Do you have a Risky Business?
The value of your business is tied to the future cash flow that the business is expected to generate, specifically adjusted to how you compare to similar size and type of companies as well as the risks associated with those cash flows. Those risks to your cash flow will vary in terms of types and degrees of risk. Some are related to your industry and region and others will be specific to your company. Following is a list of the type of risks that effect your business value. How does your company stack up?
Economic Risk
How will your company be affected by the economic outlook (both overall, in your region and for our industry?) For example, with inflation raising interest rates for construction loans, demand may decrease for new design/build projects of certain sizes. Will maintenance costs also be affected?
Business Risk
How is your company affected by factors like sales trends? Are you reactionary, with results varying widely, increasing, and decreasing from period to period? OR does your company grow at a steady rate year over year? How much and big are the peaks and valleys in your cash flow? Why do they exist? As you know from watching public companies, steady, smooth growth in a company is considered attractive by investors. Predictable cash flow creates confidence in your ability to pay back loans, for example. A landscaping company that is operating on a steady growth plan will probably be able to borrow money at a lower interest rate than a more volatile one.
Operating Risk
What is the cost structure of your company? Do you have attractive gross margins compared to the industry benchmarks? Do you manage your costs so that fixed costs won’t destroy your profits when revenues decrease? I compared two similarly sized companies recently and found that while they had similar organizational structures, one owner had increased his fixed compensation costs dramatically while the other used an increasing bonus structure to pay that marginal difference needed to keep his team together. When times are tight, the owner with less fixed overhead in salaries will not have to think about laying off people as soon as the owner with fixed costs built into his compensation program. That flexible incentive pay owner also had a “built in” escalator already built into his people’s compensation. If they hit certain targets for net income, they knew what their increase would be. That is just harder to leave with money on the table.
Financial Risk
How much leverage do you have in the company? Are you able to easily cover your debt payments or are you at the edge of what you could afford? What happens when interest rates increase and/or revenues dip due to higher costs passed on to customers? OR is your company sitting on a lot of cash that is not “working” to build new revenues or improved infrastructure? If so, you may be under-leveraged. That might be fine if we are going into a recession, but it is still risky for the company since you are not managing the company to achieve its full potential. Eventually, this will become clear as your company can’t keep up with others in a similar market of your size. They will deploy their capital to continue to build their strength and abilities. At some point, this will become clear to employees and potential customers.
Asset Risk
How does your fleet and equipment look? Are you keeping ancient equipment running by over investing in repair costs or are you optimizing the benefit of new purchases for tax and operations purposes?
Product Risk
Do you have all your eggs in one basket? Are you a total mowing company and have no other services? If you have a very narrow range of services, you are at risk of becoming obsolete or easily replaced. Have you noticed the number of companies that increasingly offer a diversified set of services? Not only does this give you a fallback if one or more of your services becomes “non-essential”, but it also often optimizes your labor if, for example, your crews can be used for snow removal or holiday lighting in the winter. Your customers will generally like the effect too, as they are working with service providers who know their property and they are used to seeing them there.
Technological Risk
Have you been keeping up with the amazing software that has become available to landscape companies in the past decade? You could be using technology to automate processes that are cumbersome (paper pay forms, payroll, measuring, estimating, etc.). If not, you may be using labor to do repetitive tasks that could easily be performed by machines. The benefits of keeping up with technology appropriate to your company’s size and complexity benefits can make a huge difference in terms of employee and customer satisfaction as well as costs.
Regulatory Risk
As we’ve seen with COVID, federal, state, and local government and regulatory agencies all impact the landscape industry’s ability to perform work in a dramatic fashion. Even relatively small issues like leaf blowing in certain townships can create havoc for some landscaping businesses. Your valuation should include the impact of these kinds of risks on your bottom line.
Legal Risk
Is your company at risk in terms of employee discrimination or other HR issues or liability issues related to product or service performance or other potential legal issues? The costs in money and in time for defending yourself against these claims could significantly impact your profitability. Do you have the proper kinds of insurance to protect against these claims? Have your processes and procedures and Employee Handbook all been updated to attempt to mitigate your exposure? I’ve seen disgruntled employees make claims that started a Wage and Hour dispute that could have killed some small companies (and did so, in one case.)
If you would like to discuss valuation for your landscaping business, feel free to give me a call. If you haven’t started your exit planning and want to begin the process, let’s talk. If you already know you want to sell your business or buy another, please give us a call to discuss how we may be able to help you with that process. You can reach me via email: [email protected] or on my cell phone a: 224-688-8838. We’re here to help you Harvest Your Potential!
