<font color=red>From November 2003:</font> Consolidation Shake Out

This story appeared in the November 2003 issue of Lawn & Landscape.

The news reports came fast and furious five years ago announcing that yet another landscape contractor had sold his successful business to a national giant.

These contractors sold their companies for numerous reasons – both strategic and opportunistic. As five-year noncompete agreements begin to expire, principals of the mega deals share firsthand perspectives on why they made their decisions and the lessons they learned along the way.

BOOM TIMES. Five years ago, the economy was booming. Banks lined up to loan money to consolidators or, specifically, to rollups – a group of businesses that merge to form one national presence and then continue acquiring companies or "rolling up" the industry to create a market leader, explains David Hartzell, managing director, Business Services Investment Banking Group, CIBC World Markets, Baltimore.

Rollups were born in other fragmented service trades, like the heating/ventilation/air conditioning (HVAC) and motorcoach industries. But to investors the landscape industry offered even greater growth and higher profit margins. "At the time, a good commercial maintenance business was growing 12 to 20 percent a year, while an HVAC company was only growing 1 to 2 percent a year and a motorcoach company was only growing 2 to 3 percent a year," points out Ken Garcia, senior vice president, Anaerobics, Rochester, N.Y.

Consequently, Garcia and his team at Notre Capital Ventures Group, Houston, Texas, merged seven landscape companies to form Houston-based LandCare USA in 1997 with Garcia as senior vice president and chief development officer.

"Our goal was to try and build one large company to service national customers and get the economies of scale you gain as a national company, such as insurance savings and purchasing power," Garcia says.

As one of the seven founding members of LandCare USA, Roger Braswell, owner, Power House Equipment, Charlotte, N.C., and former owner of Charlotte, N.C.-based Southern Tree & Landscape Co., thought the idea was compelling. "I was intrigued and inspired by the concept," he says. "Being able to turn assets into a more liquid position, and have cash and stock in a public company was a motivation, as well as being able to provide my employees with better growth opportunities."

Others thought the rollup provided a greater chance for business growth and development. "We looked at it as a way to go to the next level," adds Hal Cranston, former owner, Four Seasons Landscape & Maintenance, Foster City, Calif., and another one of LandCare’s founding members. "We thought we’d work with other people’s money for a change and leverage this business."

Shortly after LandCare began, TruGreen-ChemLawn started its landscape maintenance division through acquisitions. With two consolidators, competition for potential sellers was red-hot, driving up business values and giving those who may have never thought about selling their businesses before a reason to think again.

"Rollups were sexy at the time – it was definitely a gold rush in 1998," says Dave Slott, president, TruGreen-ChemLawn, Memphis, Tenn.

Cranston calls the period a seller’s market. "Offers were at levels they won’t be at for a long time," he says.

"People never called to buy my company before and now I had several offers and each one was better than the last," adds Ed LaFlamme, owner, Grass Roots Consulting, Huntington, Conn., and former owner of LaFlamme Services, Bridgeport, Conn. "It felt like the right time to sell."

On three occasions, buyers approached Tom Fochtman, president, CoCal Landscape, Denver, Colo., to purchase his business and the price rose each time. "Landscape companies aren’t the easiest things to sell," he says. "If you created a brand and were in a bit of a leadership position in your market, then you were an acquisition candidate. This provided exit strategies for a lot of owners that weren’t available before. Some got out of the business quite attractively. For us, it wasn’t the right time to sell, so we didn’t."

As someone who’s familiar with how the acquisition process works, Burt Sperber, founder and chief executive officer, ValleyCrest Cos., Calabasas, Calif., says during this consolidation wave buyers overpaid for many of the companies they purchased. "I think a lot of hardworking owners got very lucky because they got paid a lot more than their companies were worth," he says. "Future owners can only dream that the same thing will happen to them one day."

The bidding wars escalated. "We’d offer $2 million, for instance," Garcia says. "Then, TruGreen would offer $2.2 million and we’d offer $2.5 million. It was ratcheting up the purchasing price for companies and after awhile, it just didn’t make sense."

Some consolidators admit that mounting competition resulted in some poor buying decisions. "I wish we would have done a little more due diligence in the companies we acquired," Cranston says. "We could have really tried harder to make sure there was a fit. We acquired some companies we should not have acquired – we knew the owner would never be a team player. Both TruGreen and LandCare were making purchases they shouldn’t have. The focus then became correcting the problems when we could have avoided them by spending more time picking the right companies."

