THIS IS WHERE LANDSCAPE OMPANY LEADERS …...Lawn Care Maintenance (organic or chemical fertilizers)...

www.caberhill.com/landscaping ● 820 W. Jackson Blvd, Suite 805 Chicago, IL 60607 ● (312) 618-0715 © 2016 Caber Hill Advisors

THIS IS WHERE LANDSCAPE COMPANY LEADERS WILL BE NEXT …

LEADERS FORUM FRENCHMAN’S REEF & MORNINGSTARMARRIOTT BEACH RESORTJanuary 12 - 14, 2017

bit.ly/nalpleaders

Platinum sponsor:


The Sellable Landscaping/Lawn Care Business

Presented by Peter J. Holton

Managing Director

Caber Hill Advisors

(312) 618-0715 | [email protected]


Disclosures

I have no financial or non-financial relationships to disclose.


The Concept of Sellability

Sellability assesses the likelihood of a business being sold for fair market value to a third party buyer acting at arm’s length. It is a concept

that is independent from valuation, and measures the attainability of a valuation.

Financial

Legal

Ownership

OperationsCustomers

Employees

Industry & Market


Why It’s Important to Understand Sellability

Mary’s Landscaping

Revenue:$750k

Bob’s Landscaping

Revenue:$750k

John’s Landscaping

Revenue:$750k

X + $400,000 X + $600,000

Same Revenues

Same Operating Philosophy

What’s the difference?

Market

Ownership

Buyer

Preparation for Sale

Employees

Sale Price:X


Financial Aspects of Sellability

Financial

Legal

Ownership

OperationsCustomers

Employees

Industry & Market


Financial

1 Revenue 2 Profitability

3 Growth 4 Owner’s Understanding of FMV

Larger landscaping company attract more buyers

• Opportunities for Scale

• Profit Potential

• Profit Margins

• Quality of Earnings

• Historical Consistency

• Is revenue growing in line with the industry?

• Are profits growing at the same rate as

revenue?

• What is driving growth, and is it sustainable?

How realistic is the owner?


Fair Market Value

Valuation RangeLOW HIGH

How the market values your business

How most owners value their business

The #1 reason companies don’t sell:

Seller’s Unrealistic Expectations


Legal Factors Influencing Sellability

Financial

Legal

Ownership

OperationsCustomers

Employees

Industry & Market


Legal

• Date of Incorporation

• Entity Type

• Capital Structure

• Litigation History

• Pending Litigation / Legal Claims

10


Business Entity Types

Sole

ProprietorshipLLC S Corporation C Corporation

Definition

A business owned

by one person

for profit.

A business formed by

statute,

owners have limited

liability like a

corporation. LLC's do

not issue

stock or have

shareholders, it's

owners are called

members.

A business formed by

statute,

owners have limited

liability like a

corporation. Limit on

number of

shareholders, and

shareholders

cannot be foreign

persons or

entities.

A business formed by statute,

owners have limited liability like

a

corporation. No restrictions on

ownership/shareholders,

corporation go public.

Personal

Liability

Sole proprietor

personally liable

No personal liability

of members

No personal liability of

shareholders

No personal liability of

shareholders

Restrictions on

ownership

Only one sole

proprietor

One member allowed in

all sates

Most states allow one-

person S Corps. No more

than 100 shareholders

permitted

Most states allow one-person corps;

no maximum number of shareholders

Taxation of

business

profits

Individual tax

rates of sole

proprietor

Individual tax rates

of members

Individual tax rates of

shareholders

Split up and taxed at corporate

rates and individual tax rates of

shareholders

Self-employment

tax

Assessed on

business profit

Depends on how LLC

chooses to be taxed

Salary subject to self-

employment tax;

distributions are not

Salary subject to self-employment

tax; distributions taxed as

dividends


Asset v. Stock Sale

Type Definition Pros Cons

Asset

Buyer purchases the

assets of the

corporation (tangible &

intangible), but does

not purchase the

corporation itself.

Buyer establishes a new

corporation with which

to operate the business,

and Seller dissolves

existing corporation.

Limitation of Liability

• Buyer chooses which liabilities to

assume

• Shields from risk associated with

prior ownership (tax audits, fraud,

lawsuits)

Ability to select new accounting

methods

• Overall

• Depreciation & Amortization

Double taxation for C Corps

Portion of purchase price

taxed as ordinary income (for

all other entities)

Difficulty in transferring

contracts, licenses, leases,

etc.

