This time of year, I often think of the classic Rod Stewart song, Maggie May. The line that sticks in my head is “It’s late September and I really should be back in school.” I think of that line as a kind of metaphor reminding me that summer is over and it is time to make a push to close the year on a strong note. If you are contemplating pursuing a transaction, now is a good time to make a move.
This month, we are beginning a series on exit planning and what that really means for green industry business owners. We have also included a parable that illustrates why having an exit strategy doesn’t necessarily mean you have an adequate exit plan.
As always, if you are contemplating the sale of your business or acquiring one, we’d welcome the opportunity to talk with you. If it is time for you to begin thinking about an exit plan, we’d like to talk with you as well.
Exit Planning: The Basics
Every business owner’s ownership interest will change hands at some point during the business owner’s lifetime or immediately thereafter, either voluntarily or involuntary. That change may include the sale of the business to a third party, the transfer of the business to family members or employees or the liquidation of the business. Most green industry business owners would agree that having an exit strategy or a plan for how the ownership interest will be transferred is a good idea. Few, however, have gone through the process of developing an exit or succession plan.
There are four basic steps in developing an exit plan: determining the owner’s objectives, assessing the current value and marketability of the business, developing an action plan for preserving and enhancing the value and marketability of the business, and developing a plan for the sale or transfer of the business in the future.
The Objectives of the Owner
Before proceeding with developing the exit plan, the owner must determine what his or her objectives really are, including determining when he or she wants to sell the business, to whom he or she wants to transfer the business and what net cash flows he or she will require after the business is sold. Determining one’s true objectives requires some soul searching and may require assistance from financial professionals.
Assessing the Current Value and Marketability of the Business
In order to determine the best way to reach the objectives of the business owner, it is necessary to assess the value and marketability of the business. Ultimately, the marketplace will determine the value of the business, but an assessment of the business’s value and marketability are necessary in order to determine if a business sale can reasonably be expected to produce a result that will allow the owner to achieve his or her objectives. A formal business valuation may or may not be necessary, depending on the intentions of the owner. For example, a formal valuation may be necessary for tax purposes if the transfer will be made to a family member or if a sale is to be made to an entity such as an employee stock ownership plan (ESOP).
An assessment of the cash flows of the business is a key component of valuing the business and is also a key factor in structuring a transfer to family members or employees. In addition, an assessment must be made of current market conditions and the best time to go to market.
Preserving and Enhancing Value and Marketability
After assessing the value and marketability of the business, a plan can be developed to enhance value and marketability. This plan is based on an assessment of the value drivers of the business. Value drivers are usually related either to the long-term growth prospects of the business or to factors that reduce a prospective buyer’s risk that the business will not perform as expected.
Put more simply, the plan addresses steps can be taken to improve the value and marketability of the business. The good news is that in most cases the same steps that improve the value and marketability of the business in the long-term will improve the operations and growth prospects of the business as well. These factors may include management and employees, operational issues, the nature and quality of the customer base, financial controls, facility issues and tax planning, among others.
Developing a Plan for the Sale or Transfer of the Business
Based on the objectives of the owner, the assessment of the value and marketability of the business and the plan for improving value and marketability of the business, a plan can be developed for the sale or transfer of the business. This plan will include the process to be followed and the proposed timing. This plan will be revisited based on inevitable changes in the owner’s objectives, the state of the business and market conditions until the time comes to execute the plan for the sale or transfer of the business.
Over the next four months, we will be examining in more depth each of the four steps in exit planning.
Swingle Lawn Tree and Landscape Care recently announced the acquisition of Tropic Green Lawn & Tree Care of Denver, Colorado. Swingle has branches in Denver and Fort Collins and the Tropic Green customers will be served from the existing Swingle branches.
The Tropic Green acquisition is Swingle’s tenth acquisition since 2005. Swingle now serves customers throughout the Front Range in Colorado.
Despite Slump, 12 Green Industry Companies Make the Inc. 5000
Despite the significant industry slump over the past two years, it is interesting to note that at least 12 green industry companies made this year’s Inc. 5000 list of the fastest growing private companies in the United States. The list is based on three-year revenue growth (2009 versus 2006). The top green industry company on the list grew a whopping 710% over the three year period.
