Have you thought of selling your landscaping business now or in the future? If so, have you thought about what it takes to prepare for the sale? It can be a long and complicated process without proper planning or advisors.
Landscaping businesses have been popular sellers the last few years, and who the buyers are might surprise you. Our firm, Sun Acquisitions, recently sold a commercial landscaping business in the Chicago area. This business had been operating for over 50 years, and it had long-standing relationships with clients. During our confidential marketing of this business, we generated multiple offers. However, the ultimate buyer with the highest offer was someone completely outside of the industry.
This buyer might come as a surprise. We received other offers from existing landscape contractors, but none of those came close to the offer we received from someone outside of the industry.
The owner of the company we represented was just as surprised. He could not imagine that the ultimate buyer was not from the industry – a possibility that we had mentioned in our very first planning session with him.
The sale of a business doesn’t just happen; it requires planning and a good group of advisors to ensure that your exit yields you the highest return. All landscape owners need to consider the following factors as they prepare for their exit.
Financial Readiness
As your business is most likely your main source of income, you should determine whether you are financially ready to sell your business. Remember, the sale of your business will provide you with the funds necessary for whatever lifestyle you have planned, unless you have other means of support. Ask yourself what kind of lifestyle you want after the sale and determine whether the proceeds from the sale of the business will support that lifestyle and other expenses. If not, you should take steps to build the value of the business, adjust your plans or prepare an alternative source of income.
Emotional Readiness
An oft overlooked factor in deciding to sell your business is whether you are emotionally prepared for the sale of your business. Your business has been an important part of your life and you have invested a great deal of effort to make the business what it is today. Are you ready to part with it? More often than not, the sale of your business will result in a lifestyle change. It is imperative that you ask yourself why you want to sell your business. Are you ready to switch gears in life and pursue other interests or are you burned out? Answering such questions will reveal your motivation. To successfully sell your business, you need to be a motivated seller and you should have an after-sale plan in place so that you know what to expect and your transition is as smooth as possible.
Financial Records
In order to have your business valued, you should present your business broker with the following:
- The last three years of tax returns
- The last three years of profit and loss statements
- The balance sheets and other miscellaneous statements based on your type of business
These statements will be used to determine the proper value of your business and in securing a bank pre-qualification. In preparing your financial statements for the sale of your business, you should minimize add-backs. Add-backs are personal expenses that you have run through your business. Because add-backs can at times be unclear as to whether they are a business or personal expense, it is best to eliminate add-backs as much as possible. If that’s not possible, it is best to sufficiently differentiate personal expenses (you should consult with your accountant prior to taking any actions, as there will most likely be tax consequences). When a personal expense cannot be added back, the cash flow of the business will be smaller and as a result, the value of your business will take a hit.
Customer Diversity
You should know where the business derives its revenues from. Is there a customer concentration where one customer contributes 10 percent, 20 percent or more of the revenues? If so and if you are still a few years out from the sale, you should work to diversify your customer base and do your best to eliminate customer concentration. Any customer concentration issues will negatively impact the value of your business and will make potential buyers hesitant in considering your business. Buyers will appreciate if you detail the breakdown of revenues and your relationships with the customers.
Employees
Your key employees are part of the value of your business. As such, you need to make sure that the key employees are well trained and suited for the work that they do. In the case of the Chicago-based landscaping business we sold, there were some key personnel who were well compensated and trained to handle the operations of the business. With the large number of seasonal or transient workers in the landscaping business, it is critical to have a core group of key employees who can manage the business.
Equipment
Having the right amount of equipment in good working condition is imperative. In landscaping businesses, we tend to see an abundance of equipment, some of which is inoperable. In the case of our client, there was a fair amount of older equipment that needed to be replaced and this was taken into account when arriving at an opinion of value. Our best advice is to liquidate any excess or unnecessary equipment; maintain the remainder of the equipment in good working condition; and refrain from making any large equipment purchases as you near the sale of the business, as it will be hard to recoup those investments. With that said, you need the proper amount of equipment to service the clientele and continue to generate the sales of the business.
Contracts
Most residential landscape firms do not have contracts and this is rarely an issue. However, if you are a commercial landscaper, there is a good chance you have contracts with clients, vendors or suppliers. It is important to make certain those are in order and, most importantly, transferable to a new owner when you sell the business. Our client had some contracts and the good news was that those contracts were all transferable, which made for an easy transition.
The Owner and the Business
One of the most important factors when it comes to maximizing the value of your business is that the business operates separately from the owner. As the owner, you should not be the face of the business. Your clients should have a relationship with the business and not just with you. Ensuring that you are not the business safeguards against the risk that the clients will leave when there is new ownership. Once you decide it is time to plan the sale, there are several other things to keep in mind.
Confidentiality
Confidentiality is crucial to retaining value in the business as you prepare for sale. As excited as you may be about your decision to sell, you should avoid sharing your plans unless it is absolutely necessary. Do not tell your employees, customers, vendors or bankers about your plans to sell. In fact, we recommend not telling anyone other than your significant other, partner and your advisor team. Should employees find out of a pending sale, there is a high likelihood that their focus on the job will be altered and, worse yet, they may leave. Losing employees or clients during this process will adversely affect the value, and it could take a long time to regain those losses.
Advisors/Deal Team
Building a team of advisors can make all the difference. A seasoned team of advisors should include an attorney, accountant, exit planner, wealth manager and business broker. Having the right team in place will ensure the proper exit plan is drafted. Your team will implement the exit strategy, which should result in maximizing the value.
Running the Business
If you are worn out and ready to exit the business as soon as possible, it is tempting to slow down. But this is one of the worst things you could do. Now, more than ever, you should charge ahead with full steam and run the business as best as you can. In doing this, you not only build value but ensure that the value does not take a hit when it comes time for sale. Banks and buyers want to see that the business is continuing to perform on par with previous years.
Conclusion
It’s easy to delay the planning of such a life event, but as I hear repeatedly at industry conferences: “owners should run their businesses everyday with the exit in mind.” With this mentality, you will always be thinking about maximizing the value be prepared if you have to sell unexpectedly.
Domenic Rinaldi is owner and managing direction of Sun Acquisitions, a Chicago-based M&A firm. For more information on Sun Acquisitions, click here.
