Cash and carry

Cash and carry

Supplement - Mergers and Acquisitions Guide

We shed some light on the inner workings of private equity investment. It’s not just for the big guys anymore.

August 13, 2012
Chuck Bowen
Industry News

As banks are still reining in their credit for small businesses, many landscapers are left out in the cold when it comes to finding a source for investment capital. An area that should appeal to contractors is private equity. PE investment, no longer the provenance of the largest companies in the industry, has become a growing source of cash for firms looking to take advantage of their market conditions and expand. To help contractors learn more about how this segment works – and what they could expect – Lawn & Landscape caught up with three firms that are (or were) invested in the green industry. Read on to find out what they look for in an investment, how the process works and what you stand to gain.

What attracted you to this industry? To date, our focus has been primarily on lawn care. Unlike a maintenance business where service is scheduled every 7 to 14 days, lawn care applications are made every 30 to 40 days. The extended amount of time between scheduled customer applications allows lawn care businesses to be more efficient with respect to its fixed assets and people. Another favorable attribute of lawn care is that most of the revenue is recurring in nature. We see opportunity in market fragmentation.

Describe the process of investing in a landscape company. How does it work? We look closely at revenue trends, revenue type, revenue categories, gross margin, revenue per customer, sales and marketing expense per customer and EBITDA margin. Even if the numbers are “all there,” we won’t move forward on an opportunity unless we believe we’ll be able to work with the seller and/or management team going forward. Chemistry is just so important when you are talking about a partnership between a private equity firm and an owner/operator. A lot of the financial analysis can be done remotely, but you need face-to-face time with your prospective partner, discussing things like strategy, growth opportunities, past successes and failures, etc., to ultimately know whether it makes sense to move forward.

What does a typical investment look like?
What are the metrics you look for? We make control equity investments and prefer to purchase assets as opposed to stock. We look closely at all financial and operating metrics, but don’t have any hard-and-fast benchmarks in place. Sometimes it can be hard to compare one company to the next on metrics alone. Differences in programs and services offered to customers, geography, revenue type (residential versus commercial), etc. can all skew metrics. You have to look at the “whole picture.”

What can a landscaper do to court private equity?
Make sure you have good information, particularly financial information. So many smaller companies we see don’t have audited or reviewed financial statements. It’s hard to get many private equity buyers to spend time evaluating a business without high quality historical financials. If you know you might explore a sale of your business in the next few years, we’d recommend going out and getting a review (or at least a compilation) sooner rather than later. Even two years of historical financials will lend a level of credibility to your business that will positively impact any process.


What attracted you to this industry? We were attracted to it from the diversified maintenance aspect – the steady revenue every month. In 2009, many industries were falling even harder than those maintenance-related business. In 2011, we started to look a little more aggressively at making some tuck in acquisitions and purchased Cimmaron.

At Terracare, we do a lot of municipal work, and we’re seeing that trend continue – municipalities are under financial strain and having to do more with less.

Describe the process of investing in a landscape company. How does it work? It’s typical of any investment we’d make in any industry. We’re investing only majority control. We’ll get contacted by that source typically, and they’ll have a package prepared that describes the business. That will lead to a group of players, one of which is us. That leads to further discussion and further meetings, then a letter of intent by both parties. That process takes 90 to 120 days.

What does a typical investment look like? What are the metrics you look for? The key for your readers is how prepared they are. If you have audited finances and really good records, the process goes smoothly. If everything’s in a shoebox, it takes longer. The process is dictated by how well the company is prepared. The private equity groups can move as quickly as the owner wants to.

All the numbers matter, but most particularly for us is what the company does in operating profit. Also our proxy for cash flows, and that’s what matters to lenders and our ROI. Then, what’s the state of equipment, and what’s the level of investment required to keep that EBITDA going.

That’s what we call free cash flow, and that’s the basis for all our investment decisions.

What can a landscaper do to court private equity?
You can contact us directly, but I think there’s a lot of value added to the process to hire some intermediary to help you orchestrate that process. It’s a special process and they’re at it. And have your administrative house in order, and have prior year audits. That’s the biggest help.


What attracted you to this industry? Our interest was based on a few key factors. One is the strength of management. The depth and breadth of management’s experience is critical. If you look at the different concepts the Dwyer Group has, these are things the homeowner wants to get repaired. The yard is going to grow and need maintenance, as opposed to closet customization. When you have people over to your house, they notice the landscaping. People know when they come to your house if they can’t flush the toilet or the yard is overgrown. The franchise model in general is very scalable and helps entrepreneurs as well.

What does a typical investment look like? What are the metrics you look for – revenue, retention rate, customer base, etc.? We look at it in terms of profitability. In franchising world, we would start to look at concepts north of $1 million of profitability. You could have a million of profitability and not have much scale, with the dynamic of franchising, to reach $1 million in profitability you have a few hundred units. We also look at if the concept or brand has traveled from one market to another. Some entrepreneurs are very successful in their home market … but it’s another thing to move into another market and be successful.

Describe the process of investing in a landscape company. How does it work? Our parameters are growth rate, profitability, brand assessment, number of employees, a lot of different financial parameters, as well as a market assesment – looking at how competitive that market is. Is there a concept or proprietary edge a company has? One could argue the ValleyCrest brand has an edge because it’s recognized. People rely on the brand as a proxy for quality, so they would rely on that brand rather than try to assess the market for landscape services.

What can a landscaper do to court private equity?
Typically the top few things we’re going to look at is depth of management team, quality of systems – customer relationship management software, is it an organized, scalable business. Some of it will be brand, their receptivity to assistance, their size and if they’re in multiple markets. Riverside has a strong preference to franchise concepts as opposed to 100 percent company owned. Typically, we’re most known for control investments, and that’s more about what we’ve promised our investors.

I would stress that they should check many reference prior to partnering. The best investors are proud of their track record and body of work and their references. Entrepreneurs have every right and a duty to check just as many references – if not more – as us.