"There’s no guarantee that an acquisition will be perfect," Sperber adds. "People make mistakes. Sometimes, acquisitions don’t fit and the return is pennies on the dollar."

MONSTER MERGER. The competitive offers and industry atmosphere changed overnight when TruGreen bought LandCare in March 1999, adding $450 million to its $820-million revenue.

"When we put up the map and put dots on the places where we had operations and dots on the map where they had acquired companies, you could see a national network that made sense," Garcia says. "We could have continued going head-to-head with TruGreen for only so long, especially with ServiceMaster behind them. They either had to crush us or work with us."

Suddenly, the rollup rush ended. Though LandCare was considered a financial success (selling to TruGreen for $11 a share after debuting on the stock market at $8 a share), it didn’t achieve its ultimate goal of survival, and suffered a fate similar to comparable rollups in other industries.

Some industry observers believe the landscape market will never be open to rollups like LandCare again. "I don’t think rollups can work in this industry," Cranston observes. "Look at the people who get into this business – entrepreneurs. They want to be their own boss and then all of a sudden you push them together and create a company with 25 of these individuals managing it and no majority shareholder. They have 25 different cultures, management systems and philosophies of how to run a business. How can you put them together and expect it to work?"

Hartzell, who in 1998 worked for Alex Brown, the investment bank that underwrote LandCare’s public offering and was the mergers and acquisitions adviser on its sale to TruGreen, agrees. "People looked through the risks, and the banks were willing to give venture capitalists who said they could seamlessly create a market leader the benefit of the doubt," he says. "People thought they could make a lot of money, but they underestimated the difficulty of making a merger of many companies work."

"In my opinion, the investment group behind LandCare never intended to be a long-term player in the industry," adds Scott Brickman, president, The Brickman Group, Langhorne, Pa., who is knowledgeable about working with financial investors. "They saw an opportunity to roll up a fragmented industry and make a lot of money in a short period of time through financial engineering. The acquisition by TruGreen allowed them to get out and make some money."

The number of "spectacular rollup blowups" that happened at the time still makes banks hesitant to fund similar projects, Hartzell says. "Banks are much more skeptical about the rollup strategy, so it’s hard to get a rollup financed today," he says. "I do see it opening up over the last year, though, as interest rates have come down. But it’s definitely not like it was in 1997 and 1998 when you could get bank financing and go public on just a business plan."

But Cranston thinks that won’t stop future rollup-inspired entrepreneurs from repeating history. "All of a sudden, it’ll be a novel idea again" he says. "People will forget what happened in 1998.

SURVIVAL OF THE FITTEST. While TruGreen LandCare in its early stages was a rollup, Slott considers it an operating company today. And the owners have gained some knowledge from rapid consolidation times.

"We learned a lot about valuing businesses," Slott points out. "When we are ready to begin making acquisitions on the maintenance side again, we will bring more scrutiny to the valuation of companies."

Within the past two years, TruGreen LandCare sold off construction and line clearing – two services it considered out-of-place in its menu – to fully focus on commercial maintenance. "Bid/build construction work was foreign to us," Slott says. "Sellers were unwilling to unbundle their bid/build construction from their maintenance so we took it on. We made some mistakes in that arena thinking that a small piece of the business can’t hurt you that much. But we didn’t have the learning curve or expertise because it was not the recurring revenue model we were used to."

Today, instead of centering on acquisitions, the company concentrates on organic growth.

Though TruGreen is dedicating time and manpower to its LandCare business (the company hired Robert Fates in September to run the division), industry observers believe that ServiceMaster cannot succeed in maintenance by borrowing off of what it’s learned in lawn care.

"They are two different services," Cranston says. "In landscape maintenance, you want to be as close to the customer as you can. The fact that they are centralizing their operations and directing them from Memphis is a big negative. You have to call the shots locally with this service. You can’t have someone from Memphis telling them what crew size they should use."

"Commercial maintenance doesn’t fit the ServiceMaster model," LaFlamme agrees. "Something tells me they may have a five-year plan in place to exit the business and they are going into their second or third year."

