Unless you have heirs who want to take over your landscape business, you may eventually want to sell. In that case, your goal should be to make that business as valuable as possible. So, what makes a landscape business highly attractive to a buyer?
Landscape Workshop, a full-service grounds management company with its flagship location in Birmingham, AL, has completed nine acquisitions in the last seven years, purchasing companies ranging from $1 million to $11 million in revenue. During this time, we researched a large number of possible acquisitions, many of which we decided not to pursue. Below is a list of key factors that we use when determining the value of a business and deciding whether or not to make an offer:
Legal Labor: If you ever want to sell your business, start using E-Verify. The use of I-9s just doesn’t cut it—it’s easy for applicants to come up with very convincing fake documents. Your most likely, high-paying buyers—larger landscape companies and private equity—won’t take the risk of buying a company that doesn’t E-Verify. We walked away from three, otherwise interesting acquisitions in the last few years due to labor legality issues.
Commercial Customers: Single-family residential work can have good margins and be a profitable business, but it doesn’t scale well and is more sensitive to recession. Being at least 70% commercial increases value significantly.
Maintenance Work: Construction and design-build have a place in our industry, and Landscape Workshop has strong offerings in both areas. But these divisions fluctuate with the economy, therefore we work to keep our mix focused on commercial maintenance. If your company is over 70% maintenance (and less than 30% construction), it’s perceived to be more valuable.
Good Margins: This is important both while owning your business and when trying to sell it. When Landscape Workshop performs due diligence for an acquisition, our COO Paul Young dives into this in a serious way. Badly priced contracts are not very valuable.
Well-Maintained Equipment: This is a trade-off as quality equipment costs money. That said, keeping your vehicles and mowers well-maintained, and replacing aged vehicles and equipment is smart practice while owning your business. If we are looking at an acquisition where unkempt vehicles and mowers need to be replaced, we will subtract the cost of replacement from our offer.
Customer Retention: If you aren’t renewing at least 80% (preferably 85-90%) of your maintenance contracts each year, that’s a red flag. It indicates that 1) your team doesn’t provide consistent, good work, 2) your team doesn’t have strong relationships with your customers, 3) you’re doing low-bid work for customers that aren’t concerned about quality and bid you out every year, or 4) all of the above.
Middle Management and Non-Solicitation Agreements: Most sellers want to walk away when they sell their business. This only works for a buyer if you are leaving behind a solid team—especially managers who own the customer relationships and manage the crews day-to-day. It is important to have everyone sign agreements where they commit to not soliciting your customers or employees for at least two years after they leave your company. If a buyer thinks that your key managers can walk away with all of the customers the day after a transaction, that will deter them.
Scale: It takes us almost as much work to buy a company with $10 million in revenue as it does to buy a company with $1 million in revenue. We would rather do one $10 million deal than 10 $1 million deals, and we will pay accordingly. Most buyers share these same feelings.
Paperwork: Have your paperwork in order. To get full value you need to be able to prove that your business is as good as you say it is. Having signed customer contracts on file is a great starting point.
Does COVID-19 change any of this? Not really. In the short-term, buyers will pay less and/or want more of the price to be contingent on future performance to reflect the risk of this moment. Generally, your business will be valued on the factors listed above, with or without COVID.
Increasing The Value
Understandably, this can be an intimidating list if you don’t already have your business set up this way. So, how do you get from where you are today to where you want to be?
Start E-Verifying: This does not mean you have to fire existing employees who can’t E-Verify—grandfather them in. However, if you start E-Verifying now, in a few years you will have a mostly legal workforce. Yes, it will make it harder for you to get staffed, but it’s a lot better to do this over time than it is to have an I-9 audit during due diligence and have a buyer walk away when 50% of your labor turns out to be illegal.
Get a Good Software System (preferably with mobile time capture): Landscape Workshop uses Aspire. The cost of having good software has come down dramatically in the last 10 years, and the functionality has improved even more. Good software lets you know how much money you are making on each and every job. This helps you know the difference between good work and bad work so you can improve your pricing over time. It will also help keep your paperwork and financials organized.
Hire Good Managers, Measure, and Incent Properly: You can’t get to scale if you are the only person who can talk to a customer or run a crew.
Once you have these things in place you’ll start to recognize good work, price it correctly, and start moving in the direction of commercial maintenance (if that’s what you desire). If you’re pricing work correctly, your margins will start to support the equipment, insurance, and team you need to satisfy commercial customers. It won’t happen overnight, but if you do the right things over a period of years, it will happen.
Price is the CEO of Landscape Workshop, a full-service grounds management company that operates in Kentucky, Tennessee, Alabama, and Florida. His team has grown the business from $18 million to $44 million in revenue in the last six years. Before joining Landscape Workshop, Price was a principal at a New York-based middle-market private equity firm, a partner at a regional investment bank leading the restructuring practice, and an engagement manager at McKinsey & Company. Since joining the Landscape Workshop leadership team in 2014, his primary goal has been to cultivate a performance culture—not a political one.
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