How to Sell a Lawn Care Business
Gary Rapp and Ralana Abraham Miller are two brokers in Indiana Business Advisors who just completed the acquisition of an extremely profitable well-run lawn care business in Indianapolis. And they are going to tell us the story of how they completed the transaction and what they learned.
If you happen to be in this type of business or if you’re thinking about being in this type of business, there’s a lot of valuable nuggets that they share in this episode.
Enjoy this conversation with Gary Rapp and Ralana Abraham Miller.
1:00 – The seller’s background
3:19 – What drove the sale?
5:30 – What do business owners need to prepare their company for sale and get an optimal exit?
6:58 – The buyer’s background
8:59 – How did the buyer look at the business and where did he perceive the risks were?
11:50 – How did the buyer mitigate the risk of losing customers?
15:00 – How did you warrant the premium?
16:50 – What should business sellers expect when selling a business like this?
17:43 – It seems timing played a critical role in the success of the sale. Should prospective sellers wait for the season to be over before selling?
18:54 – Ralana’s parting suggestions for prospective sellers and buyers
The seller’s background
Recently, Gary Rapp of Indiana Business Advisors sold a loan company that focused on top goal solutions. The seller is 65 years old. He came to Gary on Nov 11, 2019 to express his intent to sell his business. He has previously talked to a CPA who advised him to get in touch with Indiana Business Advisors. He wanted to sell it before the spring season started. Gary mentioned to him that a business that size would take 6 months to a year to sell it. But the seller gave the challenge to sell the business before spring season started. And by January 31st, they had the transaction closed.
The business has 6 employees and generated roughly $450,000 per year with a cash flow of $125,000.
The seller/owner is the leader of the company. He was the one who actually did the work in the field. He did quotes when his internal manager was behind, or if one of his guys had a breakdown in the field he would go out and assist in the field. He is more of an overlay. All the intellectual capital of the business was spread out amongst the employees.
What drove the sale?
The seller has a realistic expectation of what his business was worth. The key selling point of the business is that the seller has a large recurring revenue every year from a customer base. He typically had a 900 to 950 out of 1200 recurring customers every year. About three-fourths of the business is repeat business. His recurring revenue is maybe a little higher than what his competition would do. But his average treatment was about 15% higher than his nearest competitor. The quality of work and level of service is superior. And superior service and product warrant a premium.
What do business owners need to prepare their company for sale and get an optimal exit?
There are several things that the seller did right. Two years ago, he did not know that he is selling his business this year. But he is doing the right things by preparing his financials, keeping track of the discretionary expenses that were running to the business along with taking a log of the day-to-day recurring tasks in the business and enabling his employees to do those tasks because he knew that if he wants to go and transition the business, it would be easy for him to transition because all the knowledge is within his team and not just in his head. Additionally, he did some research about what multiple he will get based on the cash flow of the business and he had a realistic expectation of the sale of the business.
The buyer’s background
Ralana Miller’s buyer owned a prior business like this several years ago. He was a fairly young family man and has a long-range plan. It starts with acquiring another business similar to what he had before and going from there. He actually came initially to Ralana about over a year ago to look for another lawn and landscaping company that she had. One of his biggest requirements was quality in the product and service and maybe the price was at a premium. It was very much a culture that he was looking for.
The first business that he looked at fit the culture that he was looking for but it didn’t quite fit the service mix that he wanted. It did not fit the financial requirements that he’s looking specifically for. So, he took a pass on that one. Ralana looked at a couple of other things that they had but nothing was ever really quite the right fit until Gary had listed this business. And once the buyer looked at that, oddly enough he actually knew the seller from many years ago.
How did the buyer look at the business and where did he perceive the risks were?
Employee retention was one of his hot button points that they were able to alleviate. In this particular situation, it was a little unusual. In most deals, with this type of business, the buyer doesn’t necessarily meet the owners right away. You have to keep the confidentiality of the business and protect the business while you’re trying to sell it. So buyers have to understand that they can’t just talk to employees. And Ralana mitigated that risk by accomplishing everything else first and then he was able to speak to the employees and establish rapport with them and tell them that they have a future and that they’re going to stay.
The quality of equipment, in this particular case, didn’t really become an issue. The advantage of the buyer being in the industry, he had an understanding of the equipment that was used. And the seller, their equipment were in excellent condition.
This particular buyer had some other savings and some other investments he was able to take advantage of. From a financing standpoint, he was prepared. He was a very sophisticated buyer which means, not only was he prepared for that purchase price but that he also made sure that he had a working capital in place and would have the resources he needed to set up. He already engaged someone to make some technological changes in the business.
How did the buyer mitigate the risk of losing customers?
The seller’s involvement is going to be key there. He needs to be very involved in the first few days of the introduction. He also has had one or two key accounts that were addressed ahead of time. The seller has serviced basic commercial landscapes that have become his key accounts – a church and some corporate buildings. He services them all year if they pay, in this case, cash in advance. He would service the account throughout the year at a set price. And that was one of the keys to his business was that recurring revenue. He’s had those accounts for a long time. And one of the things they did in the LOI was to have these top three accounts, which only made up about 10% of the revenue, sign the agreement.
One of the beauties of this business was that the people who drive the service had their own accounts assigned to them. They all show up the same type of vans with the same markings, they are the guys that dressed the same, but they knew Jimmy, Bobby, and Joe. They know the people that they’re servicing.
How did you warrant the premium?
The seller had a business that was a business and not the owner, meaning, he had employees doing the work. Additionally, the way the deal was structured is that the seller took a 3-year note. Only about 20% of the sale price. The reason for that is because the buyer still wants a little skin in the game. There was a transition period which is about 30 days. It’s a seasonal business. What happens in the fall and the winter, they’re also preparing for all the marketing for the next and spring of 2021. He did a lot of that part of the business, so if the buyer will call the seller, he’d pick it up.
What should business sellers expect when selling a business like this?
We’ve seen this a lot in the baby boom generation. They had the company for several years that has provided wealth to their family. Don’t wait too late to sell your company. Enjoy life. This seller was 65. His kids were grown up and out of college. He and his wife are empty-nesters, and they want to travel and do things together. They wanted to exit on their terms versus you don’t know what the future’s going to hold for the economy. His balance sheet continued to grow year over year not substantially but it had a good path, so it positioned his business well to sell.
It seems timing played a critical role in the success of the sale. Should prospective sellers wait for the season to be over before selling?
The thing about selling your lawn care business, the window is during the off-peak time. But you need to be thinking about what you need to do to sell your business now because during the summer months when all hands on deck, you won’t have the time to think about the details you have to do to prepare your business. It would be good to talk to your advisor about how to prepare your business for sale because the people that are looking to buy a business are looking to buy during the offseason as well. They’re going to start looking in November and December. What’s available will take 30-60 days to close, and you want to close before February 15th before that season peaks up.
Ralana’s parting suggestions for prospective sellers and buyers
Ralana has a couple of advice to buyers and sellers. One – Gary touched about the note component and being willing to have skin in the game. It is important in this industry for the buyer to have that support, and also that was a way to get the price to that premium that the seller wanted.
The other thing, and it goes hand-in-hand with the buyer situation that Ralana found herself in with this buyer, is being on the market in a timely manner. Being on the market by the fall. It may not be the first buyer just like how her buyer wasn’t the first business he looked at. It was probably the 4th or 5th. So just be prepared and be ready to hit the market because the buyer also has to be in place before the peak season so that they can hit the ground running.
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Connect with Ralana Abraham Miller