How buyouts can bring expansion, and what it takes to do the due diligence and seal a solid deal.
Acquisitions are a way for businesses to expand rapidly, gain marketshare, grow a service menu and bolster the client base. But, the deal has to be a win for both parties involved, and an acquiring business needs a platform for this growth that includes capital, infrastructure and personnel.
This month, Lawn & Landscape spoke with three companies about their acquisition deals to learn what brought them to the table and how they worked through the transition.
In a tough labor market, searching for reliable, trained workers seems like mission impossible. A smart acquisition can be a talent boon for business. That’s what Dan Beekhuizen found when he bought out a local landscape and snow removal firm and melded it with his business, Keesen Landscape Management in Englewood, Colo.
“There is only so much organic growth you can get, and coming up with qualified workers is extremely hard,” Beekhuizen says, noting that 30 solid, hard-working employees joined his team as part of the acquisition. And, he grew his business by about 20 percent.
This local firm was a fit for Beekhuizen for a number of reasons. That’s why when the “seller” approached Beekhuizen about a year ago, looking for an exit plan from his $2-million firm, Beekhuizen thought his $12.5-million outfit would benefit financially and operationally.
“They were working on jobs right next door to the ones we were doing,” Beekhuizen says, adding that the owner’s family-focused culture also aligned with Keesen Landscape Management’s core values. “We are proud of our culture, and we work hard to maintain that,” Beekhuizen says. “The (seller) thought our company was a good cultural fit, and knowing us in the Denver market for quite a while, he felt it would be beneficial for us to come together.” Of course, sharing the same ideals doesn’t mean unity without a few hiccups.
“His employees needed to fit with our structure and needed to feel comfortable working with our crews, and for a little while there was a bit of us vs. them, but after a short time we were able to bring them in and make them feel like a part of the family,” Beekhuizen says.
Keesen Landscape Management staged meetings prior to the acquisition in which Beekhuizen and managers explained the health care benefits and advantages that the deal would bring to the other firm’s employees. But, there were some down sides, and Beekhuizen told employees they would have to make some changes.
One of those included the purchase of uniforms. And, employees would have to learn Keesen’s technology, which includes tablet use for timekeeping and more. “There was a learning curve,” Beekhuizen says.
Taking the initiative to share information with the other company’s employees at their work site, prior to the acquisition, paved a path for positive communication from there on out. “We had meetings and let them ask questions,” Beekhuizen says.
Employees were happy that they transitioned into Keesen with the same wage. “We went back to their anniversary dates and gave them the benefits they needed like sick and vacation days,” Beekhuizen says.
Because the seller had been in business for 10 years, there were many longtime workers who had been with the company for the duration. Beekhuizen wanted this acquisition to feel like an evolution into their next stage of employment. He says: “The acquisition was not like starting for a new company – it felt like a continuation of working for the company they knew.”
The deal flowed smoothly because of Beekhuizen’s due diligence – both parties involved attorneys and accountants – and his understanding of exactly what he was getting with the acquisition, from employees to equipment. “The devil’s in the details,” he says, noting that the deal took about a year, with the companies merged by April 2014.
“Acquisitions are a good way to grow, and they can be enjoyable – they can also be frustrating,” Beekhuizen says. “But this one has worked out extremely well and I’m happy that we did it.”
No more handshakes
Pacific Lawn Sprinklers in College Point, N.Y., built its market share by acquiring other companies. “That’s how we developed in different regions,” says John Dellafiora, president. “We would do an acquisition of a smaller company that was existing in an area where we wanted to build a presence, and then we would rebrand it.”
In other deals, Pacific Lawn Sprinklers (PLS) would fulfill an older owner’s exit plan by acquiring the company’s accounts and bringing the owner on as part of the PLS team.
Acquisitions began about a decade after PSL was founded. “The first ones went very well – you pretty much paid for the accounts and they were not heavy on legal contracts,” Dellafiora says. But, as the company grew and times changed, the “handshake” deals pretty much disappeared. “We got more astute on the contracts for buying out other companies,” he says.
All told, PLS has completed eight acquisitions, Dellafiora says. The key to completing them successfully, and growing your business rather than ending up cash-poor, is to focus on capitalization and manpower. “Capitalization is important,” he says, adding that money should be set aside “just in case” to avoid negative cash flow if forecasted revenues do not arrive from the new business gained. “You don’t want to drive down your company or have a cash flow issue because there were unforeseen issues.”
And, if you’re going to expand, you need the personnel to handle the sudden growth – office staff and account managers, for example. “You better make sure you have the people on board, otherwise you are not helping your customers and future customers,” Dellafiora says.
