Mergers & Acquisitions 101: The Basics

To launch Lawn & Landscape’s new Mergers & Acquisitions column, I’m writing about the basics. In future months, I and other writers will dive deeply into some of the topics introduced below. Please note that I’m writing this with a target audience of owners with $20 million or less in revenue; some things change for companies larger than that.

1. Why is M&A booming in our industry? Why now?

The short answer is private equity (PE) has decided they like landscaping. A more nuanced answer is “software has allowed management of field services at scale such that the power of being a large company is as great as the power of being a smaller company owned by a local entrepreneur.” Failed rollups of a generation ago turned off PE on our industry for a long time. The success of companies generating financial returns for PE investors has made the industry attractive to PE again.

2. What drives value for my company when it comes time to sell?

Sustainable profits driven by recurring maintenance work are still king when it comes to valuation. Five years ago, I would have said “commercial” maintenance, but there are now a number of PE-backed companies rolling up single family residential maintenance as well. New construction work is still less valuable than maintenance. There are many other factors, such as quality of middle management, fleet quality and legality of labor, that I will discuss in future columns.

3. Who will buy my company?

Almost certainly a PE-backed landscape company (if you have over $20 million in revenue, possibly a PE firm directly). There’s just not a lot of reason to sell to an individual investor (who probably doesn’t have the money and may not know how to efficiently execute a purchase) or your employees (who almost definitely don’t have the money or know how to buy a company) in the current environment.

4. What types of advisors will I need to protect me?

The most important advisor is a competent M&A lawyer. This is someone who does corporate mergers all the time. This is not your golf buddy who does divorce work or defends DUIs.

A good M&A lawyer knows the market and what is reasonable and not reasonable for buyers to expect. It is also helpful to have a tax accountant who can help you understand your own financials and optimize to make sure most of your proceeds of a sale are taxed at the lower long term capital gains rate.

Finally, there are “brokers” or “investment bankers.” The smaller the deal is, the harder it is for them to create enough value to justify their fees. If you have over $20 million in revenue, an investment banker probably makes sense. Start with a good M&A lawyer and get their thoughts on whether you need a broker.

5. What should I watch out for?

Here are some high points to keep an eye on.

• “Loose lips sink ships” — in general the only people who need to know you’re thinking about selling the business are your family and your advisors. Rumors stress out your employees and customers.
• Demand a very detailed offer (also called a “Letter of Intent” or “LOI”) before you sign up — you deserve to know what you are signing up for at the beginning of a deal, not at the end. I see some buyers who quote a high purchase price with a vague LOI and then hammer down the price during due diligence.
• Keep due diligence periods reasonable — no experienced and capable buyer should need more than 90 days from signing of an LOI to closing. If a buyer doesn’t close within 90 days of signing an LOI, you as a seller should have the right to walk away and find another buyer.
• Tell the truth at the beginning of the process —exaggerating profitability or hiding problems like an illegal workforce before a buyer makes an offer just gives a buyer a reason to reduce price or walk away at the last minute. If your buyer is competent, they will know everything about your business between the initial offer and closing of a transaction, so you might as well be transparent up front.
• Find advisors and buyers who have done lots of deals and reference-check them — you would never want a doctor who has never done surgery to operate on your heart, and you don’t want your buyer or M&A lawyer or broker to be learning about the industry or buying a company on the job. Landscape Workshop has acquired over 20 companies in the last three years, and we are much better buyers than we were when we were doing our first deals 10 years ago.
• Talk to others who have previously sold their company — they have been where you are and will have valuable perspectives.
• Seller financing and unpriced rollover equity are bad things — while earnouts of 10-20% of purchase price are almost universal in small and medium landscape and lawn care deals, if a buyer is asking you to take a “seller note” or rollover equity without transparency into how the rollover equity will be valued, those are red flags.
• Make sure your values and priorities are aligned with the buyer you select — selecting the right buyer will ultimately determine the satisfaction you receive from selling your business. Receiving your full earnout, growth opportunities for your employees and the satisfaction of your long-term clients are all impacted and determined by the buyer you choose. Choose wisely based on what is important to you.
• On a similar note, understand what you care about personally and what you are solving for before you start talking to potential buyers. If you want to retire and walk away, you probably just care about getting the most money with the highest certainty to close. If you want to work in the business for years to come, understand your role and make sure you like the people you are selling to.

Thanks for reading this column. I hope it has been helpful. For more content on M&A, please visit merger.landscapeworkshop.com or keep an eye out for future columns where we will do deep dives on the topics introduced above. 

J. T. Price is the CEO of Landscape Workshop, based in Birmingham, Alabama, since 2014. LW has grown from $18 million to over $150 million in revenue under his leadership and has executed over 30 add-on acquisitions. He can be reached at jtprice@landscapeworkshop.com.