What landscaping companies need to know about mergers and acquisitions
April, 16th 2019
Mergers and acquisitions may sound like a practice that only occurs among mega-corporations buying other well-known brands, but it is something that landscape company owners should consider as a viable option when developing their exit strategies.
“As a landscape business, I think the most important thing to understand is that the business is tremendously valuable and to market it in the right ways from a merger and acquisition perspective,” says Dena Jalbert, CEO of Align Business Advisory Services, a merger and acquisition firm focused on the lower middle market.
Jalbert says many landscape companies that don’t have succession plans may believe the only option is to close the doors once the owner retires, but this doesn’t have to be the case. There has recently been an upsurge in mergers and acquisitions as more owners become aware of the true value of their businesses.
When landscaping companies find the right acquirer, they can create even more value for their business and it can be a win-win for both the buyer and seller.
“For example, if you’ve got a landscape business that’s particularly successful in one geography and when you merge it with a larger organization you get to take advantage of a big company infrastructure with things like advertising and sales and marketing,” Jalbert says. “(These are) things that for a landscape business when they’re on their own it’s too expensive to do because you’re a smaller business so you don’t get as much economy of scale, if you will.”
Difference between mergers and acquisitions Depending on what you are wanting to do after you sell you company will determine whether you want to conduct a merger or an acquisition.
A merger is when two companies come together, and an acquisition is one when one company buys another. These might sound essentially the same but Jalbert says there are nuances to both.
“In a merger traditionally, the owner or the leader would stay on after the close and run the business as a part of the larger organization,” she says. “In a full buyout acquisition traditionally, the owner doesn’t stay on, they’re ready to exit, maybe they’re ready to retire or they want to start an entirely new business.”
She says the characteristics of the transaction look very different from selling your company to merging it with another and staying on to continue to work within the business. Jalbert encourages companies to do due diligence whether they are the buyer or seller in a merger or acquisition situation.
“Landscape businesses are people businesses,” she says. “You have hundreds of employees that have many of whom have likely been with you for decades in some cases. These are longstanding relationship driven-businesses. From a seller perspective, you want to make sure you’re doing right by your people. Most of our clients that we work with in this space are really sensitive to that. They want to make sure that their people are in the right hands after they exit.”
Employment agreements are common and can be put in place to protect employees from being let go right after an acquisition. Jalbert encourages owners to communicate the situation well to employees so that they feel comfortable during the transition.
“People get anxious about change, but if they can feel that everything is okay, and the world isn’t going to change a whole lot and it’s actually a really good thing because now maybe they get better health benefits,” she says. “A bigger company has the ability to have better health care benefits or retirement benefits, things that for a smaller business are too cost prohibitive for them to have.”
If a landscaping company conducts the proper due diligence and finds a good buyer and the transition is communicated well, there is only a small amount attrition as most employees will see the acquisition as a positive thing with new opportunities.
“When managed well, most people are pretty happy and they’re excited and there’s a small amount of fallout just because of personal relationships and loyalties,” Jalbert says.
Vetting is even more crucial on the merger side because the owner needs to be clear on what their new role will be in the company. Jalbert says it’s important that if the seller is staying on to be part of the larger business that they are excited about their new role in the organization and that they like the people they’re going to be working with.
While some may just be thinking about getting the maximum sell price, regardless of whether they like the buyer, this can sometimes backfire, especially if they are using an earnout, which provides a certain amount cash at closing and the rest is paid out over time based on performance.
“So, if you’re not in sync with your new partner, it’s going to be hard to achieve that earnout because there’s going to be conflict,” Jalbert says. “I like the ‘Would you have a beer with them’ test. If you like them and feel good about that I think that’s a really important aspect because it’s such a people driven business.”
Build a good team When considering a merger or an acquisition, it is wise to gather a strong team to help your company through this process, just like you’d hire subcontractors to handle parts of a project that are not in your wheelhouse.
Some individuals landscape company owners should consider including on this team is a certified public accountant (CPA) and an attorney who understands mergers and acquisitions.
