The dreamed-of day finally arrives, and excitement and anticipation electrifies the air. The couple’s relatives and friends can’t wait to see them decked out in their wedding finery. When the two people finally walk down the aisle, they, along with everyone watching, hope their union will last forever.
But as we all know, marriage stories don’t always end with “… and they lived happily ever after.” The odds improve, however, if the couple has taken the time to discover if they really are right for each other before taking that major leap.
While the process of one green industry company acquiring another one isn’t quite the same as two people getting married, there are similarities. In an acquisition, the courtship period is all about taking the time to discover if a company that looks like a good match for yours actually is. In other words, don’t order a cake or buy flowers until you’re absolutely sure you’re making a sound decision.
There’s no set metric or threshold that tells a company owner when it’s time to buy another, says Ronald Edmonds, founder and CEO of Principium, Nashville, Tennessee, a company that helps green industry companies make acquisitions.
“Ultimately, it’s a question of what your plan is for growing your business. It may be less risky to grow a company via acquisition than through organic growth (adding customers over time). If you’re in a hurry to grow, then buying might be the cheaper way to go.”
Edmonds provides an example. “Say you were a general landscaper and you wanted to expand into irrigation. You could hire an irrigation manager, buy equipment and inventory, train a team, and then advertise that new service — but it’s likely you’ll spend a lot of money before you start generating revenues of substance.”
On the other hand, if you buy an existing irrigation business, he says there may not be any startup losses.
Step 1 — Find a company for sale that will help you achieve your goal.
There are lots of reasons why you, the owner of a landscape, landscape maintenance, irrigation, lawn care or tree care company, might seek to buy another, similar company. It might be to expand your company’s market share within an existing market, to extend your market geographically, to expand your business in terms of additional service lines or to obtain another company’s stellar management team or field employees.
Those first two reasons were behind Fort Myers, Florida-based Juniper Landscaping’s recent acquisition of Coast to Coast Landscaping, a large regional provider of landscape maintenance services in the Vero Beach and Port St. Lucie areas. The purchase included its three affiliated companies: Southeast Irrigation, Coast to Coast Pest Control and East Coast Tree Co.
Brandon Duke, Juniper’s CEO, says that acquiring Coast to Coast will help his company achieve its goal of “being able to service the whole state of Florida in the larger markets.”
A desire to extend its market into North Carolina was behind Orlando, Florida-based Massey Services’ acquisition of Venture Pest Control, a company with branches in Raleigh and Charlotte. “If we have to drive more than 20 minutes from our door to your door, that’s too much,” says Adam Jones, vice president of quality assurance. “We’ll seize any opportunity to open new offices so we’re able to be flexible and nimble in serving our customers.”
Acquiring another landscape company’s management team was one of the main motivations Gary Horton, CEO of Landscape Development Inc., Valencia, California, had for buying Enhanced Landscape Management in Thousand Oaks, California, from owner Greg Epstein.
“We wanted to diversify from just doing landscape construction to adding landscape maintenance,” Horton says. “We needed more recurring revenue. At the time, we were probably 10% recurring, and we wanted to get closer to 50%. We wanted to gain dollar volume and revenue, but we wanted to acquire the talent and know-how just as much. It’s worked out wonderfully because Greg’s expertise has spilled over to the wider area of our business.” Wonderfully, indeed — Horton says LDI’s maintenance division has grown 700% in the three-and-a-half years since the acquisition.
Step 2 — Do your due diligence.
Once you’ve nailed down the reason or reasons for buying, the next step is the due diligence phase. This involves researching the selling company’s customer base, employees and assets, such as equipment and vehicles. “Most important of all is understanding where the customers come from,” says Edmonds.
“We do a significant amount of due diligence,” says Jones. “We look at bank deposits, the history of cancellations within the business and at how long its customer base has been there.”
You need to discover the real reason the owner wants to sell, Edmonds says. “If it’s a good, solid business that’s growing and has good margins, why is the owner trying to get out of it?” he asks. “What does he know that you don’t know?”
Of course, there are plenty of legitimate reasons an owner can have for wanting to sell, such as a desire to retire or move out of state. However, Edmonds warns that whatever the owner tells you the reason for selling is, don’t swallow it whole.
“The owner may secretly wish to sell because the company’s struggling in the market and is in a negative revenue trend,” he says. “Maybe the company’s been mismanaged, or the market is too saturated with the services it offers.”
If you are satisfied after your all your research that the company is a strong, growing business, you can then proceed to the next step.
Step 3 — Prepare a financial analysis.
This is where you’ll evaluate the business you’re thinking about acquiring and model what it would look like as part of yours.
You’ll examine the company’s financial papers. Ideally, the seller will have accrual-based records such as profit-and-loss statements. That’s the ideal … but be prepared to see something less than that.
“A solid majority of businesses that turn over less than $10 million a year don’t do job costing,” says Jones. “They’ll have one line for sales with landscape maintenance, design/build and spraying customers, for instance, all on the same line. That’s not very helpful when you’re trying to analyze the business, as you can’t tell which parts of the business are making more money than others.”
Edmonds often deals with companies whose financial records are primarily based on the preparation of income tax returns. “That’s not enough to give you an indication of what you can expect to do with the business,” he says. “You need to know what kind of profits and losses the business produces. Don’t assume that what you’re initially given is reliable.”
