The consequences of being too late for various things in life will vary. Miss the bus? That’s okay; you can wait for the next one. However, when it comes to exit planning, being too late to build your business into something buyers are interested in can result in the destruction of the value of your business.
“Unfortunately, there have been many examples of this with landscape companies,” says Ron Edmonds, principal consultant with the Principium Group, based in Memphis, Tennessee. “A widow or widower of a landscape company owner can be faced with an impossible task – just when they are most vulnerable.”
Edmonds says another possible situation that can occur is being presented with some fantastic, unexpected opportunities but not being in a position to take advantage of them.
“You are not in a buyers’ market anymore, like we have been for the last 12 years,” says. “Less potential buyers and multiples have fallen. Maybe the landscape industry loses the economic appeal that it once had. You start your exit plan when you are 65 years old and your #2 person decides to retire. Or gets ill or in a debilitating accident. The owner(s) might take ill. Or the spouse does. That stuff can happen at any age, which is more the reason to have your succession and exit plan in place.”
Don’t Delay The Process
Fochtman says one major mistake is underestimating how long it takes to effectively implement an effective exit strategy. He says depending on the weaknesses of the company, it’s a three to five-year process.
Weaknesses could include not having much middle management, out-of-date assets or the wrong revenue mix.
“Recurring revenue is still the #1 driver of increased multiples of EBITDA when selling,” Fochtman says. “The company may be too heavy on construction. Then as they start to work their strategy and they think they are ready or close to being able to maximize value, the economic market may be flat or down. We may be in a recession. This it is why it is so important to have and work your exit strategy.”
In one example, Fochtman visited a commercial landscape company five years ago and after assessing, he informed the two partners they couldn’t afford to sell yet as they wouldn’t get enough money at time of sale and certainly wouldn’t net enough after tax. He provided them a plan, which they implemented and they sold the company last year for 2.5 times what they were worth five years prior.
Be aware that having a profitable company isn’t enough. Fochtman says a poor company culture is a deal killer. This is another aspect that takes time and effort to change.
Consider Your Team
Edmonds notes that crafting an exit strategy is a team project. Your team may include your attorney, your accountant, a wealth advisor and others. Seek out these individuals if you don’t already have them.
“Most of the really great companies in our industry use outside consultants beyond legal and accounting,” Fochtman says.
Aside from considering who you need to get involved in helping execute your exit strategy, you also need to give thought to how you might appropriately reward the team members who have made the business successful.
“Many business owners find great success by encouraging their employees to ‘think like an owner’ as they fulfill their job responsibilities but don’t treat them that way when reaping the rewards of the business’s success,” Edmonds says. “They may not even think about their employees very much when negotiating with a buyer, but often do, later on when they have time to think about it. It is a much better idea to factor that in to their thinking as they plan their exit.”
Think Through Your After
Other factors you also need to consider in your exit strategy are how long you’ll need to stay on post-sale, coming to terms with the legacy of the business and figuring out what you’re going to do next.
The nature of the business and the transaction will determine if you’ll be able to exit at close or if you’ll need to stay on for a few years.
“A business will likely be more valuable if the owner is willing to stay in a leadership position for three to five years, but in some situations, an owner can stay on for a very brief period,” Edmonds says.
An aspect of exiting you need to mentally come to terms with is the legacy of the business. You may want it to continue under its existing name with its current staff or you may care more about the employees accessing new opportunities within the larger organization.
Fochtman says the reality is past owners cannot ensure their vision for the company will continue after leaving.
“But I would say that most companies have evolved pretty well as the new ownership group has entered,” Fochtman says. “There are not many bad stories so far as these larger companies have evolved.”
Edmonds says you shouldn’t rush to leave the business without something in mind for the future.
“The most satisfying ‘next chapters’ happen with planning and thought,” Edmonds says. “Some business owners start some sort of new business. Some get involved with a nonprofit. Some plan extensive travel. Others will decide to write a book. Doing nothing is not a great idea for most people.”