The following companies made the list (in order of ranking)t:
418 Complete Landscaping Systems (Wichita, KS)
2180 Clean Air Gardening (Dallas, TX)
2889 Eastern Land Management (Stamford, CT)
2919 Lewis Tree Services (West Henrietta, NY)
3299 MasterGardening.com (Frederick, MD)
3525 Schill Landscaping and Lawn Care Services (Sheffield Village, OH)
4229 Natural Way Lawn & Tree (Lake Orion, MI)
4297 Native Land Design (Cedar Park, TX)
4313 NaturaLawn of America (Frederick, MD)
4662 Carolina Tree Care (Concord, NC)
4806 Bennett Landscape (Harbor City, CA)
4991 Maldonado Nursery & Landscaping (San Antonio, TX)
An Exit Planning Parable for the Green Industry
Albert was a fairly typical small business owner. He had worked hard to build a respectable business. He never dreamed that in only twenty years, the business had grown from a part-time lawn mowing service to a $7 million commercial landscaping business with well over 100 employees. Albert’s business was, in many ways, a family business. His wife Sherry had run his office for years, although she had been backing away the last few years by training other office personnel. She had a hold on things by only spending a average of two days a week in the business. Albert’s son Joe had worked in the business since he was 15. If the truth was known, he had worked in it almost since he could walk. He had spent his summer school vacations riding with his father as he supervised his five crews. Joe always planned to take over the business from his father at some point. They were unusually close and Joe’s objective was to allow his father to work a lot less but still direct the business as long as he wanted to. He would try to learn everything his father knew. There was never any question where he would go to school – he went to A&M and studied agribusiness with an emphasis on landscape construction and maintenance. Albert was thrilled. Handing over a successful business to his son was one of his life’s major goals and everything was in place. When Joe finished school, he was already to be the operations manager for the business. Albert called him the vice president of operations. He liked the sound of that. Pretty good for a 23 year old!
Albert’s plan was in action. He knew exactly where he was going. Joe would be there to help him make it all happen and when the time came, he would be ready to take over.
While he was away at school, Joe met Sarah. They had lots in common and shared many interests. They had met at A&M. She was even a student in the agriculture college. This was great. They became inseparable. Two years after college, Joe married Sarah. Sarah began to work in Albert’s business part-time. Everyone knew children would be coming along soon. Albert thought this was all great.
Sarah was from a small town about 150 miles away. Her parents had a small farm and dairy operation. They were able to visit her parents regularly and that was a good thing because Sarah was very close to her parents. One day when Joe and Sarah were about five years out of college, the call came from her mother. Her father Bill had had a serious heart attack. Joe and Sarah rushed home to her parents. The news from the doctors was pretty good. Her dad would probably have a pretty complete recovery, especially if he quit smoking and got his weight down. However, they believed it was best for him to scale back and retire at once. Sarah’s father was upset and her mother was scared. What was she going to do? Who would run the farm? Could she sell it? What would happen to her livelihood.
As they drove to their home the next day, Joe and Sarah talked. Sarah had forgotten how much she liked the town she grew up in. Joe liked it to. What a great place to raise a family! And Sarah really wanted to help her mother out. They began to talk about moving to Sarah’s hometown and taking over the family business there. The more they talked and thought, the better the plan seemed to them. It was almost perfect, except that Joe was very worried about telling Albert about the new plan.
When Joe told Albert about their plans, Albert controlled his anguish. He cared about Sarah’s parents, too. He knew that Sarah’s hometown would be a great place to raise a family.
But inside, Albert was thinking that his world was being torn inside out. He was about to lose his vice president of operations. His dream of an easy transition to retirement had just evaporated. And then one more thing hit him: What if he was the next one to have a heart attack? Who would help them cope with a sudden change like that?
After reflecting a bit—and a long talk with Sherry, he realized this news was not so bad. He wasn’t really ready to retire. He had some time left to develop and implement his new “exit strategy.” It was, however, time to take the exit planning process seriously—and to develop contingency plans just in case things didn’t work out like he expected again.