Landscape Management

Start building an exit strategy now

This plan will help you secure a fair price for all the hours and hard work you’ve spent building your landscape or lawn care company.

By Erin Hollis, AVA, CM&AA, MBA

Business owners often spend 10 hours per day, six days a week getting their businesses to the point where they can provide a measure of financial security and comfort for their futures. One day, control of their businesses will be transferred to either a known or unrelated third- party. It is clear the departure of an owner can be devastating for a closely held company and for the owner’s surviving relatives. A well-structured exit strategy that anticipates timely and untimely triggering events can compensate for that loss.

What’s an exit strategy?

For the closely held business owner, an exit strategy is a pre-mapped plan narrating how an owner will leave the company. It is a tactical road map that proactively prepares an owner for life’s events, including the eight “Ds:” death, disability, dissolution (of business), dissention (disagreement between co-owners), decline of market, debt overload (bankruptcy), divorce, departure (retirement, transfer or third-party sale). Hence, the exit strategy maps the business’ and the owner’s futures.

Of the eight "Ds", only one is within an owner’s control – departure. This is true whether the business is owned by one or by several individuals.

Pre-planning for the exit versus reacting to it can mean the difference, for example, between bankruptcy and a lucrative retirement fund. Planning for foreseen and unforeseen life events allows an owner to manage and orchestrate the future no matter what happens. Different methods of ownership transfer exist, and many require years to implement. Some are more difficult to implement than others, and some allow owners to relinquish control over time versus immediately. Regardless of the transfer channel used, a business valuation is the first step to realizing exit- planning goals.

Your company’s worth

The share value of publicly traded companies is easily accessed by locating stock tables in the newspaper and multiplying the closing price by the number of shares owned. However, no convenient tables discern privately held companies’ share value. That value can only be accurately determined through a business valuation.

A valuation assesses the worth of a business from several perspectives. It examines the business on its own merit, how it compares with industry participants and how it rates in the market. A valuation considers all tangible and intangible assets.

Selling the business

For many closely held business owners, a substantial percentage of their own personal net worth is tied up in their business. Approximately 75% of business owners invest their own net worth in the business, and many never see the materialization of the full investment again. As one of the largest assets in the owner’s estate, the business should be valued regularly to gauge the return on investment (ROI) or to assess how much the value of the business has grown relative to the original purchase price.

For example, a business purchased eight years ago grossing approximately $1.5 million in annual sales now has sales of more than $3.5 million. Clearly operations are unlike they were eight years ago. An owner must assess the current return on the initial investment or, to put it more pointedly, how much the investment has grown since the original purchase, or since the inception of the business.

If owners desire to sell their businesses to a third-party and use the sale proceeds to fund retirement, regular valuations are vital in benchmarking the value toward the planned exit’s goal. In these cases, key questions must be addressed, such as:

• How much money will be needed to adequately fund retirement?
• After consideration of other retirement funding vehicles, how can a determination be made to calculate how much more will be needed for retirement if the business’ current value is unknown?

Owners who plan to sell their enterprise to an outside third-party must differentiate it from other market participants. Recognizing a company’s underlying intangible value can help sellers obtain a better deal price, including identifying strategic buyers. As is the case with many landscaping companies, the intangible value of the business is far more valuable than its tangible value.

For acquisition purposes, intangible value means the difference between an attractive, lucrative investment and a profit for the seller; and an asset purchase and a break-even, or loss, for the seller.

There are certain “intangible value drivers” that make a company a desirable investment; however, owners must also examine those that decrease value. For all closely held entities, key person dependence must be examined because dependence lowers a company’s value. A business is considered more "saleable" if variables that generate profit and success are transferable and not contingent upon the owner’s existence.

For a landscape services company, intangible value is included in:

• Bonding: The federal government and municipalities regularly engage private landscape firms and self-employed architects for projects, and, in some cases, the firm must be bonded to qualify for the job.
• Certification of personnel: A total of 46 states require landscape architects to be licensed or registered. National and state industry associations also offer certifications in various professions and skill sets. Having certified employees demonstrates a certain level of competency by a company, and boosts its potential value to a purchaser.
• Repeat clientele and diversity: Repeat clientele drives value, and a high volume of referred clientele signals efficient operations management and a core position within the community and industry at large. According to a 2005 industry report on buying trends, referrals accounted for 55% of consumer decision-making when choosing a landscape professional. A diverse revenue base also enhances intangible value, as witnessed by many major architectural and engineering firms that see the benefit in diversification and now offer services internally.
• Competition: The lawn and landscape services industry is highly competitive with thousands of look-alikes. Owners need to consider, "what differentiates my company from the competition?"
• Employee retention: Though most landscape architects remain in private firms, an increasing number are migrating to large-scale design firms that offer landscape-planning services. Additionally, more than 80% of all firms in the industry have fewer than four employees; therefore, employee retention is crucial for profitability and client satisfaction.

A business valuation can also quantify intangible value derived from established operational history, successful bidding history, cutting-edge knowledge or the latest applications in landscape/lawn care technology and established market share and reputation. Sometimes referred to as goodwill or "blue sky," these factors enhance value and attract buyers. Conversely, litigation, union disputes, workers’ compensation claims and bonding troubles deflate goodwill value.

Start planning now

When is the best time to plan the exit strategy? Before the doors open for business. Prior to investing in the business, an owner must consider what it is he or she ultimately wants from the business.

Nevertheless, if a plan doesn’t exist, it’s never too late to begin. Start with a business valuation assessment. Then use the valuation in conjunction with a strategic plan that dictates goals, for example, accelerate growth (or continue growth) or help execute a lucrative shareholder exit. Knowing the value of your business enables you to construct an effective, proactive plan and to implement strategies to assure a desired result.

A strategic exit plan is essential if the business owner ever hopes to receive an attractive price upon the sale of the business or a successful transfer to related parties. Together with qualified professionals, map the company’s worth, execute the plan, monitor the results achieved and continually modify the plan (as necessary) while charting the course to sale or transfer.

Erin Hollis is the director of valuation services for AAL, a related company of IPA and IBA. For further information, call (847) 495-6786 or visit www.ipa-iba.com.