Something of Value: Valuing Your Business

A general rule of thumb in the landscape industry is that the fair market value of a business ranges from three to six times earnings before interest, taxes, depreciation and amortization. That range may not seem like an enormous difference until you actually run the multiplication. In fact, there may be hundreds of thousands of dollars difference depending on where your business rates on the scale buyers use to determine value.

For example, a recent valuation I did for a client with annual revenue of about $1.5 million showed a price range of $1.2 to $2.4 million. In this client’s case, I determined the business would be valued at the higher end of the range. Based on my years of brokering and consulting, I’m convinced that a well-run business being sold by a well-informed owner could be priced twice as high as a business that doesn’t meet industry criteria – or is being sold by an owner who hasn’t done his or her homework.

Though most of us would never consider selling our car or home without some form of independent appraisal or analysis to determine market value, many landscape contractors sell their businesses by merely estimating a price. They may determine a sale price based on what they’ve heard about other sales or by figuring out how much they need to retire comfortably. Without valuing your business based on important industry and buyer criteria, you could lose thousands of dollars or spend months – even years – negotiating in vain.

DEFINING A COMPANY’S WORTH. So, how can a landscape contractor rate his or her business to determine if its value is at the high or low end of that range?

Some criteria depends on an individual buyer’s preferences or current operating procedures. For instance, having a compatible mix of services will generally boost your business’s value in the buyer’s mind. And a large percentage of commercial accounts may appeal to one buyer but not another.

Still, most of the difference in value is based on a series of industry standards and buyer criteria. A buyer’s offer is made after a thorough review that determines how your business stacks up. If you’re getting ready to sell your business, knowing how a potential buyer will rate it makes you a much better negotiator. In some cases, landscape business owners may decide they’re better off keeping the business, boosting their performance and then selling for top dollar a couple of years down the road.

If your plans to sell are longterm, taking the time to figure out how your business rates now may significantly increase its value when you decide to sell. In the meantime, your bottom line profitability may increase dramatically, depending on how well you’re already running your business.

Over the last 20 years, I’ve developed a list of criteria that buyers consistently review to determine value. From that list, I’ve created a system that rates individual criterion and then determines a score that indicates how your landscape business rates in the green industry.

• General financial statement profitability, review and customer base growth. One key point often overlooked is that buyers are looking at growth across all lines of business and in total number of customers. Even if revenue is increasing, buyers are leery if one line of business shows decline or your customer base is static or decreasing.
• Account receivables. Well-run businesses have relatively low levels of receivables over 90 days, so take a careful look at how well you are actually being paid for the services you provide. Also, note that a significant number of pre-paid accounts can lead to an adjustment in the purchase price.
• Payroll costs. An astute buyer will compare your costs to industry averages by both service type and individual employee. Labor is the single most expensive part of doing business in the landscape industry. If your costs are out of line compared to industry standards, a buyer will want to know why. At this time, buyers will also be determining what they are willing to live with after the deal closes.
• Revenue by route. Again, a careful buyer will look closely at how much revenue each route produces each month. Production per employee is a key factor in the business’s value. Buyers will carefully review your pricing of accounts and ask about contracts with pricing guarantees.
• Employee turnover. Employees are one of your business’s most valuable assets, and employee turnover will be closely scrutinized. In fact, some buyers request payroll records from recent pay periods and several years prior to determine how many employees have been retained. Shrewd buyers also will expect that all employees have enforceable non-compete contracts.
• Customer cancellation rates. If employees are your most valuable assets, customers run a close second. How many customers do you retain annually? How many unserviced customers do you have? How many customers are on your books but haven’t had service in months? The growth and stability of your customer base is an important aspect of value.
• Company vehicle condition. Another key expense for a potential buyer is maintaining — or replacing — a fleet of worn-out vehicles? Note, however, that payments or lease contracts will normally come out of your side of a final sales figure. Most buyers assume your business without liabilities.
• Litigation, claims or other liabilities. Potential buyers will ask for a detailed list of litigation – both pending and threatened – when they are trying to determine the value of your business. Even verbal threats – “I’ll take you to court” – should be noted before the actual sale. Full litigation disclosure will certainly be required in the purchase agreement.
• Ongoing costs. A business with minimal ongoing costs, like Yellow Pages or other contracted advertising, computers and office equipment maintenance, consulting, etc., is clearly a better buy for most new owners who have contracts with their own providers.
• Real estate. Many buyers expect to merge your business into their operations and facilities. They normally do not want to purchase real estate, and leases would be short term. If real estate is purchased or leased, buying the business is a separate transaction.
• Add-backs. Costs that will be eliminated after the sale, such as owner’s compensation, travel, benefits or vehicles can be “added back” to the bottom line and may make a significant difference in a final offer. The more, the better as long as you can clearly document and track them.

The value of your business –and which end of the range of multiples your business will command in today’s market – goes way beyond simple earnings and revenue statements. A well-run business deserves a higher market value, and buyers have consistently shown they are willing to pay a premium for high-quality businesses. Whether you are ready to sell now or plan to wait until later, knowing how a potential buyer will look at your business will help improve its value so you get the best price possible.

The author is a consultant specializing in financial analysis, strategic planning and mergers and acquisitions. She also is the author of Level the Field, a workbook written specifically for service industry professionals selling their businesses.