Part of my job involves speaking gigs around the country, usually getting up in front of a few dozen landscapers at a regional or state meeting.
I give them my take on the state of the industry and what trends I see coming down the pike that are going to have the most impact on them in the coming year.
It gives me a chance to get out and talk with contractors, association folks and suppliers that I might not otherwise get to see.
Earlier this winter, I was at a conference in Columbus, where I’d coordinated some education sessions for the Ohio Turfgrass Foundation.
One of the speakers I asked to come up was Larry Smith. He runs Greentech in Troy, near Cincinnati. He shared a few to-do items that made for great advice for owners just starting out and who have been in the business for a while.
My favorite thing he said during his short presentation was this: “Start succession planning today. If you started your business yesterday, start succession planning today. If you started your business 10 years ago, start succession planning today.”
With the sale of Brickman last year to KKR for $1.6 billion, and its subsequent purchase of Metheny Commercial Lawn Maintenance, one of the largest contractors in Texas, a lot of owners are thinking that it might be time to cash in.
But many of them aren’t ready – financially or emotionally – for that to happen.
You could do almost anything with your company. You could sell it to a national company, or you could sell it to a regional player. You could liquidate and just close the doors. You could transfer it to your son or daughter or employees.
Whatever you decide to do with it when you’ve finished your run, you have to decide what it is. Because the decisions you make today and this spring and next year to grow your company will be predicated on what you want to do with it when you’re ready to sell it.
Maybe your kids aren’t interested in taking over the family business. Maybe you don’t want to sell to the guys in the two-tone trucks from Maryland. That’s fine.
But, whatever you want to do when you’re ready to retire or step back, you have to start thinking about it now and do what you need now to build your company accordingly.
Our 2014 Mergers and Acquisitions Guide starts on page 76 and is designed to help you get ready, to ask yourself those big questions to see what you want and how to get there. The time to start thinking about the future is today.
When we launched Grow the Market last February, we sought to conduct the first major post-recession study of homeowners’ attitudes about their landscaping and lawn care. We wanted to find out why Mr. and Mrs. Jones hired you, and why they fired you. How much do they spend on your services, and what they were planning to spend in the next few years?
It was a great report, and we ran a year’s worth of stories based on the data. I was excited to share it with every reader I talked to. But I was in Atlanta last winter, doing just that – sharing my excitement and geeking out about this data – and the contractor I was talking to looked at the notes, then at me and said, without missing a beat: “This is good. But what about property managers? I don’t do residential service.”
|How we did it
In mid-January, the editorial team at Lawn & Landscape teamed up with the fine folks at BOMA International – the nation’s leading property manager association – to distribute a web-based survey to their members. We also asked some key commercial landscape contractors to pass along the same link to their customers. Ultimately, we received 248 responses from property managers, building owners and facilities managers in 43 states across the country. The data in our report this month come from these people – all of whom, regardless of their specific title, are responsible for the hiring and firing of the landscapers at their properties.
I left a bit deflated, but with a plan to replicate the same ideas in a different market. And so Grow the Market II was born, in which we sought to answer the same questions about commercial property managers. Here are some of the key points we learned:
- Far and away, having good communication and high levels of good customer service ranked far ahead of pricing or services performed. Those are much more difficult to do, sure, but not impossible.
- Most of our survey respondents – 60 percent – spend more than $20,000 a year on their entire landscape, and almost half of them say that budget has increased since 2011.
- Just 11 percent of respondents say their budgets have decreased in the last three years, and most of them say that drop has been less than 10 percent. About a third of them say they’ve slimmed their landscape budget by between 10 and 19 percent.
- Seventy-eight percent of respondents to our survey say that a well-maintained landscape at their building helps increase occupancy rates.
- Three-quarters of property managers agree that a well-maintained landscape is good for the environment.
- Two-thirds of survey respondents say that a well-maintained landscape helps save water.
- And, in a nod to how contractors stack up to other professions, only 7 percent of respondents say that they spend more time working through problems with their landscaper than with other service contractors.
Now, residential service still is the bread and butter of the average landscaper, producing two-thirds of sales, according to our 2013 State of the Industry Report. Commercial work makes up just 22 percent of the average top line. For smaller companies, those numbers are thrown into higher relief: Companies earning less than $200,000 a year earn, on average, 17 percent of their revenue from commercial accounts. For companies earning more than $200,000 a year, commercial business only accounts for 28 percent of their top line.
To me, that shows commercial landscaping as an untapped market for most of you reading this column right now. The following pages contain a treasure trove of data and analysis that will help you either enter the world of commercial landscaping, or intelligently expand your current commercial division. Our report does exactly what it says on the tin: It helps you grow your market. So read on and take notes. It’s time to move on up.
