The trouble with exit planning is that it is at the same time an emotional transaction and a practical one. Business owners have to look at their companies with a critical eye, and after many years spent building them, it can be hard to separate the emotional investments they’ve made from practical investments that can be transferred to a new owner.
Tom Trench, manager of Landscape Systems & Designs and Colorado Living Spaces, has seen the transition planning issue from just about every side. He’s sold businesses as opportunities presented themselves and after working with professional valuation teams. He’s also bought into companies to become a partner.
Many of the transitions Trench has done have been to a partner who was already in the business. He started his first landscaping business with a friend right out of college in Long Island, New York. When he got an itch to move to Denver, he sold his stake to his partner with a verbal agreement for a one-time payment.
Later, after joining JBK Landscape, he earned a minority ownership in that company. When he decided to leave the industry altogether, he sold his stake again, with another verbal agreement.
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As the size of the enterprises he was working in got bigger, the ability to negotiate simple handshake deals became less realistic.
For example, after leaving the landscaping industry for several years, he decided to rejoin a former partner’s company. They agreed on a price that would let Trench buy in to 50% ownership of the company, and he became a partner. They grew the company to over $1 million, including a property that allowed them to rent office space.
“There was a lot of value to the blue sky, to the equipment,” he said. “It was a much more involved sale than any of the [other] ones we did, so I did bring in an outside professional.”
Grow with the end in mind
While Trench has for the most part navigated business transitions with instinct and heart, some owners want to take a more analytical approach.
Jeff Harkness is a certified financial planner at Three Point Group (3PG), a consulting firm that serves contracting and service businesses. The Alpharetta, Georgia-based firm works with about 100 landscape and lawn care companies at different points in the business lifecycle, he said.
Harkness encourages his clients to set goals for what they want at the end of their career and use them to drive their growth strategy.
“The succession plan and the end game help drive the strategy year to year,” Harkness said. “As you’re evaluating the type of business that you’re building,” owners should keep their end game in sight.
“It comes back to the concept of what you want to eventually do with your business long term,” he added.
After all, a business is only valuable if it makes money, notes Harkness. Landscape business owners who truly want to grow their firms should look beyond sales and revenue, he added. What it really comes down to is profit, and the business’s ability to generate it year after year.
“The bigger you are in sales and revenue, conceptually, the more marketable you could be, but it’s really about profit,” he explained, and whether “you’re driving a profitable business that has recurring income to it, where you don’t start January 1 at $0 and have to go resell your $1 million, $2 million, $3 million of services every year.”
While Trench and Harkness have a different approach to transition planning, they agree that building a pipeline of recurring business is important to demonstrate value to a potential buyer.
Smaller design-build companies or residential maintenance companies are sometimes harder to sell to a private equity or institutional buyer, Harkness said. If they don’t have a solid recurring customer base, they can be seen as less marketable because they don’t have regular cash flow.
That doesn’t mean it’s impossible, Harkness said, but he urges business owners to be realistic about what their companies are worth.
“We’ve sold a bunch of residential companies, and we’ve moved some companies that have an installation-design-build component to them,” he acknowledged. “It’s never just one magic bullet.”
Trench noted that in the landscape industry, a business’s “blue sky”—the intangible value of a good reputation—“is the biggest piece of the value in my mind.”
He continued, “A design company or a construction company doesn’t have a lot of value.” It’s not that owners of those companies aren’t working as hard for their clients, it’s just that they often lack the kind of recurring business that makes the company attractive to a potential buyer.
“A maintenance company is where there’s great value because you have long-term contracts that you’re selling, long-term relationships,” Trench noted.
Better late than never
Harkness recommends drafting an exit plan early to provide strategic direction as the business grows, but does that mean it’s too late for business owners who are just starting to think about exit planning to get the most value from their business?
No, he said, but owners shouldn’t think they can wait until they’re ready to retire and then start planning their exit. Depending on the size of the firm, it can take between a year and seven years to complete a transfer.
“Most people start looking at a five- to seven-year window; they can see some type of end game or succession coming five to seven years out and they want to begin to get their arms around things,” Harkness said.
He’s also heard from clients who want to get out of the business in under two years.
“There’s no magic in the time frame,” he said. What’s more important is that the owner is able to “look in the mirror and say, ‘I really don’t have [an exit plan]. That’s part of good business fundamentals, so I’m going to start educating myself on what the options would be regardless of the timeline.’”
Trench believes that business owners should always be thinking about selling. “There’s nothing more exciting about owning a business than selling a business,” he said.
Practice good accounting hygiene
“Nobody really wants to pay for accounting,” Harkness acknowledged, but cutting corners in this area can cause huge headaches or kill a deal.
“When you bring in outside bankers and private equity groups and bond companies and attorneys, … they dive really deep into your accounting,” he pointed out. “If your accounting practices are bad or you can’t stand behind the quality of the earnings that you’re reporting year over year, it just creates a mess.”
Documented compliance with labor and safety regulations is another factor that can be overlooked to owners’ dismay when transferring a business.
Harkness advises his clients that transition planning is “about valuation, it’s about net cash after taxes, debt and fees, [but] it’s also about the quality of your earnings and the quality of your operations.”
Some potential buyers may even walk away from a deal rather than try to sort through a business’s unorganized or inaccurate recordkeeping.
Harkness warns that sometimes, “the valuation and the accounting is the easy part.” Identifying a successor, especially when the owner would like to keep the business in the family, can be difficult and emotionally taxing.
“We’ve been involved in transition plans with families where … Mom and Dad have to pick one sibling over another,” he said, or where they’d like to split ownership between their children, but “one sibling is a rock star and the other sibling doesn’t have the same work ethic and goals.”
‘Peace of mind’
Successful transition plans don’t just generate big pay days for business owners. There are lots of examples in this industry of owners who have done just that, Harkness said, but “it’s not just about wealth; it’s also peace of mind that my people and my customers can continue on with something that I built as an owner. That’s exciting for us to be involved in.”
For Trench, many of his transactions were handshake deals. “I thought [they] were fairly done, and I thought I got out of them what I expected and what I deserve.”
Even in transactions where he was the buyer rather than the seller, “I just looked at what I thought I could make out of the company and what I thought was a fair value to those people. … There was no science or equations that were necessarily used,” he explained.