Stock

Buyer purchases the

stock in Seller’s

corporation, effectively

purchasing the

corporation itself in

addition to all of the

assets.

Ease of transfer of licenses and

contracts

All purchase price allocated to stock

is taxed as capital gains

• Most, if not all, of price is

typically allocated to stock

• Some can be allocated to non-compete,

training, or personal goodwill

All liabilities are assumed

No change in asset basis –

“tax basis” carries over

Old depreciation schedules

maintained

Cannot amortize price

allocated to stock

Most industry transactions – and most small business purchases in general – are structured as

asset purchases.


Tax Treatment in an Asset Sale

I am not a CPA and this does not constitute tax advice. Please consult with your accountant

if you have questions about your personal tax obligations.

Item Seller Buyer

Physical Assets (FFE) Ordinary gain or lossCapitalize and depreciate (usually over

5-7 years)

Accounts ReceivableOrdinary gain or loss to the extent

allocated value differs from tax basis

Ordinary gain or loss to the extent

collection differs from allocated value

Inventory Ordinary gain or lossCapitalize – can impact earnings in

first year

Goodwill Capital Gain Capitalize and amortize over 15 years

Non-Compete Agreement Ordinary Income Capitalize and amortize over 15 years

Consulting / Employment Agreement Ordinary Income subject to FICA Current deduction

Other Intangibles Capital Gain Capitalize and amortize over 15 years


Legal

• Date of Incorporation

• Entity Type

• Capital Structure

• Litigation History

• Pending Litigation / Legal Claims


The Owner’s Impact on Sellability

Financial

Legal

Ownership

OperationsCustomers

Employees

Industry & Market


Ownership

• Owner’s Role

• Contribution to Revenue

• Relationship with Referral Sources

• Motivation / Energy Level

• Preparedness for Sale

• Willingness to Support Transition


The Relationship of the Owner to the Business’s Value

P&L

• Future

revenue &

cash flow

Tangible

Assets

• Equipment

• Inventory

• Furnished

OfficeIntangible

Assets

• Files

• Name

• Contracts

• Goodwill


Owner Risk

Owner Risk:

Occurs when owner is key contributor to the business (i.e. sales and operations)

Risk of losing customers/revenue when owner retires

Two primary ways to reduce owner risk:

Owner moves out of a sales role prior

to selling and therefore generates a

very small percentage of total revenue

Owner agrees to a very long transition

period and/or a multi-year employment

agreement to work for the buyer

No Owner Risk Owner Risk significantly reduced

OR

1 2


Ownership

• Owner’s Role

• Motivation / Energy Level

• Preparedness for Sale

• Personal (mental & financial)

• Business

• Willingness to Support Transition

Exit Planning

Personal Issues

Financial Issues

Tax Issues

Value Creation

Business Issues

Legal Issues

An exit plan asks and answers all the business, personal, financial, legal and tax questions involved in transitioning a privately owned business.

It includes contingencies for illness, burnout, divorce, death.

Its purpose is to maximize the value of the business at the time of exit, minimize taxes, and ensure the owner is able to accomplish all his or her personal and financial goals in the process.

- Richard Jackim Cofounder of the Exit Planning Institute

Key Personal Questions:• Can I afford to sell? At

what price?• What am I going to do

next?


How Operations Impact Sellability

Financial

Legal

Ownership

OperationsCustomers

Employees

Industry & Market


Operations

• Accounting

• Marketing

• HR

• Systems for general management


Turnkey Business

New owner can begin operating on day one. Strategies and processes are already in place and the new owner only needs to

“turn the key” in order to be up and running.


Turnkey Business

New owner can begin operating on day one. Strategies and processes are already in place and the new owner only needs to

“turn the key” in order to be up and running.

Franchise Elements

Accounting System

Marketing Plan

Business Management System

HR System

Business profitable and growing


The Influence Customers have on Sellability

Financial

Legal

Ownership

OperationsCustomers

Employees

Industry & Market


Customers

• Customer Concentration

• Recurring vs Non-Recurring Revenue

• Contracts


Customer Concentration Risk

Explanation

Customer concentration is extremely risky because the

loss of one customer can have a disproportionate impact

on the business.

Consider Two Examples:

ABC company only generates 43% of revenue

from client A, with 29% from Client B and 21%

from Client C.

XYZ company has a one client with 90% of

their revenue, and no other client accounts for

more than 2% of revenue

Which business would you rather be?

