Preparing to Sell Your Business A Guide for Green Industry Business Owners Ron Edmonds The Principium Group Share this e-book: LinkedIn Facebook Twitter
2012 The Principium Group All rights reserved. Permission to quote from this document is granted with attribution to the author. The Principium Group Mergers & Acquisitions Exit Planning Capital Formation Serving the Green Industry Ron Edmonds redmonds@principiumgroup.com 901-231-4180 (direct) 901-351-1510(cell)
Contents Introduction... 1 The Four Elements of Being Prepared to Sell Your Business... 2 Being Mentally Prepared to Sell Your Business... 4 Being Financially Prepared to Sell Your Business... 8 Preparing Your Business for Sale... 11 Knowing When the Time is Right... 23 About the Author... 25 Additional Resources... 26 The Principium Group... 28
Introduction This e-book is intended for business owners in the green industry, owners of lawn and landscape and similar businesses, who are contemplating the sale of their businesses, either now or sometime in the future. Our thesis is simple that business owners who go through the process of preparing themselves to sell their business and preparing their business to be sold are likely to have a much better result when the time comes to sell their business in terms of the price which can be realized, the time it takes to sell and whether it can be sold at all. We invite you to read this short e-book and check out the additional resources listed as well. In the mean time, if you would like to discuss your particular situation, please give as a call or email. 1
The Four Elements of Being Prepared to Sell Your Business In order to successfully sell a green industry business (or any other business), four things need to happen. One You, as the business owner, need to be mentally ready to sell your business. Two You, as the business owner, need to be financially prepared to sell your business. Three The business needs to be ready to be sold. Four Market conditions need to be right for the sale of the business. 2
One of the first things we ask potential clients who approach us about selling their business is Are you ready to sell your business? Almost invariably they say YES. Sometimes, that is a well-thought-out response. But often the yes is influenced greatly by some personal or business frustration the business owner may have or anticipate in the future. When we delve a little deeper into the topic of whether a seller is ready to sell his or her business, we break it down into two dimensions whether they are mentally and emotionally ready to sell the business and whether they are financially ready to sell the business. Let s look at the dimensions in a bit more depth. 3
Being Mentally Ready to Sell Your Business In the best of situations, the decision to sell a business that you have built into a successful one and have operated for a number of years is an emotional one. Over the years, we have been involved in a number of situations in which a business owner believed he or she was ready to sell their business and we went through the entire process of marketing the business and finding a prospective buyer, only for the prospective seller to ultimately decide they couldn t go forward with the deal. That is a costly mistake to make because of the time and effort that went into the process. 4
Here are some questions to ask yourself to help measure your readiness to sell the business: Can you imagine someone else running the business that you started and grew? How will you feel if you do not agree with some of the decisions the new owner makes? Can you imagine yourself not running the business? Do you know what you are going to do after the sale is completed? How well fleshed out are those plans? Do you have outside interests now or is practically all of your time spent on the business? When was the last time you took a vacation and didn t have to call into work at least once a day? Do you secretly enjoy how reliant the business is on you as the leader? 5
Sometimes it is pretty difficult to answer questions like that honestly even to yourself. If, after asking yourself questions like that, you find that maybe you aren t as mentally ready to sell your business as you thought, here are a few suggestions: Work on developing your management team and being able to trust them with day-to-day operations. In addition to helping you build some distance from day-to-day operations, the existence f a strong management team will be a very important factor in the sale of the business. 6
Work on the goal of being able to take a one or two week vacation without the necessity of being in the loop on everything going on in the business? Set out the policies and procedures you want the team to follow in your absence, including what issues are of the level of importance that you need to be contacted. Develop some outside interests. Work on developing what your plans will be after the sale is completed. Are you going to retire? If so, what are you going to do? Are you going to start a new business what will be required? Do you plan to take a new job? 7
Being Financially Ready to Sell Your Business When we say Are you financially ready to sell your business?, what we mean is: Does the combination of the expected proceeds from the sale of your business, after tax, along with your other financial resources, including savings and income to be generated from a new job or venture, provide you with the financial resources to achieve your post-business sale objectives. 8