To read our 2013 Residential report go to www.lawnandlandscape.com
During the past 25 years, I’ve probably helped more than 100 companies merge with, acquire or divest a division or company. Most of these transactions have gone reasonably well. I’ve also had the opportunity to witness from afar similar transactions that did not go so well. Upon analysis of these failed transactions, it wasn’t difficult to see whey they didn’t have legs and why they did not last over the long haul.
A highly profitable maintenance company (net profit margin more than 20 percent for many years) with annual revenues exceeding $7 million, calculated a value for his business of about $2.45 million using the gross profit margin evaluation model. I recommended that he and his CPA use the EBIDTA method. Using it, the value calculated to be roughly $5 million, double the GPM amount. In the final analysis, he used the EBIDTA model and sold his business for more than $5 million.
The almost bad.
A number of years ago, a $1 million commercial lawn maintenance contractor called me. He was interested in possibly selling his business. His net profit margin after all bills and a reasonable salary to him were paid was 10 percent. I gave him a ballpark value of around $0.75 per revenue dollar – $750,000. This figure included his inventory at fair market value and equipment, but no real estate. He then told me that his CPA, using various evaluation models, told him he should get around $2 million for his business. I told him that he had better get all of his money, the entire $2 million, up front. Otherwise, he’d never see it.
Think about this deal.
Even if a buyer pays $1 million as a down payment, and the seller finances the remaining $1 million for 10 years at 10 percent interest, the interest payment wipes out the entire net profit margin for ten years. There’s nothing left to pay off the principal. This deal simply will not work.
The really bad.
In the early 1990s, two large multi-million dollar landscape companies in the upper midwest merged – for all the wrong reasons. One company focused on installation while the other was primarily a maintenance business. The new entity endured for about five years and grew to more than $35 million in annual sales. Then it blew up.
I talked with some of the non-owner survivors who went on to form new companies that ended up doing quite well. Their stories were amazing. For years, after the two companies merged, there were no centralized systems for accounting, estimating, job costing, sales, etc. Worse yet, a year after the merger, many of them did not even know to who they were to report to.
In the final analysis, motivation to merge the two entities was primarily driven due to financial mismanagement and cash flow needs – the two needed each other for all of the wrong reasons.
The down-right ugly.
In the late 1990s, public and private money was raised to fuel the creation of large landscape entities primarily focused on commercial lawn maintenance services. Soon a number of companies doing hundreds of millions of revenue dollars emerged.
Many of my clients sold their companies to these large consolidators. Almost none of the sellers lasted more than 2-3 years with their new bosses. Here are a few reasons why: 1. Layers of bureaucracy and outdated procedures killed any entrepreneurial zeal that the entrepreneurs might have. 2. Their recommendations to improve operations mostly were ignored. 3. Quality was ignored and corners cut in order to meet financial goals set by bureaucrats who were totally separated from daily operations.
Do your homework.
You may think that the big consolidators have really got it figured out. Don’t be fooled.
Due to the lack of a true entrepreneurial environment at the branch level, most of the large consolidators only produce a “C” or “C+” quality of service.
Perhaps the best lessons to learn from these stories is first, you have to do your homework on the front end and second, you have to maintain the zeal of a true entrepreneur on the back end.
The author runs J.R. Huston Consulting and is a columnist for Lawn & Landscape. He can be reached at firstname.lastname@example.org.
In the November Lawn & Landscape Benchmarking Your Business issue, we discussed the importance of monitoring your backlog at the beginning of the year. However, to make this exercise meaningful, there first has to be an annual sales budget to track against and compare to.
Once the budget is in place, you then have a meaningful target to shoot for.
I like to establish a preliminary budget for my clients in July or August for the upcoming year. This budget should be finalized in late December or early January.
I have developed a bid board in MS Excel that my clients use to track key data to help them monitor their business throughout the year in relation to their budget. You can use the bid board concept to track almost any type of work.
Benchmarks. Here are some benchmarks for some of the categories listed in the box to the right that you might find useful.
Commercial installation companies/divisions* should start monitoring their backlog in August or September for the upcoming year. They should strive to have sold one 1⁄3 to 1⁄2 of their annual budget by January 1. Bids won usually range from 10 percent to 20 percent of work bid. Sales per hour usually run $85 per man-hour (+/- $10) depending on the material intensity of the work bid.
The GPM** in a normal economy for such work ranges from 20 percent to 30 percent. You should bid negotiated work high – in the mid to high 20 percent range – and negotiate down. Low-bid-take-all work should be bid in the low 20 percent range.
Residential installation companies/divisions*** should start monitoring their backlog in November or December for the upcoming year. They should strive to have sold as much work as possible by January 1. However, due to the nature of residential work, most residential installers have a minimal backlog on the first of the year. Bids won usually range from 30 percent to 60 percent of work bid. Often it is much higher. Sales per hour usually run $75 per man-hour (+/- $10) depending on the material intensity of the work bid.
