Nov. 24 2020 06:00 AM

Find out how to get the most out of an acquisition when buying or selling.

Growing your business isn’t quite as easy as choosing the right door on a game show. In the green industry, company growth comes in many forms. In many cases, landscape and irrigation contractors are looking for more organic methods like adding services, increasing market share through customer development.

But acquisitions play an important part for a developing company and picking the right path at the right time can supercharge a business’s growth. As a seller, it can represent the opportunity of a payoff for the hard work put into building a profitable company.

From either side, it’s important to prepare to get the most out of the deal. In order to handle growth, a company needs to have its current operations really in order, says Jack Cox, president of NorthBridge Business Advisors, Morristown, New Jersey. Have a solid understanding of your processes and projects.

“You have to control and manage your own operation before you look to bring anything else on and integrate it,” he says. “You’ve got to be very comfortable with the way you’re operating.”

One solid reason to acquire is to expand your current services and bring in new customer opportunities, Cox says. Look at the potential revenue gained when adding a particular service line, and if it’s something that is frequently requested by your current customers, it could make sense.

“When you’re doing a good job with one thing, you’re very likely going to be asked to do more,” he says. “You can acquire someone who has one of those other disciplines and extrapolate your services to that client base quite easily.”

Before actively pursuing buying or selling, talk with your professional support team and advisors, including your attorneys, your bankers and your consultant, says Fred Haskett, principal at The Harvest Group, St. Louis, Missouri.

“Ask questions, and then listen on those things,” he says. “You don’t want to be well down the road and find out from your banker that their situation is not going to be as favorable for you.”

Better buying

As you’re looking to buy a company, start out by doing your homework up front, says Cox. Taking care of due diligence issues early will help the process go more smoothly. Know who you’re taking on, how many accounts they have and what issues are likely to come up during integration. Think about whether you still need the other company’s facility and if its supervisors will mesh well with your current team.

Look for companies that have diversity in customers, and make sure those customers have contracts that make transferring to new ownership straightforward. This is especially important when buying smaller companies, according to Peter Giersch, managing director, The Giersch Group LLC, Milwaukee, Wisconsin. If customers aren’t under contract, the change in ownership could serve as a wake-up call for clients that they haven’t looked at other service providers recently.

Transitioning customers can be especially tricky when it comes to pricing. Cox says it can be best to honor current pricing in the short term, especially with residential customers.

“If you’re going to make a change, and you feel that a change in pricing is necessary, you might want to do that in a second renewal,” he says. “You want to minimize disruption for customers as much as possible.”

Whatever the company has to offer, make sure it fits your current business and your overall business plan, says Giersch. Maybe they don’t have a great customer list, but there’s a lot of new equipment that could be useful.

Have a solid understanding of what you want to add to your business through the deal.

“Each deal is different,” Giersch says. “They’re going to have something different to offer, but it’s got to be complementary to what you need.”

It’s important to be realistic about market differences, and have plans to integrate them effectively, says Haskett. If your company mainly does residential work, and you’re acquiring a company that does mostly commercial, be aware that the sales and service approaches for both markets are often very different.

Once the deal is moving, put your due diligence plans into action to push the integration along quickly, says Cox. Have an actionable plan with defined steps. The longer it drags on where you’re managing multiple facilities and teams, the less of a financial return you’re getting overall. It can also establish bad habits with the new combined team by keeping around inefficient procedures that were meant to just be holdovers but end up being just the way things are done.

“You need to be truthful with yourself and hold yourself accountable to put those things into place,” he says. For a company at the range of about $5 million or less, Cox says to aim to have the integration completed within about three months.

Selling smart

As you’re considering selling your business, make certain that you have the records available to show potential buyers what your company is worth, says Cox.

“What’s universally important is finance, that you have books and records,” he says. “Without books and records, it’s hard for someone to rely on what you’re representing today.”

Also, have a manual of your operations, including all your major processes like hiring and pricing, he says. “It’s almost like a flowchart for how your business runs. The more you have this documented, the easier it is for the owner.”

Make certain that your company is in complete legal compliance as well and up to date on tax returns, Cox says.

As a green industry company, be considerate of potential buyers that are coming from outside the industry, says Haskett.