Customer Concentration: Occurs when a small number of customers generate an abnormally large amount of revenue.

43%

29%

21%

4% 3%

Customer Concentration

Client A

Client B

Client C

Client D

Client E


Revenue Stream Risk

Non-Recurring Recurring

Hardscape Installation

Irrigation Installation

Landscape Construction

Tree Installation

“Mow and Go”

Commercial Maintenance

Lawn Care Maintenance (organic or chemical fertilizers)

Tree Maintenance

Revenue Streams:

Non-recurring revenue is referred to as Project Revenue or a one time project.

Recurring revenue is a job that is under contract and billed weekly, bi-weekly,

monthly or quarterly.


The Employee Factor

Financial

Legal

Ownership

OperationsCustomers

Employees

Industry & Market


Employees

• W-2

• 1099

• H-2b

• Key employee non-competes

• Compensation Structure

• How long could you be gone and let employees run biz?


Employees

• W-2, 1099, H-2B

• Key employee family members

• Will they work for the new owner?

• Will they be loyal to the new owner?

• Key employee non-competes

• What happens if they leave but remain in the local market?

• Compensation Structure

• How long could the employees manage the business?

© 2015 Caber Hill Advisors LLC 30

Key Employees

• General Manager

• Sales Manager

• Lead Foreman

Key Labor Force Employees

Scenario of business being sold:

• Employee A is the lead foreman for the seller, but is not H-2B verified

• Over 50% of the labor force and office personnel are 1099

• Owner and family members want to retire at the same time, upon selling the business

Non-Competes

• Security for current and future owners

• Makes business more turnkey

• Must be “reasonable” (definition varies by state)

• If attempting to convince existing employees to sign non-competes, consideration may be required in order to make them enforceable

What is the additional risk inherent in having to replace 2/3 of the employee base and 100% of key employees?


The Final Piece: Your Industry

Financial

Legal

Ownership

OperationsCustomers

Employees

Industry & Market


Industry & Market

• Industry Growth Rate

• How fast has it been growing?

• What are expected future growth rates?

• What is the Baby Boomer affect?

• Acquisition Activity / Presence of Buyers

• Local Market

• 66% of all businesses with employees, nearly 4 million companies, are owned by baby boomers

• Ten TRILLION dollars worth of businesses will change hands by 2025

• 65% to 75% of small companies in the U.S. will likely hang up a "for sale" sign during the next 5-10 years

• The oldest of America’s baby boomer generation started turning 65 on January 1, 2011, at a rate of 10,000 people a day

BABY BOOMER STATISTICS


Industry & Market



• Transaction Volume

• Financing Options

• Strategic & Financial Buyers

• Local Market

Corporate Buyers

Private EquityIndividual Private Investors

Buying Groups


Industry & Market



• Local Market

• Size

• Demographics

• Growth

• Urbanization Trends


Caber Hill Advisors Outlook

Hot Industry

Transaction volume will

increase

Stronger multiples than most service

businesses

Private Equity interest

Presence of Buyers

Corporate Buyers / National Chains

Mid-sized independents (5-20

locations)

Accessible financing for

individuals / small independents

How do you know when it’s a good time to sell?


Caber Hill Advisors Outlook

Tax Rates

Sellers pay capital gains tax on

majority of sale proceeds

Cap Gains Tax increased in 2013, but still relatively

low

Future of tax rates uncertain, highly

political

Interest Rates

Held at historic lows for the past

6-7 years

Fed suggests rate increase beginning

later this year

Interest has an inverse

relationship with valuation

How do you know if it’s a good time to sell?


Putting it all together

Financial

Legal

Ownership

OperationsCustomers

Employees

Industry & Market

Upon assessing sellability, the next step is to develop a roadmap that outlines steps the business and the owner will take toward improving the company and preparing it for a sale. Developing and completing action items is critical to a successful exit plan.


• Presented by Peter J. Holton

• Managing Director

• Caber Hill Advisors

• (312) 618-0715

• [email protected]


THIS IS WHERE LANDSCAPE COMPANY LEADERS WILL BE NEXT …

LEADERS FORUM FRENCHMAN’S REEF & MORNINGSTARMARRIOTT BEACH RESORTJanuary 12 - 14, 2017

bit.ly/nalpleadersPlatinum sponsor:

THIS IS WHERE LANDSCAPE OMPANY LEADERS …...Lawn Care Maintenance (organic or chemical fertilizers)...

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