When it's time to sell your landscaping business
|By Mary Elizabeth Williams-Villano|
Solid preparation can help create a successful outcome when you decide it’s time to sell your landscaping business.
“It’s time.” Something inside (or outside) is telling you that the time has come to put the baby you so carefully birthed, nurtured and helped grow — your landscape business — up for adoption.
The reasons for deciding to hand the reins over to someone else are as unique as you are. It could be that your priorities have changed over time from building a business to support your growing family to wanting more time to spend with your grandchildren. Or you decided it’s time to pursue hobbies, do charity work or travel the world with your spouse.
Whatever the reasons are, you want to get the most bang for your buck — or, perhaps we should say, the most bucks for all of your bang, the hard work you’ve put in over the years building that business. But it’s not all about how much money you’ll net at the end of the process. You also want to protect the legacy you built with your blood, sweat and tears. You don’t want to hand it over to just anybody.
No wonder Patrick Schultz, former co-owner and co-founder of Atlanta-based Perimeter Landscape Management likens the process to walking his daughter down the aisle. “It's not an easy thing to do. You want to make sure you’re handing her off to somebody with whom you feel very comfortable and can trust like family.”
Putting a business up for sale isn’t a simple matter. When people throw big weddings, they hire wedding planners. When people need help with their landscape businesses or want to sell them, they often hire consultants like Jeff Harkness.
A green industry consultant with Atlanta’s Three Point Group, he’s shepherded many of these sales. I asked him, “What’s the first thing you say to someone who comes to you wanting to sell his business?” “The first thing I’d ask is, ‘Why,’ and next, ‘Why now?’ So that we can get on the same page with regard to expectations,” he says. Why is the ‘why’ so important? “It’s the first question smart buyers ask.”
Harkness says even though the fundamentals and economics of a sale are relatively straightforward, there are variables from market to market and from company to company (the raw data, balance sheet, profit-and-loss statement, et cetera).
“In order to get the right deal closed for a client, it’s not just about metrics. There are a lot of intangibles that can spook a potential buyer into not wanting to do a deal with that particular company. It’s not just about how much cash you’ll get at closing and what the purchase price will be, although those are certainly drivers.”
Those intangibles include how involved the owner is and in what area or areas within the company he impacts the most. It also encompasses the depth of and strengths and weaknesses of the management team and other leaders within the business.
It means asking questions such as, “What is the rate of customer retention?” “How diverse is the client base?” “What markets does the company service?” And “What processes and services does the company handle well, and which ones does it struggle with?”
But even if you’ve been kind of a handsoff or even an absentee owner, that’s not necessarily a bad thing when sale time comes, says Harkness. “It depends on who your buyer is. It could actually give him great peace of mind to know that your business isn’t a single-owner-control type of setup, with a strong personality at the top. The buyer wants to know what’s left after the owner leaves. He’s asking, ‘How sustainable is the business once this key person is no longer in the mix?’”
This also affects scalability — the ability of the buyer to grow the business after the sale. “If you have a dominant owner that controls every process, every customer, and that person exits, how is the new owner going to be able to grow the business? If the business can’t be scaled, then he’s probably not going to be interested.”
After working in the green industry for many years, Pat Schultz and his partner Jeff Craven started Perimeter in 1995 in Atlanta. They had been doing well performing commercial maintenance for homeowners’ associations — picking up business that big maintenance companies weren’t interested in. The business was growing by 30 to 40 percent a year. Grounds maintenance made up about 95 percent of the company’s mix, with some installation, irrigation and chemical application filling out the rest.
Schultz and Craven added three branches: Lake Oconee and Augusta, Georgia, and Columbia, South Carolina. Then a trifecta of things happened. Around 2007, a whole bunch of maintenance companies came flooding into the market, including some of the bigger players who could afford to low-ball as a way to capture some of that market share. The pie kept getting sliced thinner.
“We also had a drought in 2008, and that didn’t help, either,” Schultz says. “That was followed by the housing market collapse. It was a perfect storm for the landscape industry down here.”
By the time the recession was in full swing “I was getting these calls; ‘Hey, we love the work you guys do, but we have foreclosures going on. Can you match this bid?’ And we couldn’t. Everything just tightened up; people stopped spending money. We’d shrunk to a third of what we were making, from $6.3 million in 2007 to about $3.5 million by 2010.”
Schultz and Craven cut their own salaries and their costs. Around 2009 they attended a green industry conference and met Harkness, who was giving a talk about “What else? — Coping with the downturn.”
They decided to bring him in to help them make things more efficient. “At that point, we were at Defcon 5, just trying to survive,” says Schultz.
He helped them restructure their operations, primarily, their financials and income statements. He also advised them to change the company from a C-corporation to an S-corporation to ease the sale. From that point on, everything they did was with an eye towards the endgame, the eventual sale of the company.