“I think a lot of times people are not aware of how complex the moving parts are in this business,” he says. Things like the seasonality of the business or dealing with weather are second nature to contractors, but a buyer might not be familiar. “We live it every day. But to someone on the outside or private equity, there’s those levels of complexity.” Be patient in walking them through the business and what makes your company’s assets special.

Key man risk is one of the major issues to consider when looking at making your company more attractive for purchase, says Giersch.

“If the company cannot function without you, it really is going to be a hard sell,” he says. “The key man risk is when somebody just starts wearing a whole bunch of hats, and they just do lot of work. It’s not written down anywhere, the processes are just all in their head. You couldn’t hire somebody to walk in tomorrow and do the job. That kind of company is really hard to sell.”

Another way to look at it is to know who owns the client relationships in the eligible company, says Haskett.

“If there are account managers present and production managers who are interfacing and working with the clients on a regular basis, that’s a good thing,” he says. If the owner has those connections or manages all the sales while the crews take care of the work, that person will need to stick around through the integration and possibly longer.

Watch your customer concentration as you’re getting ready to sell as well. If one large customer makes up the majority of your base or you have just a few key accounts, that could be an obstacle, says Giersch. Buyers want to see a diversified set of options in customers, so that if some don’t come along with the changes in the company, it won’t adversely affect the overall result.

Beyond having a wider range of customers, a buyer is going to want specific contracts with customers, says Geirsch. Having a working relationship with the customer is great, but a contract is going to be more helpful overall when transferring to a new company.

Timing it right

If your company is struggling on one of these fronts, whether in customer diversification or overall profitability, it might not be a good time to sell, Cox says.

Take some time to fix the problems you’re facing and give your company a better chance with a buyer. As a broker, Cox sometimes looks at helping an owner through exit planning from two different approaches: one as a doctor and the other as an undertaker.

“I like being the doctor, because it creates better value for the seller,” he says. “Being the undertaker, there’s not much I can do with it.”

When selling, think about the return that you can expect in terms of overall owner benefit, says Giersch. That takes into account everything that the owner takes home in terms of salary, as well as anything counted as perks such as a cell phone or truck. For owneroperated businesses at a size of about $5 million and under, if the business is in good shape and has the aspects mentioned above taken care of, look for a return of about three times the owner benefit as the standard.

If you’re looking for a larger return, you’ll probably want to take some more time to continue growing your company before selling, says Giersch.

Though many landscapers ended up pulling through this year reasonably well despite COVID-19, if the pandemic pushed you to consider getting out, you might not see a strong sale price, says Giersch.

“If your revenue is down and your market share is down and you’re just tired and you want to sell, don’t expect to get very much for it,” Giersch says. “There’s nothing wrong with selling. You’re just selling at the bottom.”

But the opposite is also true. If you’ve been able to weather the year well, it might be a good opportunity to look at local smaller competitors that you might be able to buy out at a lower price.

For many of Haskett’s clients, it’s turned out to be a good year. The shutdowns at the beginning of 2020 gave some a push to restructure and rework their business models. By the middle of the summer, many had figured out how to work safely and had backlogs to work through.

With acquisitions in mind, Haskett thinks 2021 will be a more normal year. It might not be the year to plan for extremely aggressive growth as other industries continue to react to COVID-19, but the dynamic should be positive for business owners in the green industry. He’s keeping an eye on other market indicators such as housing starts and occupancy rates.

“Watch those indicators and be prepared to maybe push a little bit down on the accelerator or pull back on the accelerator a little bit,” Haskett says. “Just be vigilant of what’s going on around us.”

The author is editor-in-chief of Irrigation & Green Industry and can be reached at kylebrown@igin.com.

Welcome back

On top of the regular obstacles to the easy integration of an acquired business, it can be difficult to make seasonal employees feel welcome and included when the boss has changed over their time away. It’s important to identify the leaders among the staff who own the team relationships, says Fred Haskett, principal at The Harvest Group, St. Louis, Missouri. Look for operations or production managers who have sway within the other employees and make certain they’re visible and on board when seasonal employees come back.

“That way they’re not walking into a strange facility and talking to a bunch of strangers,” he says. “When they walk in the door, there’s a familiar face and a familiar voice. Make sure those people are prepared and comfortable, that they’ve embraced the process and are telling the new story.”