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Landscaping companies are one of the more desirable industries among today’s business buyers. They sell well, especially when located in large markets.
There are quite a few differentiators that drive values in the landscaping sector. It’s important for owners to understand these factors as they consider selling their company. It’s worthwhile for owners to take any action possible to improve the value of their business, and the desirability in the eyes of buyers.
It’s all about risk. When buyers see very little risk, they move forward. With that in mind, here are many factors that play a role in valuing landscaping companies.
Residential vs. commercial – Companies with mostly or all commercial clients will fetch a higher price. Buyers assign greater longterm value to commercial accounts which are often supported by contracts. Many entrepreneurs start on the residential side then migrate toward commercial, so commercial accounts sometimes reflect a more seasoned company. Commercial clients tend to be less price-conscious than residential customers. (On the flip side, many commercial customers enjoy pushing their payments to 60 or 90 days out, rather than cash payments typical for residential.)
Maintenance vs. construction – This is the huge dividing line in landscaping. Many landscape construction specialists, hardscape designers, pool builders and others have carved out incredibly successful, profitable businesses over the years. But buyers assign more risk to this project-based income than they do maintenance-based recurring revenues. That makes selling a maintenance landscaping business easier.
Market Locations – There is enormous competition among the largest landscaping companies in the U.S. who seek to purchase local and regional businesses to bring into their portfolios. They attack growth strategies on a market-by-market basis. So if your company is situated in a target market, they will assign greater desirability to your acquisition (and possibly pay more). These strategic buyers are not alone in seeking attractive markets. A company in the heart of Los Angeles County will get more attention, and more value, than the same company in Humboldt County.
Large vs. small – A small company carries greater risk so its valuation multiple will be lower than a larger company. This difference can be dramatic. Smaller companies may struggle to get 2.5 times earnings while a larger one may fetch above 4 or times earnings.
Reputation & Reviews – Yelp isn’t just for restaurants. Savvy business buyers often go right to social media outlets and review sites when they take their first glimpse of any opportunity. When investors see numerous negative reviews, it can kill their interest. They not only look at overall ratings scores and the ratio of positive to negative reviews, but also at how the company is responding online to the negative reviews. Are they addressing the negative comments properly and quickly? Are bad reviews allowed to build on themselves? Are bad reviews talking about the same issues?
Customer concentration – Years ago I sold a landscaping company which had 6 customers. That’s not an easy sell. The company’s customer base was HOA management companies who oversaw multiple properties and associations. There is more risk involved when losing one customer can have a substantial impact.
Equipment & vehicles – Landscaping requires lots of trucks, equipment and tools. If these assets are repaired and replaced properly, it will increase the company’s value. If the business keeps regular repair logs, that also helps value.
Marketing methods – There are quite a few landscaping companies who do little or no marketing or advertising. They have a website that serves as a digital business card and they spend no time or energy on the web. These companies will fetch less in an acquisition than a company with a fully built-out marketing platform. I always cringe when an owner proudly proclaims that all his business is word-of-mouth. That’s a negative which can impact the ability to sell your company.
Owner Involvement – This is a big one. If the owner is the C-27 license holder and also making all the major business decisions, assigning crews, working at job sites, and driving all new business, that fact will be obvious to buyers. It will also have a substantial negative impact on the value of the business. You want your company to run perfectly fine without you (an impossibility for many).
Most landscaping businesses will sell for a price somewhere between 2.5 to 4.0 times seller’s discretionary earnings. That’s a pretty huge range when you start doing the math. The more you can position the business favorably before you hit the market, the more likely you’ll have a successful outcome.