As client partners continue bringing us a phenomenal range of Strategic Planning questions, the underlying consensus is no longer that the world is changing but rather that it already has changed - and we need to be among the first to catch up to it and harness it. Among these recurring themes in assessing life-after-2020 is company health, valuation, and potential.
Due to phenomenal feedback from the previous blog on Budgeting and Strategic Planning, The Harvest Group graciously agreed to share wisdom with our team and our clients again, this time from Alison Hoffman. Alison brings an industry-unique expertise to the discussion, with over a decade as a female landscape business owner and over a decade in corporate America running mergers and acquisitions from $1M to $400M. Below are a few highlights from our hour together; enjoy.
BOSS LM: I've heard you joke previously, "When is the best time to start thinking about selling your business? … The day you start it!" (ALISON: It's true!) … but far more people seem to be wondering it in our hearts now than a few short months ago. For many landscape owners, though, it's a big misconception that we can't make that confidential phone call before we're literally ready to sell now. Is there such a thing as engaging someone before its time to sell just to get their opinion and wisdom?
ALISON: Absolutely! We actually have some clients who do a valuation every 2-3 years just to keep on top of it. The Harvest Group has been in the business of helping landscape and snow companies "harvest your potential" for almost 20 years, so this conversation is a natural extension. A lot of the strategic planning and operational assessments that the Harvesters do naturally lead from long-term vision right into valuation, transition planning, buying a company, or selling your company. I'm here to specialize in that area of need and talk to anyone of any size and any status to help tell them the truth.
BOSS LM: So, setting aside for a moment the eventual journey's end of "selling the business", most of us have no idea where to begin with just an assessment of today. What does it look like to consider company valuation "the right way"?
ALISON: Well first let me be encouraging: COVID hasn't been priced too hard into deals I've seen so far; the companies who are doing things the right way, who are decent-sized, and who have healthy numbers are still highly desired. Consolidation is still very positive in our industry -- because you're providing essential services, because there's a recurring nature to the revenues, and because it's still difficult to replace much of what you do with software or automation. So the same amount of capital that was out there before the pandemic is still out there.
I love the landscape industry because it's such a beautiful and nurturing field of work to be in, but that also makes it emotional for owners. Because of that, I suggest it's helpful to have someone external, who's not emotionally tied to the business like you are, help look at valuation.
What you really want as the seller is to optimize your company in terms of your market, so when we do a valuation for somebody we do a two part estimation. First is your fair market value; we look at how the business measures up against the industry in key factors to estimate what your business is worth today. (Is that price okay with you, or too low?) Second is looking at what your business could be worth if certain targeted goals can happen, giving you a chance to explore if you are up for what the climb will take, and letting you check if the time and dollars involved will make a good return on investment.
BOSS LM: I'd imagine that's a piece where potentially there's great upside for owners - not just the external analysis of "today the business valuation is this and it could be worth that", but to have a coach to get us through the journey to reach that end goal. But… Talk more about this two-part valuation. What are some of those "key factors" you alluded to?
ALISON: There are certain things a buyer is going to give you credit for more or less, so if you're trying to optimize your situation you're going to want sure you get those things covered. (To name a few…)
- Do you have more recurring revenue or one-time design-build revenue?
- Is your revenue trending up, and if not what drove the plateaus or falls?
- Are you in a market that's rural or dying, or is it building and growing?
- Is your overhead reasonably proportioned to your business?
- How high are your year-to-year contract retentions?
- Do you have a good safety record or a history of accidents and near-misses?
- Some buyers have a big interest in your environmental risk and profile
- Do you have a healthy cash flow and balance reports?
- Is there a strong customer base, where accounts will stay without you?
- Will they need an immediate investment after purchase, like fleet renewal?
One of the biggest key factors is how your margins fit within industry standards. I see a lot of income statements, and there just are not that many people who have it right. Because QuickBooks doesn't really guide you well in that, if you don't have another system (like BOSS LM) guiding you you're not going to know where your margins truly are. If on the other hand someone has gone through the process of evaluating their bad margin work and replacing it with good margin work, the difference is tremendous.
