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.
More recently, one of Bailey’s contractor clients paid around three times the monthly revenue for just the accounts, negotiating the equipment separately.
Bailey says there are three primary methods of acquisition. (See the online version of this article for a sidebar discussing the pros and cons of each.)
“The thing to remember is that there is no standard deal when it comes to buying a company,” Bailey emphasizes. “The one constant is that buyers should seek some level of guidance, at least from their accountant or a consultant. Obtain a copy of all the company’s service contracts as well as the seller’s personal tax returns. The documents will help shed light on the company’s profitability and stability.”
Like Bailey, consultant Kevin Kehoe advises prospective buyers to never pay one lump sum for a company unless they get a great deal. He also says buyers should be on the lookout for hidden liabilities.
WHAT THE SELLER SHOULD DO
Kehoe’s definition of a successful sale is one that makes both parties happy. Hence, he offers these “due diligence” suggestions to the seller, which, in turn, will please the buyer and facilitate a sale:
Financials. Have at least two solid years of profit by profit center.
Aging schedules. Clean up anything in excess of 60 days (accounts payable and accounts receivable).
Revenue. Document net revenue per hour performance for every job.
Job costs. Have solid job cost data for contracts.
Leases. Make certain that the lease is not expiring and that it is transferable.
Non-solicit agreements. These must be enforced for all key employees, up to date and signed.
Employee files. These should be audited for extraneous information and for immigration exposure. Resolve and/or bring up to date for present and past employees.
Contracts. Make certain contracts are up to date and transferable. Clean up contact information by site, address, contact, billing, and other related contacts in the renewal, decision-making process.
Legal. Disclose and resolve any recent and current legal actions. This includes any actions with customers, employees, vendors or government agencies.
Vendors. Document vendor contact list, along with any pricing and term arrangements favorable to you and by extension to the buyer.
Shop. Make sure your facility is clean and well-organized, and that repair and maintenance records are up to date on vehicles and larger pieces of equipment.
“You may want to retain the previous owner for a year or so, just to ease the transition, keep customer relationships in place, and retain other key employees,” Heaviland explains.
Also, ask yourself if you can generate the expected revenue gains from buying another company simply by hiring a good salesperson in your existing organization. If so, don’t buy the company—grow organically instead. “It will cost you a heck of a lot less, and you get exactly the type of clients and properties you want,” Heaviland points out.
Finally, another alternative to buying is merging. You exchange ownership interests after placing a value on both companies. If there are good synergies involved, your remaining ownership percentage can be worth more than your original valuation. “The due diligence investigation is the same as if you’re buying the company, though” Bailey points out. PRO
Methods of Acquisition
There are three primary ways to place a value on a landscape company. Here are the pros and cons of each.
There are three primary ways to place a value on a landscape company, according to Green industry consultant Rod Bailey, CCLP:
- Accounts only
- Assets (including vehicles and equipment)
- Buy the company lock, stock and barrel
• You don't assume any liabilities of the seller's business.
• Fairly simple transaction since you are just buying a customer list.
• Seller's customers are not obligated to stay with you unless there are signed contracts being purchased.
• There may be contracts involved that you don't want. Be selective if you can.
• Seller's business may continue.
Things to keep in mind
Check all contracts for "non-transferability" clauses.
Have a written agreement spelling out payment terms.
Make sure you check out pricing and gross margin yields on all service agreements. Is pricing compatible?
Make sure you get a non-compete agreement on accounts purchased.
Obtain an accounts receivable record. Are customers current? Do they pay their bills?
ASSETS ONLY (including accounts list)
• You do not assume any liabilities of the seller's business.
• May include equipment, inventory and supplies at bargain prices (if you need them).
• You may be able to re-capitalize the equipment to realize future depreciation deductions.
• May include equipment, inventory, supplies you don't want or need. Be selective.
• In some states, you may be required to pay sales or use taxes on the hard assets.
• Involve your tax accountant and attorney.
Things to keep in mind
Make sure seller pays off equipment loans, or only buy the "net equity" if you assume the loans.
Make sure you comply with the Bulk Sales Act if inventories and supplies are included.
BUY ENTIRE COMPANY (stock purchase)
• The simplest transaction. Only applies if seller is incorporated.
• You acquire all the assets as well as the liabilities, including any hidden or undisclosed liabilities.
• A great deal of "due diligence" investigation is required to fully understand what is involved.
• Work with a broker, consultant or attorney experienced with this type of purchase.
Things to keep in mind
Get a seller's Indemnity Agreement on undisclosed liabilities.
Make sure seller is current on payables, including payroll taxes, sales taxes, etc.
"Generally speaking, most sellers prefer to sell on a stock purchase since they will get rid of liabilities," Rod Bailey points out. "Most buyers prefer an assets and/or accounts purchase since liabilities stay with the seller.