obtain a business valuation and the purpose of the valuation is important to communicate to the “valuator.”)  Competent business valuations can be prepared by a variety of professionals, including business appraisers and some CPAs and business brokers.

The business valuation process should  also help a business owner to understand the value drivers of his or her business.  In other words, what characteristics of his or her particular business tend to increase the value (or multiple) assigned to the business and what characteristics tend to decrease the value or multiple.  Understanding those value drivers will enable the business owner to develop a plan to preserve and increase the value of the business over time.  This will be the topic of a future article.

 

Recent Transactions

Noon Turf Care of Hudson, Mass., recently acquired Lawnmaster Boston West.  Noon Turf Care was founded by Christopher and Matthew Noon more than 10 years ago. This acquisition makes the company the largest independent privately owned lawn care company in the state.

Colorado’s Swingle Lawn, Tree & Landscape Care announced the acquisition of the customers of two tree care companies in  Colorado’s Northern Front Range markets. The customers of the two companies,  Conservative Tree Care, Inc and Arbor Care Plus will be supported by Swingle’s Fort Collins branch with a single point of contact for lawn care and tree care as well as award winning holiday décor services. Earlier this year, Swingle announced the acquisition of Tropic Green Lawn and Tree Care of Denver

Since 2005, Swingle has acquired fourteen other lawn care, tree care and holiday décor companies expanding  their services to Colorado Front Range communities from Castle Rock to Fort Collins.

Orkin, Inc., a subsidiary of Rollins, Inc. recently announced the acquisition of Sorrentino’s Pest Control of Sebastian, Florida.  Founded in 1996, Sorrentino’s is a provider of pest, lawn and ornamental services.  Sorrentino’s will relocate to Orkin’s Fort Pierce Branch in late 2011.

 

Uncertainty Over Capital Gains Tax Rates Remains

Not long ago, an executive of a potential buyer for one of our clients asked me if my client was pressing for a close by December 31 to take advantage of the lower capital gains rates.  The question caught me a little off-guard for a couple of reasons.  First, it is very late in the year to be trying to get a deal closed by year-end.  Second, I have been largely taking it for granted, perhaps unwisely, that the lower capital gains rates would be extended for at least another year.

Political turmoil always creates risks and opportunities.  Uncertainty is part of the game.  However, I do not remember a time when operating a business had more uncertainties than today.  Much uncertainty is unavoidable coming out of the economic turmoil of the past few years, but it is truly unfortunate that tax policy remains such a matter of uncertainty.

The President has called on Republicans to compromise and permanently extend the Bush era tax cuts to so-called middle-class taxpayers – those families with incomes of less than $250,000 per year and individuals with incomes of less than $200,000.    Although the President’s official position is that the cuts should expire as scheduled on December 31, 2010, his current comments have softened a bit to usually state that he is opposed to making the cuts on those with incomes above $250,000 permanent.  That leaves open the possibility of extending them for one or two years.

Personally, I believe that it is likely that there will be a one or two year extension of the status quo.  However, it is already mid-November and the lame-duck session of Congress starts November 15.  They have a huge agenda for a short session, but tax policy is at the top of the list.  While there seems to be momentum toward compromise, it is hard to rule out any possibility, including a stalemate which might let the cuts temporarily expire as a result of non-action, although they could still be retroactively re-instated to January 1.

Where does this leave a potential business seller?  Unfortunately, it leaves a great deal of uncertainty.  Since it is probably too late for the vast majority of deals to get closed before year-end, we can hope for relief with the expected extension.  Going forward, if the $250,000 ($200,000 for individuals) definition of  “middle class” survives, there may be opportunities to structure sales in very specific circumstances to avoid the added tax bite from higher capital gains rates.

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