The GPM in a normal economy for such work ranges from 30 percent to 40 percent. Smaller jobs under $10,000 to $20,000 should be priced with a GPM near 40 percent, while larger jobs – ones more than $20,000 – should be priced a little more aggressively near 35 percent.
Maintenance companies/divisions should start monitoring their backlog in the fall for the upcoming year. Non-seasonal companies / divisions should strive to be 80 percent to 90 percent sold by January 1.
Seasonal companies/divisions should strive to be at this level by mid-February or March. Bids won usually range from 10 percent to 20 percent of work bid for commercial work and 30 percent to 60 percent for residential work. Like bids won, sales per hour varies dramatically depending upon the geographical location of the company.
Non-seasonal companies usually see sales per hour near $25, while seasonal companies usually see it at $35 to $55. The GPM for both commercial and residential maintenance work is normally at 35 percent.
Another benchmark to track is enhancement work. This is the work generated from maintenance contracts. Many companies target billing 25 percent above the amount of the contract for such work. You should monitor this figure for your company and set revenue goals for it.
The staff there has been using the bid board concept for about the same amount of time. Mark Pendergast, president of SFL, is the one who got me to focus on keeping things simple and measurable.
I remember him telling me, “I focus on backlog and production. Are the crews working efficiently and do we have plenty of work in the pipeline?” From that evolved my three-fold mantra: Price it right. Produce it right. And produce enough of it.
John Sheldon, chief estimator at SFL, at any time of year can tell you exactly what the backlog is, what bids are pending and what he needs to sell to meet budget. He also knows where his GPM needs to be to win work. John is so good at bidding that I jokingly say that he can sneeze and produce a $250,000 bid.
* Commercial work is done for a general contractor, builder, homeowners’ association
** GPM is calculated by adding general and administrative (G&A) cost in a bid to the net profit margin (NPM). GPM does not include field equipment and trucks (usually 10 – 14 percent).
*** Residential work is done for a homeowner.
Email Jim at the address below for a free copy of his 2014 MS Excel bid board.
JIM HUSTON runs J.R. Huston Consulting, a green industry consulting firm. See www.jrhuston.biz; mail email@example.com.
I was graduating from college and my dad had some significant surgery and he needed some help. I was just kind of watching over the couple guys here working for him and making sure things kept going along.
I got thrown into a baptism by fire after college. “Here’s what we do and here’s the work that we have to do so make sure it gets done. I’m going to the hospital.”
Gosh, never really looked back much since then. It turned out to be a pretty good deal. I am glad that I did it.
My dad created this formula that worked really well for the rats in Spokane. We would make the formulation of the different kinds of grains and other things. At that point warfarin was the active ingredient that we were using. Then we’d take a tablespoonful and put it in these little bags. As an 8- or 9-year-old kid in the basement of our house, I could do about 1,000 of those an hour.
My major job to start out was just running a lawn care route for the most part. I got guys organized and doing the routing at that time. Then in about ’79 or ’78 I took over really the whole operation. I would have been 25, 26.
We decided that we needed to start up another branch in a different city because certainly all the people who were going to buy lawn care in Spokane had bought lawn care. All 300 of them.
We opened up our first branch in the town of Kennewick. It was a real boom town. That’s how I ended up there – that first expansion didn’t go so well. So my wife and I moved down there in 1979 and have been there since.
Our average size lawn is somewhere around 5,500 to 6,000 square feet and we have fences around every lawn almost.
The lawn care and pest control are growing and strong businesses. The commercial grounds maintenance we struggle at making money at. We just need to have more sales because we have too much overhead to support it.
Sales, sales, sales. That’s really what we’re working on. All the systems are in place to make money – every customer we have falls right to the bottom line at this point.
We’re going to be dependent on people feeling comfortable in how much money they’re making and that they’re going to have incomes and that they’re going to be able to pay for services. That’s going to be critical and I’m a little nervous in that there are a lot of people predicting a recession for early next summer, next spring.
Something that my dad did to me early on was – I want to say did to me, he made me do. He said, “Here, I want you to forecast sales over a period of time. I want you to make a plan of what you would like to do over a period of time and where you might like to have businesses at.”
I think it was kind of busywork for the winter and I still hang on to the graph and the charts that I created.
It doesn’t look anything like what I thought because I looked at the map and looked at towns where I thought maybe we could operate in. I think it was an exercise in learning how to plan.
My dad always said, “Get it right the first time you don’t have to do it again, period.” That’s the best advice I ever received.
Whether it’s doing work the first time or it’s buying something or doing a project or hiring people, if you do it with quality in mind, then you don’t have to do it again. Buy the right piece of equipment if you need it. Don’t try to go to the cheap model. You’ve got to buy right but buy the correct stuff or hire the correct person to do the job.
If people aren’t working out you’ve got to get rid of them fast and that’s probably the biggest mistake we make. My wife’s looking at me shaking her finger at me as I say that. It’s one of the biggest mistakes that we make is hanging on too long. We’re getting better at it.