Wednesday, October 22, 2014

Ron Edmonds

The Principium Group

Supplement

Questions to ask yourself

Mergers and Acquisitions Guide

Keep these queries in mind when you consider your M&A options.

March 7, 2014

Once again, there is a high level of interest in mergers & acquisitions (M&A) within the lawn and landscape industry.

There are a variety of factors causing that high level of interest. There have been some high profile transactions announced, including the acquisition of Brickman by KKR and the acquisition of a controlling interest in John Deere Landscapes by Clayton, Dubilier & Rice (CD&R). In addition, CD&R has been reconfiguring its investment in ServiceMaster by spinning off TruGreen as a separate company, all in anticipation of some sort of “liquidity event.”

These events have focused investors on the green industry, which seems poised to receive more investment capital in anticipation of growing opportunities as the economy strengthens and construction rebounds.

While these transactions involve some of the largest companies in the industry and are not at all representative of what smaller business owners can expect, the increased interest in the industry is likely to have a very positive effect on M&A in the industry overall. The ripple effect will likely include some large companies more aggressively looking for add-on acquisitions and other private equity investments in smaller companies in the industry, while some regional companies use acquisitions to build their footprints.

One thing is clear, M&A activity is cyclical and hard to predict. These cycles reflect external factors such as the economy and interest rates, the health of the industry and reactions to past M&A activity. Even today, while landscape services companies are becoming popular for acquisitions, the market for lawn care companies is weaker with TruGreen on the sidelines.

Right now, we have some additional factors coming into play that business owners would be well-advised to consider. Because the level of M&A activity in the industry has been relatively limited for the past few years, there are likely to be many business owners who would like to be able to transition their businesses who have not yet done so.

In addition, the aging of the baby boomer generation is expected to increase the number of potential sellers significantly over the next few years. Other business owners may consider exiting their businesses over such political issues as Obamacare, immigration reform and an increase in the minimum wage.

Since M&A activity is cyclical and we cannot predict the future, business owners must consider their future plans and take steps to position themselves and their businesses for the best possible outcome.

If a sale is ultimately in your plans, it is wise to be able to make a move when an opportunity arises. Here are some questions you may want to ask yourself as you consider your options.
 

Are you ready to sell your business?

This is a much more complicated question than it sounds. It takes some soul searching and, often, reflection, analysis and planning to answer it.

I like to break this down further into two sub-questions, addressing two different facets of readiness: mental readiness and financial readiness. We will address them individually.
 

Are you mentally ready to sell?

Almost everyone who contacts us about the possible sale of their business tells us they are ready for that step.

Business owners who are not mentally ready to sell their businesses may encounter a number of roadblocks along the way. Here are some questions you may ask yourself to help determine if you are mentally ready to sell your business.

  • Can you imagine your business (the one that you started with one truck and grew to a significant size) being run by someone else?
  • Do you believe that your business cannot thrive without your involvement in day-to-day operations?
  • Does your entire life revolve around your business?
  • Have you cultivated outside interests?
  • Do you know what you want to do next?


Although you may intellectually know it is the right time or a good time to consider selling your business, if you are not mentally ready to pursue a sale, the chances for a good result are diminished.

As you set your goals this year, consider these questions and what steps you can take to increase your mental readiness to consider a sale.
 

Are you financially ready to sell?

This question requires some homework and, possibly, a session with a financial planner. The basic process works like this:

  • Determine your plans for the future.
  • Determine what it will cost to execute your plans.
  • Determine the financial resources you will have available from existing assets and future income (retirement income, future earned income or other sources).
  • Estimate the market value of your business, and what it could be sold for under current market conditions. You will probably need some professional help with this, since this estimate of value is critical to the evaluation of your financial readiness. It is not safe to rely on simplistic rules of thumb or rumors of other transactions which may not be valid in your situation.
  • Compare your existing financial resources together with the estimated market value to your estimate of what it will cost to execute your plans.
     

If the result is positive, you may be financially ready to pursue a sale. I say may be because there are still many variables and the analysis you have completed is based on estimates, which may or may not be accurate.

What if the analysis suggests you may not be financially ready to pursue a sale?

Your choices include reducing the costs associated with your future plans, taking steps to increase the market value of your business or delaying or abandoning your future plans.
 

Is your business ready to be sold?

Here are some questions to ask yourself regarding your business that will give you some insight into whether your company is ready to be sold for a good price.

  • Does your business have a history of growth and profitability and quality records and systems that support it?
  • Does your business have significant growth potential through scaling the existing business, adding new service or product lines or expanding the company’s geographical territory?
  • Is your business dependent on one or a small number of customers, employees or suppliers for its continued success?
  • Does your business have positive cash flow and not require significant investment of working capital to finance operations?
  • Does your business have a significant component of recurring revenue?
  • Does your business have any significant competitive advantages that keep other businesses from competing against it successfully?
  • Does your business have a large number of satisfied, repeat customers?
  • Can your business operate without you as the owner being involved in both daily and major decisions?
     

The answers to these questions will, in large part, determine whether a business can be sold and at what price or multiple.

In reviewing these questions, it may be wise to bring in an outsider, perhaps one of your existing advisors, to help make sure you are making an objective assessment. Every business should set goals based on these questions as a part of their planning process, whether or not a sale is potentially in the works.

Of course, the good news is that addressing these same issues will make your business a stronger, more profitable business, regardless of your personal plans.

Some businesses will always be easier to sell than others, especially if a strategic buyer is active in your industry sector. Strategic buyers pursue acquisitions based on the synergies they believe may exist between their existing business and an acquisition.

The other type of buyer is a financial buyer. Financial buyers usually look at a potential acquisition’s growth, profitability and prospects on a stand-alone basis.

As we have all learned, acquisition opportunities are not always out there. Many factors beyond the facts of your particular business will affect the availability of an acquisition opportunity and what value your business may bring.

Asking yourself these questions and taking action where it is possible will help put you in the best possible position to take advantage of opportunities as they do arise and make an exit opportunity on your own timetable more feasible.



The author is president of the M&A firm The Principium Group.

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