Harkness taught them about EBIDTA, earnings before interest, depreciation, taxes and amortization. “People think that if they made $6 million last year, they should get $6 million in the sale,” says Schultz. “But that’s not how it goes. The sale price is really based on an EBIDTA equation.”
Schultz explained how this works. Let’s say a company’s EBIDTA is $200,000. The next part of the equation is the multiplier, a number from one through five. It’s a kind of score derived from an evaluation of a company’s customer relationships, management team, facilities and labor staff.
The better those intangibles are perceived to be, the higher the multiplier. You want to score as close to five as possible. Five times $200,000 means that a company’s sale price is $1 million.
Harkness told the partners what the companies want to see when they look at a prospective acquisition’s financials. They got their ducks in a row.
“We rented a conference room in a hotel for the due diligence meeting. With Jeff ’s guidance, we’d set up our systems so that everything was in order. They asked us for page upon page of information, and we gave it to them instantly on a flash drive.”
“We all expected this process to take two days; it took one. Yellowstone said it was the fastest due diligence period they’d ever seen in any acquisition,” says Schultz.
Once you’ve decided to sell, keep your cards close to your vest. You need to keep your sale plans a secret from vendors, clients, employees, and maybe even family members. “Nobody’s supposed to know that you’re selling your company; it’s the last thing you want getting out,” says Schultz.
You simply can’t keep your staff or management in the loop. You don’t want people worrying about their jobs or jumping ship at the very time you’re trying to demonstrate a stable management team and a workforce producing high-quality results.
Schultz and Craven wined and dined the people from Yellowstone Landscape, the multistate maintenance company based in central Florida and the eventual buyer. They were taken out for discreet peeks at properties Perimeter maintained so they could see the high quality of the work.
But even top-secret “black ops” can have leaks. As Schultz recalls, “One day, one of our guys walked into this vendor’s warehouse to buy something, and someone said, “So, I hear your company is up for sale.”
That put the partners in an awkward position, having to deny that anything was going on. “That was one of the most difficult parts for me,” says Schultz. “I felt I was betraying people. You have do this behind everyone’s back, and if you’re an ethical person, all this secrecy gives you a bad feeling.”
What happens to my employees?
The fate of his 50 staffers was one of Chip Morris’ primary concerns when he decided it was time to sell the Landscape Management Co., the maintenance-focused outfit that he started in March of 1978 in Atlanta. The company also offered turf care and enhancements such as planting and drainage work. It pulled in approximately $2.8 million in annual revenue.
His “why” was that after 40 years he and his wife were ready to retire and travel the world. Their grown children had other careers and didn’t want the business. Even so, he wasn’t about to sell to just anybody and called Harkness for help.
The consultant taught Morris how to keep the kind of records that a buyer would need to properly evaluate his company. He also encouraged him to begin handing off many of his responsibilities to his general manager to prepare him for the transition.
It was important to Morris that his loyal staff have greater career opportunities.
“Many of them had been with us for over 20 years, and we wanted a buyer who’d value them above everything else,” he says. “We also felt they’d be better served if we sold out to a large organization.”
Most staffers knew a sale was inevitable, but were still shocked once they learned they’d soon be working under new ownership. The new owners reassured the employees that they considered them the most valuable assets in the company.
Two happy endings
After the ink dried, was Morris happy with the outcome? “Yes, very happy. We’d hoped for more, but we can’t measure success just in dollars. Landscapes USA (the Austin, Texas-based buyer) went far beyond what we expected to accommodate us and our staff during the transition.”
Though the Perimeter partners originally wanted to sell all four branches, toward the end of the wheeling and dealing, the Yellowstone people asked if it was a deal-breaker if they only wanted Atlanta and Lake Oconee. They were told, “Yes, it is; it’s all four, or nothing.”
Yellowstone came back with a much sweeter offer for the two branches, close to what Schultz and Craven had expected to get for all four. They took it. A year to the day later, the Augusta and Columbia branches were sold to a different company.
Start early, start often?
Schultz says this is not a process you begin a month before you decide it’s time to sell. A sale takes anywhere from six to 18 months of preparation. Eighteen months is exactly how long it took to prepare and find the right buyer for Morris’ company.
Perimeter’s sale took about that long, from early 2014 when they made the formal decision, until June 2015 when the first two branches sold — but that’s only if you don’t count the years of prep work.
Would Schultz advise other contractors planning a sale to get help with it? “No question,” he says. “This goes way beyond what you go through selling a home. Most people wouldn’t do that without a Realtor. This is a thousand times more complex.”
If the time is coming for you to sell, even if it’s years away, start doing things now with that end goal in mind. It’ll pay off when that final handshake happens.