Chances are, selling your company is the furthest thing from your mind. Even so, running your business like you’re preparing to sell it will not only make it an attractive buy (if and when that day comes), it’s also the only way to operate and help ensure your future and that of your employees. This advice comes from veteran landscape contractor Mike Rorie.
Rorie compares selling a landscaping business to selling a house. To get top dollar for it, the homeowner doesn’t want to have a lot of loose ends hanging around. That could be anything from having a roof that needs repair to peeling paint, appliances that don’t work right, and window frames that need replacing.
To complete the analogy, a potential business buyer will likely interview your key employees, check to make sure your margins are healthy, review your balance sheet, and inspect your facility and equipment. Depending on the type of sale, the buyer may even want to talk with a few customers.
A disgruntled employee who should have been fired months ago would be an obvious loose end. So, too, are margins that are well below industry averages, a balance sheet showing lots of red, and old equipment in disrepair. As Rorie points out, the “loose ends” will devalue a potential sale. The same loose ends will be a drag on a company’s annual performance—even years before a sale is contemplated.
First Things First
Run your business today like you’re going to sell it. “This will unburden you from having to tie up some last minute loose ends when you decide to sell,” says Rorie. “Running your business in the right way now will also increase its value later. Most business sales, especially those to a third-party investment group, are pretty cut and dried. They’re all about the money. The seller negotiates a business value with the buyer based on EBITDA (earnings before interest, taxes, depreciation and amortization), and then a multiple of that figure is applied. Depending on the market, the multiple can range anywhere from four to eight times the EBITDA.”
Revenue and earnings potential is the primary way to value a company, Rorie adds, but money isn’t the only measuring stick. Depending on the market and type of services a company provides, the customer, management team, systems and equipment all come into play — in that order.
“Running your business in the right way now will also increase its value later. Most business sales, especially those to a third-party investment group, are pretty cut and dried. They’re all about the money.” –Mike Rorie
Landscape maintenance companies with a book of recurring business are generally more attractive to buyers than companies that primarily provide one-off design/build services. Ongoing revenue is a plus, but so too is a brand that isn’t tied too closely to the owner and his or her design reputation. Remove the owner and so goes the brand.
Owners who’ve been in business several years understand the notion that it’s best to spread work around. In other words, don’t rely on two or three customers to provide the lion’s share of revenue. Rorie notes that customer vulnerability can rate high on the list of considerations for potential buyers. Having too many eggs in one basket is never a sound business strategy, and it can be a substantial obstacle to a sale.
Value can be defined in other ways. Having a strong management team is an asset for any company. Smart buyers will want to keep key employees on board to ensure a steady revenue stream. They may take their “temperatures” ahead of time to determine how committed they are to staying put, and even talk with them about a benefits package before a sale is completed.
Having systems in place to help optimize scheduling, routing, billing, and other standard operating and administrative procedures can be attractive to buyers unless they’re inclined to bring their own systems with them.
Having good equipment in good repair is always a plus, but Rorie emphasizes that buyers are purchasing much more than your vehicles and equipment. They’re buying a business, and equipment can be replaced more easily than your customers and management team.
All sales are not created equally. In some cases, the owner may be selling to a competitor or an investment company. In others, the employees could be the buyers, or maybe it’s a family member or members who want to buy the company. In all cases, having a healthy, profitably run company is good for both the seller and ultimately the buyer.
The word “profit”, though, often carries two different connotations: 1) before you’re thinking about selling, and 2) after you put your company on the market. In the first scenario, profit creates a tax burden. For scenario two, profits add to the company’s sale value.
Healthy companies don’t always show a great deal of profit, Rorie adds. Profit can be poured back into a company in any number of ways, anything from buying and maintaining good equipment, growing sales and employees, and offering new services, to providing company benefits, attending meetings, having a company car and so forth.
Most buyers can connect the dots and get beyond anemic bottom line numbers that don’t always tell the whole story. At other times, it’s up to the seller to “add back” expenses he or she has run through the company that otherwise would be labeled a profit.
“When selling your business to an investment group or another company, it’s pretty cut and dried: It’s about the money,” Rorie re-emphasizes. “Company dollar value also plays an important role when selling to employees, but in this case, it is incumbent on the owner to plan ahead and have key people in place to assume management roles.”
The same holds true when selling to family members. Having key employees in place is certainly important. Money and profit, however, may take a back seat to giving sons and daughters the opportunity to carry on the family business name.
Still, no matter when or to whom you plan to sell, running your business like it’s going on the market tomorrow will deliver dividends today.
Mike Rorie has been a participant in the green industry for over three decades. He founded GroundMasters in Cincinnati, Ohio, in 1979 and grew the company to a multi-city regional operation before selling to a national provider in 2006. In 2014, with the help of his daughter and former management team, Mike started a new commercial grounds maintenance company, GroundSystems. He is also the CEO of GIS Dynamics, maker of Go iLawn and Go iPave property measuring systems for contractors.