The biggest factor, surprising to many people, is employees. If you're selling to somebody who's going to buy your company as an investment, they want to know if they can run the company without you. If you don't have a good quality management team in-place, especially a 2nd-in-command, it's easy to knock one of these companies completely off their feet in a year. I've seen a lot of entrepreneurs who have reached a certain level of maturity in themselves and in their business who now need to hire and establish a more professional management team; if you're feeling this, it's a great plateau to pause and to bring in a consultant and apply technology to help you scale.
BOSS LM: For those of us who are not just looking at an update or a valuation but are beginning to sense that the right time for an acquisition sale is on the horizon, how do we get ready?
ALISON: Well, first, again, it's a very emotional business, so ask yourself, "Do I really want to sell?" Plenty of people think they want to and then get an offer and get cold feet. Instead, beforehand, discuss it with your family members and close circle. (There are also literally consultants who just work with people to prepare emotionally for the sale of your business.) Think about where you are in your lifecycle and talk about what you're going to do with yourself after you sell your business and move on. It's important to acknowledge these things as significant, because once you step away, it's very much like a grieving process, like losing an important part of your life.
Then, find a broker for the sale, Yes, you need to have an attorney, a tax advisor, and obviously an accountant involved; but, just like in a real estate sale, you want someone who knows all the in's and out's and can run the process for you - who can say now's the time to call this person or that person, know how to interpret different moves, and explain what to expect at each stage.
BOSS LM: In the business management software side of the industry BOSS sees how many vendors have learned to say roughly the same set of buzzwords in their marketing to capture leads, but then when client-partners get into the nuts-and-bolts they find out the vendors don't live up to what is truly needed. I would guess in the broker side of things you see the same, so… What should owners being looking for in our selection of a “qualified broker” to help with selling their business?
ALISON: Look for someone who has a reputation for being honest and fair and whose values line up with your own; this is a very personal journey. Also, if you're working in a state with a broker that requires a real estate license of the broker, make sure that the broker is qualified to work with you in the state. In all cases, know what your enterprise value is to know what your options are…
Smaller companies may want to look for a direct sale to someone who wants to buy your business from a lifestyle perspective - where they either merge your company with theirs or "take over your seat" within the same company. A local broker might be able to help, but you'll want to ask what they know about the landscape and snow industry!
Most industry sales are of companies with revenues between $3M and $20M, and this is where a mergers & acquisitions consultant or broker (such as myself) can help. It's possible to find someone who is a "consultant" that used to be an operator but doesn't really understand what they're getting into with a sale, so check their understanding and track record.
If you are a company over $20M in revenue, particularly $30M+, your options are much broader. A landscape or snow business sale really is a sale of a security. If a transaction is done within certain guidelines, typical for a small business sale, it can usually be handled without a securities license. Companies at the larger end of the market may want to deal with a regional investment banking firm that has all of the securities licenses and connections to various sources of capital. Larger companies will want to make sure they have their financing needs optimized with different types of debt and equity instruments that are available to them (those top 200 or so landscaping companies) that won’t be used by smaller companies. You'll pay a big price for them, but they're absolutely worth it; at this size, you want the poker players from the high-end tables on your side.
BOSS LM: Closing shot: A "30,000-Foot View" at the timeline on closing a typical business sale?
ALISON: The process will vary depending on the size of the company and the potential buyers. We’ve seen a small company in a “hot” area go from initial preparation of marketing materials after engagement (2 months or longer) to closing within a year. If there is not a most likely buyer, your advisor will work to locate a buyer for you. Confidentiality is maintained by having potential buyers sign a non-disclosure agreement before receiving further information about you. From there, the process is a funnel, where potential buyers fall off with each successive step; sometimes there is one specific buyer who is willing to pay a premium price and it's a perfect match, but usually you're looking for 2-3 possible buyers to each submit a competing offer involving a price, assumptions, and a preferred close-by date. We pick the best buyer candidate, proceed through a few months of due diligence - agreeing to not talk to anyone else during that time - and if no one drops out for a hidden or unforeseen reason (which happens) then we get into the phase with data sharing, lawyers, and accountants, leading up to closing and signing a sale. It's a very labor intensive process/project and can get "stuck" in several stages of the process, so hiring an advisor who will help you focus on the end result (successful sale and transition!) is, we believe, truly worth it.