But TruGreen sees the similarities between its two businesses. "Both are labor-intensive, route businesses where density makes a difference," Slott explains. "Fifteen percent of TruGreen-ChemLawn clients are commercial, and that’s where the synergies are between both services. We are presently offering LandCare customers lawn care services for that reason. And we love the maintenance industry and think the company has a tremendous amount of potential given all the work we’ve done to position ourselves for the future."

CREATING A SALABLE COMPANY. The mega deals that happened via acquisitions by LandCare and TruGreen taught the industry some lessons. These teachings can be valuable to future sellers preparing for the return of positive economic times.

Initially, the best way a seller prepares his or her business is to always be ready to sell, according to industry buyers.

"If you are always building a salable company and you’ve been approached by someone to buy it, then it’s probably functioning pretty well," says Fochtman, who has made one acquisition and is currently working on a second.

But what specifics should a potential seller focus on to ready his business for future sale? Past sellers and current buyers offer suggestions.

"First, if a retiring owner doesn’t have family interested in taking over the business, the best thing for the company may be to put it in other hands," Hartzell says. "The second big reason is increased competition. As leaders acquire companies in your market and they take market share away from you, it makes your life more competitive. As you lose market share, the value of your business decreases, so some owners sell early to retain business value. Others sell because they are having difficulty growing their businesses or retaining employees."

Some contractors have sold in the past and thought they were going to retain a leadership role in the buying company. But then they were gone – whether they left or were let go – and had no affect on the outcome of the business. For this reason, "a contractor should ask himself what his long-term goals are when he is thinking about selling his business," Brickman advises. "If you want to stay with the business and sell it to a place where your employees have long-term opportunities and will be treated well, then really look at who you are selling to and make sure your philosophies mesh. If you are looking to sell your business, get the maximum dollar amount and then walk away, that’s a different decision. There are some unhappy people out there because they chose to sell and it ended up being the wrong decision for them."

Also, if a contractor wants to maximize his business’ sale, he needs to come to a certain point of critical mass where his company becomes attractive to buyers. This is usually obtained at $600,000 to $1.5 million in annual revenue because the owner isn’t running the company alone at this stage and has key management in place to assist him, LaFlamme says.

Potential sellers shouldn’t discredit the appeal of their service mix either. Buyers love the landscape maintenance business, Hartzell explains. "Public markets love predictability and contractual recurring revenue – and that’s maintenance," he says. "Maintenance brings higher valuations for these reasons."

"At the business end of the day, design/build is worth less than maintenance," Garcia agrees. "People didn’t get that in 1998 – there were few who focused on maintenance."

Beyond business makeup, a clean house – financially and operationally – is crucial. "You need to have consistency in profitability and growth," Garcia adds. "At the end of the day, what someone is buying is your future earnings. The only way for them to justify the purchase price is to predict what the business’ future cash flow will be. As a seller, show consistency in growth and profits and the buyer will assume it’ll be the same over the next three years. If you show sporadic growth, people won’t be interested or they will offer you less value for your business because of the predictability factor."

Owning vs. leasing a facility is also important, LaFlamme says. "For instance, if a business owner leases a property on a short-term basis, he loses equity in his business because when he goes to sell his company, it doesn’t have a permanent home. Buyers look for stability, security and if you own your property, you’re better off."

Next, bring in a consultant or professional business valuator to review your company, Cranston advises. "Don’t have the first person who walks in buy it and don’t use a business broker," he says. "Ask someone you trust – an advisory board member or another contractor – to come in and give you an honest perspective. Most sole proprietors get tunnel vision and think they know it all, which is why they need to look outside their company for new ideas and perspectives."

Steve Coffey, former owner of Scapes, Atlanta, Ga., and Washington D.C., recommends contractors do what he did before selling and talk to other contractors who have sold their businesses to gain their insight. "You need help going through it, whether it be from professionals or friends," he says. "There are a lot of moving parts in a deal and it’s best to know what to expect."

SALES MISTAKES. According to Hartzell, there are four key mistakes sellers make.

First, they have unrealistic value expectations. "When you talk to an adviser about selling your business, make sure you check his or her reputation," Hartzell suggests. "Many advisers will promise you they can sell your business for $20 million, but then end up selling it for $10 million because that’s what it was really worth. You have to be able to trust that your adviser is being honest. Make sure you’re getting objective advice and that you’re checking advisers’ references."