That can be a pretty serious question and sorting out the right answer involves several inputs, including: What is your business really worth and what can it bring in the marketplace? What will the tax consequences be in your particular situation. What do your other financial resources look like? What are your financial requirements going forward? How much cash flow will you need to maintain the lifestyle you expect and where will it come from? You may need several advisors to sort that, including a merger & acquisition professional, a financial planner and your tax accountant. 9
What can you do if you determine that you are not financially ready to sell your business? Here are some possibilities: Defer the decision to sell the business until you are financially ready. Rethink your post-sale lifestyle and adjust it accordingly. Work on improving the value of your business so that it comes closer to meeting your needs. 10
Preparing Your Business for Sale Preparing a business for sale is not usually one of a lawn or landscape business owner s highest priorities. There are really two reasons. A green industry business owner usually (but not always) does not start his or her business with the end game of selling it in mind. In addition, the complications of the day-to-day running of a business often keep business owners from effectively planning for the future. 11
Nevertheless, business owners ultimately have to confront the reality of needing to sell or transfer their business. 100% of business owners will sell their business, transfer it to a family member or liquidate their interest, planned or unplanned, either during their lifetime or at the time of their death. Often, the need to sell is triggered by unforeseen circumstances, such as death or disability, a divorce or other circumstances, which may put extra pressure on the situation and make effective planning and decision-making very difficult. Some basic steps taken well in advance will help facilitate a smoother process and likely produce a better financial result when the time comes to sell. 12
By far the most important thing to do in preparing a business for sale is to keep it growing and operating profitably, generating consistent positive cash flows. Another key issue is structuring the business to thrive without the owner involved. That is a very big step for many green industry business owners who have built their businesses around the talents, skills and personality of the owner. Often, the business owner is the lead sales person, the operations supervisor and the quality control officer. His or her name is often on the business. If the owner s involvement is crucial in terms of either sales or operations, a buyer will likely be wary of an acquisition. On the other hand, if the business has built a management team and depth in operations and sales, a buyer can imagine taking over the operation and retaining its most important assets its people and its customers. If there is a sales team and a sales system, the 13
buyer can see the pathway to continued growth and profitability of the business, making it much more attractive. It is a good idea to take an objective look at the business and consider what attributes it has that would make it attractive to you if you were a potential buyer. Focus on those things you can positively affect in the period before a sale is to be made. 14
It is wise to identify those areas that will be most attractive to likely buyers and emphasize them. In many cases, buyers will put a premium on recurring revenues, such as contractual maintenance, lawn care and irrigation service revenues. Unless you have significant lead time, it is not practical or a good idea to completely change the focus of the business, but it may be possible to make some changes that enhance the recurring revenue components. In addition, by implementing effective systems, you may be able to make some theoretically non-recurring revenues have some of the characteristics of recurring revenues. For example, although design-build projects are not recurring revenue, if you have an effective system for generating new design-build projects on an ongoing basis, that segment of the business can still be attractive. 15
Another thing to address is the quality and timeliness of financial information. Sit down with your accountant and discuss your financial statements, focusing on what can be done to improve their quality and timeliness. A buyer will be very wary when the financial statements he or she is given are full of errors. In addition, if financial reports are not timely or it takes a long time to respond to a buyer s questions, buyers will often lose interest. Always remember that whatever information you give to a prospective buyer will have to hold up to a much higher level of scrutiny than you may be used to. 16
Take a look at your balance sheet and consider how much working capital is tied up in the business. Managing the business to minimize working capital (mostly accounts receivable minus accounts payable) will often increase the value of the business, even if working capital stays with the seller. The less money a buyer will have to inject into the business as working capital after a sale closes, the more the business will be worth to him or her. 17