“There a lot of really great general business attorneys but they may not do M&A,” Jalbert says. “There are firms in every city of varying price points that have M&A experience. Having an attorney who has M&A experience is huge. If anything, that extra spend makes the deal close faster and they’re going to protect you from a liability perspective.”
Another individual to think about including is an M&A advisor. Jalbert says an advisor makes sure that all the players are in the right positions and manages everything, so the process is seamless. Advisors also help make sure their client is finding the best buyer for the right price.
“The best way is to look at the market, so an M&A advisor like myself, we have access to that information,” Jalbert says. “We work in the private market and have that information to be able to say a similar company of your size and structure in a similar geography sold recently to XYZ company for X dollars, so we use those benchmarks in order to have a market comparable just like you would in a publicly traded company you could look at other stocks and compare them and find a benchmark value.”
Without this sort of information, it can be easy to undervalue your business and it’s important to work with a firm that is familiar with the green industry, so they are well aware of what’s going on in your market.
When to sell As for when you should consider selling your landscaping company, Jalbert says landscapers should always wait to sell when the business is doing consistently well.
“A lot of times we’ll get calls where the owner is just tired,” she says. “Business hasn’t been going that well, and they’re just sort of over it and want to sell it, but you won’t get as much value for it because the business isn’t performing perhaps like it used to.”
Geography as well matters when it comes to timing the selling of your company if you are in an area that has to deal with seasonality more. Jalbert says that traditionally it is better to start the selling process in the off season as it allows the buyer to come in and participate during the growing season. On the other hand, starting during the busy season and closing the deal as the season slows down, the seller can reap the rewards from that final season.
“Timing is everything,” Jalbert says. “It’s never too soon to start thinking about it. The process takes a while. It’s not something that happens overnight. It’s not like selling your house where you just throw a sign in the front and it’s for sale. Because it’s a strategic process it takes some time so it’s never too soon to start.”
Pitfalls to avoid Once you do decide that you truly want to sell your company it’s critical to make sure all your financial records are up to date and completely reconciled. Make a point to collect from your customers, even the long-standing once that you have a little more leniency towards.
“It’s really important because in the landscape business margins are so good, and that’s what an acquirer is really interested in,” Jalbert says.
Another mistake to avoid is telling your employees about your plans to sell too early on as mergers and acquisitions can fall apart for a million different reasons and there’s no need to spark unnecessary drama in advance.
“You don’t want hearsay to start running through the building, and we see that sometimes where in an effort to be open and transparent with their people, it’s all well-intended but the side effect is the owner leaves the room and then people start talking,” Jalbert says.
She advises locking key employees into a non-disclosure agreement.
Jalbert also reiterates how important is for the seller to vet the buyer and be aware that it is their right to do so.
“Make sure that you feel comfortable about what’s happening if you’re going to continue on after the fact,” she says.
A major pitfall that a good team can help you avoid is not understanding the terms and conditions. Elements such as indemnification, liability and escrow are all factors that need to be discussed and included in the agreement.
“There’s a lot of those nuances that are complex and you need a team to help,” Jalbert says. “To navigate that on your own if you’ve never done it is really hard and don’t be afraid to ask questions. Make sure you understand every part and parcel of that agreement.”
Creating a succession plan If the concept of selling your company isn’t something you want to do, it’s important to have a succession plan in place so your landscape business can continue on even after you decide it’s time to retire.
“It’s making sure you have all the right players in all the right positions and identifying what those positions are,” Jalbert says. “You may not have them yet. You’re really breaking down where someone spends their time and how to allocate it out to others.”
Jalbert says most small businesses don’t think to have layers of succession because it seems excessive, but it can burn owners in the end when they are ready to pass on the reins but there is no one to pass it on to. She says it never hurts to start thinking about it early.
Succession plans can also help boost employee morale.
“When you do a succession plan and you show people there’s an opportunity for management maybe that might interest someone or there’s an additional earning opportunity,” Jalbert says. “The succession planning process lets people see that there’s opportunity, now and in the future, and that gives them comfort and it will boost your business.”
Landscaping company owners can find their future leaders in their business by looking for individuals who show an eagerness to contribute and want to be involved in things outside their area of work.