Next, sellers need to make certain they perform due diligence on buying companies. "It’s not just a one-way street," Hartzell says. "A seller should ensure he is passing his company onto a business he knows something about."

Third, sellers and buyers both need to understand from the beginning that due diligence will be disruptive and take time. "It can’t just be done during off-hours – it takes a commitment to the process," Hartzell says.

The fourth mistake sellers make is assuming business will be the same after the sale – it never is. "Once you sell control of the business, it’s a different ball game," Hartzell says.

Braswell explains why. "You have to be willing to accept that you will no longer have control," he says. "For me, it was the public environment that I couldn’t control that really got to me. I had to be willing to accept the consequences."

For instance, Braswell says that he’s seen contractors offer to take a certain price upfront for their business and then earn the rest over time based on the company’s future performance. "But you no longer control the business’ future performance since you sold it and the new owner can make decisions you can’t override that can negatively affect the business’ performance," Braswell explains. "Hence, you can’t truly control the forward performance of the business. Instead, agree on a price and get all your compensation at the time you sell your business and close the deal."

Most of all, these deals take time, and like any important decision, Craig Ruppert, chief executive officer, Ruppert Nurseries, Laytonsville, Md., suggests sellers "think it through, take your time and listen to the people around you and the advice they give. No matter what decision you make, it’s partly right and partly wrong. Every acquisition decision has positives and negatives and hopefully you receive more positives from the deal than negatives."

SHOULD YOU SELL? Deciding whether to sell is the most important question owners should ask themselves, as many who sold in the 1990s are now starting over again.

Instead of repeating steps they took years ago, some sellers are pursuing other industry interests. LaFlamme, for instance, is following his first love, which is consulting, writing and public speaking. "I learned how to market and sell and create my business the hard way before and now I want to help others reach those same goals," he says.

"Once you get in this business, it gets in your blood," adds Coffey, whose noncompete isn’t up until next year, but is thinking about reentering the business as a mentor or adviser.

Cranston feels similarly. "I have no desire to work 60-hour weeks again," he explains. "I’m getting back in, instead, as a passive investor. I want to help mostly one and two-location type companies that do revenue between $3 and $6 million. I will meet with them one day a month, go through their operations, review their P&L statements and provide consulting on that basis."

The most difficult part about leaving the industry for sellers is lost industry relationships. "Many people who sold their businesses in hindsight wouldn’t have if they had to do it over again," Braswell explains. "Now, they are free to go back and start over, and many have.

"When you spend your life developing a network of friendships, it’s hard to think about going in another direction," adds Braswell, whose noncompete was up in June and who in addition to running his equipment-focused company, also is advising his previous partner, David Blakeley, on his reentry into the landscape market with Southern Shade Tree Co. "I see him avoiding mistakes this time that we made the first time around. Unfortunately, you can’t just turn on a switch and have all your old clients back. We wouldn’t be able to service them all at this level anyway. We have to build back up our resources slow and steady so we’re not forced into unwanted growth."

Another landscape start-up is Ruppert Nurseries, formerly Ruppert Landscape Co., Ashton, Md., which sold to TruGreen-ChemLawn in August 1998.

The company started selling work again in August with the goal of building a business that is predominantly maintenance, according to President Chris Davitt. Making the decision to reenter the business took nearly all five noncompete years. "The reason it took years is because we had that luxury," Davitt says. "We were restricted in how much we could do with our noncompete, so we decided we would plan slowly and take our time deciding if this was really what we wanted to do."

"Our plan isn’t to become what we were before," Ruppert adds, explaining that Davitt will focus on day-to-day operations, while he will concentrate on future planning, financing, customer service and marketing. "We’ll take that if it comes, but we’d rather do it well first and then if we get big, fine. But it’s not our main goal. We’re not interested in growing another business to sell it – that’s not our motivation. Yet at the same time, you can never say never to anything."

Previous client relationships will aid gradual growth. "The fact that we still have a recognizable name in the market will make it easier – clients will remember us," Ruppert says.

Owners like Ruppert, who have former client relationships, means a new level of competition for national companies. "Our plan would be to provide greater service than anyone in the market – it’s the ultimate litmus test," Slott shares. "Any new competitors or former owners coming back into the market all bring more competition. We don’t fear their previous relationships in the market, but we certainly view them as more than just regular competition. In the end, he who provides the better service will win."