Also, during negotiations, be sure that the payment terms for the buyout are structure to protect your company. “Companies want their money right away, or within a year or two – absolutely not,” Dellafiora says. “Even if you have to pay interest, make it palatable and that interest is insurance.” He prefers five-year buyout terms.
Another negotiation point: the down payment. Sellers handing over their customer lists will want a large payment for handing over the “keys to the kingdom,” Dellafiora says. But, that can be risky depending on the value of the customers. “Nowadays in the industry, I’ve seen the value of customers go down because they aren’t as company-loyal as they used to be,” he says.
This is why vigilant due diligence – serious vetting – is a must before sealing any acquisition deal. As for PLS, the firm will not be making acquisitions in the near future. Instead, Dellafiora and team are focused on franchising the brand and expanding organically.
“We are up to more than 25 units now, and we are focused on marketing and developing franchises,” Delliafiora says. “Franchisees develop roots in their communities and that has been really positive for our brand, and that’s how we are looking to grow the company.”
Round out the service menu
When an opportunity cropped up that spelled expansion in a new arena and growth for the core business, Rudy Larsen was ready to listen. An industry colleague in his region with 50 years experience approached him about potentially buying his commercial landscape installation business. The offer appealed to Larsen because it filled a gap in services at Lawn Butler, based in Bountiful, Utah.
“We’ve been primarily a commercial maintenance business, and I’ve known this owner through the industry and locally, and he was looking for an exit strategy,” says Larsen, president.
Larsen had never executed a deal like this before. But his fast-growing business could increase 15 to 20 percent by merging with the company, and the timing was right, he says. Plus, the seller’s business had a shining reputation in the community, which was important to Larsen. “I knew what I was getting into so I saw the value,” he says of taking the seller’s offer seriously.
Of course, just knowing an owner from the business community isn’t enough to structure a deal. Larsen engaged in a thorough vetting process, including valuations and involving attorneys and accountants from both sides.
They also talked about each other’s goals for the acquisition. The seller wanted to gradually phase out of the business, and this would be possible if his commercial installation firm became a division under Lawn Butler, managed by Larsen and his team. “He wants to retire in the next five or six years, so we are working toward putting him in a position where he doesn’t have to work if he doesn’t want to,” Larsen says. The seller remains in the business today, overseeing the commercial installation department during the transition into Lawn Butler’s infrastructure.
Larsen’s goal was to break into the landscape installation business and to acquire quality talent, loyal clients and continue a positive reputation in the region. “It takes time and discipline,” Larsen says of working through an acquisition. Specifically, Lawn Butler began working on the deal in March of 2014 and closed it at the end of year.
The seaming together of the two organizations is still taking place. For now, the acquired business is set up as a branch of Lawn Butler. “They are going to be rolling into our branch,” Larsen says, noting the acquisition includes two office personnel and 18 other employees. “We have sold installation jobs and we continue to operate the business as usual, and we are working to build a synergy and bring us all together.”
A key to doing this successfully will be to stay open-minded, Larsen says. “We are pretty creative here and willing to adapt and learn, and adjust to different situations,” he says.
Knowing the owner for some time in the industry has made the deal go smoothly, Larsen says. “We both knew what we were getting into.”
Brian Corbett, founder of CCG Advisors, a green industry mergers and acquisitions firm, presents some items to consider before and during acquisitions.
- Duties. Assign people to specific tasks. Most employees have a full time job and might skimp somehow if they are tasked with the entire deal. Consider hiring experts to handle legal, financial and operational diligence.
- Equipment. You can buy what you need so the consideration here is to make sure you are not inheriting outdated equipment that will require significant repairs and maintenance to get it up to snuff.
- Negotiations. Be willing to walk away. Transactions can get emotional for some owners so let cooler heads prevail.
- People. Make sure all human resources paperwork is up to snuff and consider asking for a non-compete or at least non-solicit as you hire their employees.
- Price. Get to a ballpark figure quickly. Most business owners think their baby is worth more than it is. You can waste time and create ill-will if you don’t get a number up front.
- Profit. Are the contracts priced to where you can make money considering your overhead structure? Many smaller companies appear profitable but once your overhead is applied, contracts might not deliver the intended result.
- Property. Even if you are not buying the real estate, if you will operate from their location you must have environmental diligence done, at least a phase one and more if something shows up in that process.
- Quality of work. How does the quality of work compare to yours? If it’s low quality, look at annual retention figures to see how much turnover there may be.
- Relationships. In a small business, the owner likely has his hands on everything and everyone. If you cash them out and they leave, so might the key people and clients.