Business Smarts: When to Start Exit Planning - The Edge from the National Association of Landscape Professionals

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Business Smarts: When to Start Exit Planning

Currently, there are a number of lawn care and landscape company owners who started their business in the late 70s or 80s who are beginning to seriously consider their retirement options. If you are one of these owners, or perhaps someone younger who is wondering when you really need to start working on an exit plan, here are some things to consider. 

Exit Plan Options

There’s no right or wrong way to leave the business. It all comes down to your long-term goals. One of the most common options is to sell your book business to another local landscaping company or a private equity firm. Another common option is where an owner wants to stay in the business for a few more years and the payout is divvied out over the next three years or so based on client retention to help with the transition process.

A generational transfer is also a possibility if there is a family member to pass the business on to. Owners can get their retirement money in several different ways with this option. One structure is where the owner gets a bigger payout over time if they help the business continue to do well. This serves as an incentive to keep things operating and set the next owner up for longer-term success. Another option is selling the majority stake to the family member taking over.

“Dividends are a great way to take money out of the company to the extent that it is cash flowing,” says Jennifer Murray, vice president of McFarlin Stanford, leader of their valuation and financial advisory practices.  

Murray says owners need to think through their objectives and determine how much they would need to sell their company for in order to sustain their type of lifestyle.

What Buyers Are Looking For

If one of the first two options is what you are considering, you need to make sure your business offers what buyers are interested in.

Chris Psencik, partner and vice president of McFarlin Standford, leader of their construction operations and sales coaching practices, says consistent cash flow is the number one thing. Murray strongly recommends owners focus on top-line growth and their margins. Having a diverse client base and revenue stream is also ideal.

“Buyers are really focused on what falls through to the bottom line versus how much you’re growing at the top line,” Murray says. “You can have $10 billion of sales but if you have $1 worth of profit that’s not terribly exciting. Buyers are looking for margins and they’re really looking for consistency.”

Creating a track record that shows consistency and an upward trajectory of growth is particularly attractive to buyers. Psencik says having physical contracts in place with customers is also important.

“When the business is transitioning, what happens is there’s an opportunity for the customer to go start shopping around,” Psencik says. “I do see a lot of clients will leave during a leadership change. That’s when they’ll go price shop and try things out because there are no formal agreements in place.”

A lot of companies are currently being bought for their labor, so you should have all your documentation on hand for your employees.

If you’re specifically trying to attract private equities, they are looking for upward vertical opportunities.

“What that basically is, is I have maintenance, which rolls into arbor tree care which rolls into irrigation repairs and plant healthcare and all three of those are interrelated to that maintenance client base,” Psencik says. “So the upward vertical that goes alongside that trajectory is exponentially higher and the profit margins that are tied to those are much higher.”

Not having a leadership team in place can be very detrimental if you’re just an owner/operator and when you exit the business there’s just a team of foremen left. Psencik says they encourage owners to have a middle management team, and a clear path of how the business will operate. Buyers want to see there are knowledgeable people in place with the business who can keep it running while they’re figuring everything out.

“The most successful sale processes have lots of interested buyers, and the pool of buyers will be biggest for free-standing businesses with solid management teams and a deep bench,” Murray says. “If you don’t have that you will eliminate a whole class of buyers, i.e. private equity and some more hands-off casual owners.”

Never Too Early to Start

A major mistake of exit planning is waiting too late in the game to start considering how you plan to leave the business.

“The biggest issues I find with our coaching clients is they decide to start thinking about this when it’s time to actually make the decision, and so it’s earthshattering for them when they realize that what they put 25 years into is not worth what they thought it was going to be,” Psencik says.

Preparing a business for sale is a lengthy process and requires a lot of energy from the leadership team for at least several months.

“Some business owners are surprised by how much pre-planning and work goes into the process and how if you start that earlier you can have a wildly different outcome in terms of value,” Murray says. “If you put in the work three to five years in advance, you can come out with millions of dollars difference not tens of thousands of dollars of difference.”

By getting your company’s valuation earlier on, you can work on getting the business to where it needs to be so it is much more valuable by the time you are ready to retire.

Jill Odom

Jill Odom is the senior content manager for NALP.