The level of company mergers and acquisitions in the industry accelerated over the past few years. Some landscape company owners saw the writing on the wall and wanted out. Others simply saw an opportunity to go forward in a more competitive way by joining forces with another company.
Whatever the case, just about every company owner has got to wondering: How much is my company worth, and what can I do to make it worth even more? Here are some insights into those two questions.
Common methods of business valuation and what you can do about them
There are several ways to determine a company’s value. Some suggest calculating a multiple of gross profit, perhaps 1.2. Others suggest taking a percentage of total sales, perhaps 60% for maintenance and 30% for installation.
Probably the most common method is taking a multiple of EBITDA (earnings before interest, taxes, depreciation and amortization). EBITDA is supposed to pinpoint a company’s operational profitability, i.e. cash flow and ability to pay back debts. Some Green Industry consultants say a company value of four to six times EBITDA is routine.
There are problems with EBITDA, though. A big one is that it doesn’t consider equipment (depreciation). If you have a fleet of outdated equipment that will need to be replaced, your EBITDA might need to be adjusted down. Also, if you have high interest payments because you’d borrowed a bunch of money to acquire other companies in order to grow, your EBITDA may also be higher than your company is really worth to a prospective buyer.
There are many variables that come into play, many of which have to get ironed out at the negotiating table. The best thing for the average company owner to do is focus on the actions he can take to not only improve his company’s EBITDA, but also improve his company as a whole. For example:
- Improve gross margin by becoming more operationally efficient.
- Improve gross margin by buying smarter and managing inventories better.
- Diligently manage receivables and try to keep to within 30 days.
- Carefully plan investments so each aids in cash flow by helping bring in revenue and/or improve margins.
Get sales growing
About the best thing you can do to add value to your company is grow sales. It’s true that a prospective buyer will want to evaluate your company’s potential. But past and current performance are of equal importance. Thus, you should always be striving to grow sales year over year so you can show a positive trend line.
You can implement any of the following sales-growth strategies, which happen to take advantage of your existing capabilities:
- Simply sell more of existing products/services to existing markets through a more effective sales effort. To accomplish this you need a well thought-out marketing strategy that’s in alignment with a well-executed—and managed—sales process.
- Launch new products/services for existing markets.
- Penetrate adjacent markets with existing products/services.
Be cautious about launching new products/services in new markets, though. This approach can be very costly and risky. It can be done, but requires very careful business planning and flawless execution.
Diversify your revenue streams
Companies are generally viewed as more valuable if they do not have too many eggs in one basket. The more spread out your revenue is, the more capable you are of reacting to different changes in the business environment.
For example, it’s considered risky when three or four clients account for a third or more of your sales. If you lose one of those accounts or even experience a substantial pullback, you could be in trouble.
It could also be viewed as risky when you are too reliant on one market segment. For example, if you’re 80% residential, what happens if outside forces cause a dramatic reduction in consumer spending on landscaping and lawn care services?
It could also be viewed as risky if you’re too reliant on a given service. Landscape installation contractors learned that lesson all too well a few years ago. Even maintenance contractors learned this first-hand during last summer’s drought. When the grass stops growing, you stop mowing—so you better have something else to offer, whether it’s tree trimming or aerating or whatever you can think of.
Recurring revenue streams also help to make a company more valuable. For a landscape contractor, we’re largely talking about maintenance services: mowing, tree trimming, snow removal, lawn care, irrigation system checks/upgrades, etc. Since 2008 many landscape contractors have rebalanced their service mix so that least half of revenue is coming from maintenance-related services.
Multi-year service contracts and multi-phase construction projects that extend over a longer period of time can also be useful. Again, this helps take some of the risk out of a business because revenue is coming in continually over a period of time.
There are a lot of things that add value to your company that are more difficult to measure than EBITDA, sales growth, profit margin or number of customers. Still, they are very important and require the diligent attention of the company owner.
One is your management team. Skilled, trained leaders in your company make your company more valuable—period.
Your company’s brand strength is also important. It means a lot if you’ve been around a while and have a good reputation.
Your company becomes more valuable when it possesses unique competitive advantages which the customer greatly values. This might be the ability to provide multiple services. It could also be something as simple as they way you communicate with customers and respond to questions or issues. The point is that you don’t want to merely look and act just like all of your competitors. That’s not valuable, that’s a commodity.