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SAN DIEGO - All landscape contractors think their businesses are worth something. But placing a true value on a business can be tricky, according to Stephen Gaines, U.S Group Head, Outsourced Business Services, KPMG Corporate Finance, Baltimore, Md.
“For instance, the cash you get from selling your business is different than your business’ value,” Gaines pointed out Feb. 11, 2001, at the Lawn & Landscape School of Management, San Diego, Calif., during his session titled “Determining the Value of Your Business.”
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In addition to the annual winter School of Management conference, Lawn & Landscape holds an annual fall conference titled Business Strategies. Named “Managing Human Resources In Your Company,” this year’s conference is ideal for businesses of any size and will cover a variety of human resources issues. Business Strategies attendees in 2001 will hear from the leading experts on human resources from inside and outside the green industry, network with fellow industry professionals and walk away with the tools to make employee recruitment and retention a profitable part of their businesses. The 2001 Lawn & Landscape Business Strategies Conference: Managing Human Resources In Your Company conference will be held Oct. 7-9, 2001, in Scottsdale, Ariz. Details about this conference will soon be available at www.lawnbusinessstrategies.com. Additionally, the 2002 Lawn & Landscape School of Management will be held Feb. 17-19, 2002, in Charlotte, N.C. Details about this conference will be available later this year at www.lawnschool.com. For more information about Lawn & Landscape’s annual conferences, contact Maria Miller at 800/456-0707 or mmiller@gie.net. |
Assessing value can be best achieved after understanding what impacts value. Factors affecting value include market conditions and industry drivers. “Market conditions aren’t as favorable now, so values are down,” Gaines explained. “On the positive side, interest rates are low and inflation is tame, but forecasts say it’s supposed to dip below 3 percent in 2001. On the negative side, public equity is down and economic growth has slowed.”
Following the Gross Domestic Product (GDP) is one example of how contractors can track market conditions and industry drivers for the purpose of valuing their businesses. GDP had a high growth year in 2000, but slowed during the last quarter of that year, Gaines said. “GDP is expected to be at a low percentage in the near future much like it was in, and hasn’t been since, the early 1990s,” he stated, adding that other market conditions to watch include stock market performance, merger and acquisitions activity level, investor group purchasing power and the tax environment.
In addition to keeping track of factors that impact value, contractors need to look inside the industry at the value drivers, including industry outlook and trends, industry dynamics, overview of buyers, transaction activity, stock performance of existing public companies and consolidation issues.
Next, of course, contractors need to look inside their companies to find out what drives value. These value drivers include looking at historical and future revenue and earnings growth, corporate structure and market position in the industry.
When it comes to determining actual value, considerations such as defining the difference between value vs. liquidity, knowing buyer vs. seller expectations and minimum seller value requirements, and negotiating stand-alone vs. acquisition value are important.
Valuation methodologies include:
- INCOME APPROACH
- Discounted Cash Flow (DCF) Analysis - when management can provide reliable projections estimating ROR, projecting cash flows and terminal value, sample spreadsheet, estimating synergies, calculating PV
- Capitalized Income Analysis - when management cannot provide projections and the financial performance of the company is expected to remain stable
- MARKET APPROACH
- Comparable Transactions Analysis
- Non-Dilutive Analysis - when a potential public company acquirier is motivated only if acquisition is not dilutive
- OTHER ANALYSIS
- Cost Approach or Net Asset Value
- LBO Analysis - when debt will be used by acquirer to purchase business
- Liquidation Value - when there is no expected future earnings
- RULES OF THUMB
To conclude, Gaines said any strategic deals being made in the industry are structured on value and the holders of the negotiating power. He said, “There is some science to determining value, but a lot of it is based on judgment.”
The author is Managing Editor of Lawn & Landscape magazine.