Smaller companies that have surrendered in the face of increased competition and overall difficult market conditions offer an opportunity for owners of stronger companies to increase market share and grow.
So how does one go about buying another company? What are some important issues to consider before signing on the dotted line?
DO YOUR PORTFOLIOS MATCH UP?
“One of the first things I consider is how well a company’s portfolio matches up to ours,” says Tom Heaviland, CLP, CLT, president of Heaviland Enterprises in Vista, CA. “We’re in the larger commercial market, so if the company’s strength is small HOAs or small commercial properties, the transaction probably wouldn’t be a good fit—unless we were looking to get into a new market segment.”
Heaviland Enterprises has purchased four smaller maintenance companies over the years. In three of the four purchases, they were only interested in the smaller companies’ accounts/contracts.
In all likelihood, a smaller company’s facility is leased, and the vehicles/equipment won’t match yours anyway. Still, a complete asset purchase could work, it just depends on how well the company matches up with yours.
WILL CUSTOMERS STAY WITH YOU?
As Heaviland relates, when you’re buying accounts, you’re actually buying goodwill. The seller doesn’t own those accounts, so there’s no guarantee they will stay with you once you’ve taken control.
“A good strategy is to meet with as many customers as possible prior to buying the company,” Heaviland emphasizes. “This way customers won’t be surprised by the change. Remember that with municipalities and other larger contracts, a change in ownership may require the customer to take the property out to bid.”
“My best advice is to have a proactive program in place to ensure a smooth transition,” says David Snodgrass, CLP, president of Dennis’ Seven Dees in Portland, OR. “Assign people immediately to build relationships with these new customers. One of the most powerful incentives for customers to stay with a landscape company is the relationship they have with the foreman and/or supervisor. So don’t assume the customer will act as if nothing happened. Have a game plan to ensure a smooth transition.”
Snodgrass, who purchased a company with a maintenance division five years ago, also notes that buying a small maintenance company could be a good strategy if that company and personnel line up with your corporate culture and business philosophy. But a lot of things have to line up for the move to be successful for you in the long run.
DO PRICING STRATEGIES LINE UP?
One thing that must line up is pricing strategy. “You have to know what kind of pricing you’re talking about before buying the company/accounts,” says Snodgrass. “It has to work for your company’s pricing structure. If the accounts aren’t profitable and you have to raise prices by 10-15%, you’ll likely lose those customers. Today, if you can get a cost of living increase, you’re doing well. Don’t expect much more than that.”
Heaviland agrees, adding that it makes sense to go out ahead of the sale and price a handful of the company’s accounts to make sure its pricing scheme fits yours. “Pricing is critical from both the maintenance and enhancement side,” Heaviland relates. “How much profit/cash flow the new accounts will generate determines how much a buyer can pay for a company, including being able to service any related debt. To see if the sale would be a good economic fit, we overlay a seller’s financials on top of ours to see what impact it will have.”
HOW MUCH SHOULD YOU PAY?
Green Industry consultant Rod Bailey, CCLP, purchased two companies during his previous life as a landscaper. Each time he paid one-third down, one-third at the end of the first year, and one-third after year two. The price was adjusted according to the number of accounts his company was able to retain.