Step 4 — Prepare an integration plan.
You’ve decided to move forward. Now you need to think about how the two companies will mesh. The plan should spell out what’s going to happen in the first few days and weeks after the deal is closed. Who’s going to tell the employees and when? How are customers going to be notified, and do they even have to be? If so, what are you going to say to them?
How will the two workforces be brought together, and who will answer to whom? If you’re going to cut staff or consolidate facilities, when and how will those things happen?
When you and the former owner finally announce to the staff that the business is changing hands, you’ll probably lose a few people. “But it’s really important to try to hang on to labor,” Edmonds says. “A nightmare scenario would be to buy a company, take on client commitments and have no employees left.”
Now’s the time to tell the staff of the purchased company about the advantage of working for you. As Jones says, “Our goal is not to just buy a book of business, but to buy a talent pool that allows us to continue to grow. The benefits package that we bring along is one that many companies can’t afford. That’s an attractive piece to the existing team members.”
Step 5 — Obtain financing.
If you’re going to borrow, it’s time to talk to the bankers. Define the parameters and draw up a loan agreement. Have that document ready to close simultaneously with the purchase of the business.
“It takes on average 90 to 120 days from the day you reach a tentative agreement to the time you close the transaction,” says Edmonds.
Step 6 — Make a preliminary offer.
That’s usually done in the form of a letter of intent setting forth the general terms of the purchase. This letter is generally nonbinding, except for a few provisions. When a company accepts a letter of intent, that means they’re going to work only with you and no other potential buyers.
Either party can still back out at this point. You don’t enter into a binding contract until the deal closes, which is usually simultaneously or within a couple of days. (Horton says only about 20% of business purchases that go into escrow actually close.)
Before that happens, you’ll do some deeper due diligence to make sure you’re satisfied with the deal. This includes inspecting vehicles and other equipment for mileage and value. The seller will probably make more information available to you in terms of historical customer relationships.
Legal documents, such as the asset purchase or stock purchase agreement, disclosures of any deferred payments or promissory notes and a noncompete agreement are prepared.
There is usually an employment or consulting agreement made with the seller. These arrangements usually end early and amicably after three to six months, once the relationships with customers and employees have transferred satisfactorily.
Such an arrangement was worked out between LDI and the former owner of Enhanced. “He wanted to stay active in the business, cared about it and its people, and wanted to maintain the culture,” says Horton. “His objective of keeping what he’d developed and building on that worked with ours, which was to have someone like him help us grow.”
Step 7 — Close the deal.
Once the deal is signed, the money is held in escrow until the transaction is declared closed, say at 8:00 a.m. on a certain day. Funds are wired from the buyer and their financing source to the seller; the documents evidencing the sale are released and it’s done.
Step 8 — Inform the employees.
It’s a good idea to tell the staff about the acquisition a couple of days before the closing. “Workers always have a level of skepticism and apprehension when they first find out,” says Duke. “But after a few weeks or months, once they realize that we’re only there to try to add value to the business, people settle in.”
If you’re an E-Verify employer, but the company that’s being acquired isn’t, Edmonds says that you’re going to have to take applications and rehire the workforce. “You want to hire back all the eligible people you can, not only in terms of immigration status but things like clean driving records.”
Should you decide that it’s time to buy another company, Edmonds says it’s good to have people who are aware of all the issues involved guide you through.
“You need a team of people to help you, such as a lawyer and a CPA who specialize in acquisitions, a human resources consultant and a mergers and acquisitions advisor like myself.” Experts like these will cost money — but a bad buy will cost you far more. Good luck, and may your union be a happy and productive one!
The author is senior editor of Irrigation & Green Industry and can be reached at firstname.lastname@example.org.
Beware the red flags
You may discover things in the due diligence phase that may make you think twice before finalizing an acquisition. Here are some red flags to watch out for.
The business is too “owner-centric”
Perhaps the seller is a superlative craftsperson with an outsized reputation. Typically, his name will be part of the business name, as in “Joe Blow Landscapes.” The problem with this is that Joe Blow’s customers may depart once Joe Blow does. A potential buyer needs to ask, “How am I going to transition the customer base in that situation?”
Too high a concentration of customers
It could be a $10 million landscape business that looks like it has 12 large customers but really has only one or two, warns Ronald Edmonds, founder and CEO of Principium, Nashville, Tennessee. This dramatically increases the risk of losing those customers when a deal finally goes through.
Poor employee retention
“If everyone at the seller’s company has worked there six months or less, that should tell you something,” says Adam Jones, vice president of quality assurance for Massey Services, Orlando, Florida. “The odds of that company having a highly satisfied client base are small.”
The seller has used the business as a personal checking account, doing things like paying for the kids’ college tuition through the company credit card. “That puts the valuation numbers into question,” says Gary Horton, CEO of Landscape Development Inc., Valencia, California. “It indicates rather sloppy business practices and possibly even tax evasion.”
Too much debt
A large seller debt load can be a deal stopper, but it doesn’t have to be. “It depends on whether the acquisition gets you where you want to be and lowers your risk at the same time,” says Edmonds. “But if you’re taking on more risk than you can live with, you shouldn’t do it.”