In a previous article, we covered what landscapers should know about mergers and acquisitions if they were thinking about selling their company.
Today we’ll look at what you should be aware of if you’re considering buying another landscaping company and the ins and outs of the process.
“A buyer and a seller will each have their own priorities when evaluating a potential transaction,” says Joe Finnerty, CPA and founder and managing principal of Colm Advisory, LLC, based in Philadelphia, Pennsylvania. “Some will be competing priorities, which is where the negotiations come into play and others will be similar priorities where the buyer and seller will both work together to try to facilitate a smooth transaction.”
Some of the most heavily negotiated factors, of course, will be purchase price, the transaction structure and contract terms. Finnerty says while sellers will try to maximize their after-tax proceeds and limit their post-transaction exposure to liabilities, buyers need to make sure they are getting a fair price for their investment and the contract protects them from exposures or liabilities that existed before the transaction.
“Sellers will also have an emotional connection to their business, including its employees, customers, and the overall legacy of the business,” Finnerty says. “Buyers will want to ensure that they can secure the labor force and maintain the customer-base post-transaction but may have plans to rationalize office-staff/administrative positions and consolidate the brands depending on their overall transaction plan.”
When to buy another company
One of the main questions when it comes to mergers and acquisitions is when is it a good idea to consider purchasing another landscaping business.
Often, the best time to acquire a company is if organic growth strategies have been exhausted and sales and marketing have reached their peak. Inorganic growth by adding on another company’s client base is an option in this situation.
Acquiring a company can also help your business expand geographically. Finnerty says it can be easier to buy a presence in a specific area rather than trying to establish one through organic sales and marketing.
Buying a business with an established workforce can also help with labor shortages, but it’s important to make sure the transition is handled well to minimize losing employees from the other company.
Finnerty encourages over-communicating and being upfront and honest with employees when implementing these changes, but to not try to change too much overnight, even if they are for the better.
He also encourages buyers to understand what drove employee turnover and what helped with employee retention in the past.
“Understanding these drivers and working on improving them post-transaction will help retain the employees,” Finnerty says.
Acquisitions can boost route densities, but you also might have to consider purchasing a business in a defensive maneuver to prevent competitors from buying the for-sale company themselves.
As for drawbacks of acquiring another landscaping company, Finnerty says the ultimate one is not getting the return on investment.
“In order to secure a good return on investment, it takes a solid game plan and excellent execution to ensure the integration goes well and you secure the workforce and customer base that are keys to maximizing your return,” he says.
Deciding between conducting a merger or acquisition
Mergers and acquisitions are often used interchangeably but there is a difference to the two. A merger is when two companies come together, and an acquisition is one when one company buys another.
“In a merger traditionally, the owner or the leader would stay on after the close and run the business as a part of the larger organization,” says Dena Jalbert, CEO of Align Business Advisory Services, a merger and acquisition firm focused on the lower middle market. “In a full buyout acquisition traditionally, the owner doesn’t stay on, they’re ready to exit, maybe they’re ready to retire or they want to start an entirely new business.”
Because mergers typically involve certain management teams staying on from the previous company, acquisitions are far more common. Typically, when a landscaping owner is selling the business, they are ready to exit the industry and buyer is looking to grow their own company.
“Mergers can be difficult as tough decisions need to be made around who will be in charge post-transaction,” Finnerty says. “Too many cooks in the kitchen can cause a cultural clash and ultimately impact the performance of the business. A successful merger requires excellent management and communication but if done properly, you can align best practices of the two companies to improve efficiency and increase profitability.”
The process before purchase
Whether you decide to go the merger or the acquisition route is both up to you and the seller, but having a solid team on your side can help ensure you get the best deal and are purchasing a solid company.
An M&A advisor can help find businesses for your company to purchase.
“Engaging an M&A advisor can help ensure the valuation is comparable to what is trending in the market,” Finnerty says. “The best M&A advisors will bring multiple buyers to the table which will help drive demand for the business and increase the price.”
Financial and legal advisors will be able to aid with the more technical aspects and your management team will be assisting in the integration of the two companies. Finnerty says the most important team member is the seller as working with them is critical to the success of the transaction.
Here are some of the elements to investigate before purchasing include but don’t limit yourself to simply what is listed. Consider the financial performance of the company, its management team and company culture. Study the customer contracts and how long they are retained as well as the revenue mix of recurring maintenance vs. project revenue.
See what the business offers in terms of employee benefits and how this lines up with your own company. Check out the condition of equipment to see if they are in good working order. You may have to invest more than you bargained for to get them up to your standards.
Finnerty says it’s important to not bite off more than you can chew and take the process one step at a time. Common mistakes buyers can make include trying to implement too many changes at once, poorly communicating with employees and/or customers and causing culture clashes.
“It really varies based on the circumstances,” he says. “Toxic cultures are hard to change, while good cultures may be open to change and improvement for the better.”