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Another important step is identifying potential roadblocks to completing a transaction and working to resolve them. Some real-life examples of potential roadblocks include tax issues, including unpaid taxes or unfiled tax returns. In many cases, these issues will not derail the deal if they are identified and addressed. However, if a buyer finds this kind of issue in due diligence, his or her confidence will be lessened. Other potential roadblocks include unresolved litigation or other claims. If possible, these matters should be resolved. At a minimum, they should be openly discussed with the potential buyer so that their impact can be evaluated and a solution can be found. 19
One more potential roadblock is the ownership of the business: The ownership should be clear. One potential obstacle is the existence of former partners who still legally retain an interest in the business. Another can arise from promises of equity ownership that may have been made to a key employee. Such promises are often forgotten by business owners, but rarely by the key employees to whom the promise was made. If such issues emerge late in the sale negotiations, they are harder to resolve without unexpected costs, difficulties and delays. 20
Another important step involves the business s facilities and equipment. Do they present a favorable impression of the business and its operations? Clean it up! One thing we often see is a junk pile of old equipment somewhere behind the main warehouse facility. Not only does this present a generally negative impression, but it also may raise questions in a buyer s mind about potential environmental liabilities. 21
Cluttered and disorganized storage facilities present a negative impression, even if the facilities are not part of a proposed transaction. Do the facilities and equipment appear to be well-maintained and in good condition? This will affect a buyer s perceptions of the value of the business, especially if he or she perceives there is a significant amount of deferred maintenance that will have to be addressed after a transaction is closed. As you plan for the sale of your business, you will also want to assemble your team of advisors your lawyer, accountant and, in many cases, a merger and acquisition advisor. Make sure they are dealmakers, not deal breakers. Your team will guide you through the process and help you avoid mistakes along the way. 22
Taking steps to ready your business for sale will often improve both the value of your business and its marketability. In other words, preparation can help increase the ultimate sales price of your business and make it more likely to sell within a reasonable time frame. 23
Knowing When the Time is Right Thus far, we have addressed areas that you as the business owner, can directly impact, including your mental and financial readiness to sell and the readiness of the business to be sold. What we haven t yet addressed is the fourth element: Market conditions are right for the sale of your business. 24
Unfortunately, this is something that you cannot control. That makes it all the more important to address those you can influence. So, when are market conditions right? The primary determinant is that there are active buyers in the marketplace who are motivated to make acquisitions and are not unduly burdened by such factors as a lack of access to financing. The motivation of buyers may be affected by many issues, such as perceptions of industry growth prospects, general economic conditions, general uncertainties and a variety of political issues. Of course, such issues are extremely hard to predict. What you can do is take steps to make sure both you and your business are ready for a sale when market conditions do become favorable. That way, you will be positioned for the best possible outcome in a sale of your business. 25
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About the Author Ron Edmonds serves as president of The Principium Group. His practice focuses on mergers & acquisitions, exit planning and capital formation in the green industry. He has extensive background in all phases of the merger and acquisition process. He has participated as an advisor or intermediary hundreds of acquisitions over the past ten years. He is a frequent author and speaker on topics related to green industry mergers & acquisitions. He can be reached by phone at or email at redmonds@principiumgroup.com. 27
Additional Resources Books by Ron Edmonds (available through Amazon.com) Green Exit - Exit Planning for Lawn and Landscape Business Owners How to Sell Your Green Industry Business Charting a Course Acquisition Strategies in the Green Industry Green Industry Merger & Acquisition News, a monthly electronic newsletter published by The Principium Group. You can read past issues and subscribe via email at greenmergernews.com The Sellability Score: Take an online quiz and find out whether you have a sellable business and find out how to improve your business s sellability. Click here 28
Websites: PrincipiumGroup.com SellMyGreenBusiness.com (our blog) GreenMergerNews.com GreenExit.biz 29
The Principium Group Mergers & Acquisitions Exit Planning Capital Formation Serving the Green Industry info@princiiumgroup.com The Principium Group P.O. Box 414 Cordova, TN 38088 Share this e-book: LinkedIn Facebook Twitter