What is my landscaping company worth now in light of the pandemic?
Please read this piece keeping in mind that we’ve never been in this situation. How long it will continue and/or how long it will take for our economy to recover is anyone’s guess. We are in the Big Unknown.
That being said, I think it’s helpful for readers to know what experienced advisors working with “Main Street” sized private companies are seeing in terms of buying and selling companies. There will be regional and size differences in deals, but here are a few “big picture” observations.
- Most lenders and companies were completely distracted until just a couple of weeks ago with PPP or EIDL loans and responding to client and employee concerns. Some advisors are starting to see a few deals being made (LOIs) again this week.
- For existing deals, about half of buyers and lenders are re-evaluating deal terms based on re-projecting the deal’s underlying cash flows.
- Essential businesses (including landscaping) are more likely to see offers this year because they do have some continuing revenue.
- As I noted in my earlier post, there are active buyers. There is money in the system (unlike 2009 when banks were frozen.)
- However, with the Big Unknown, buyers (and their lenders) will be applying even more rigorous requirements in their cash flow analysis as they evaluate sellers’ companies.
- Some “SBA banks” will say their lending capacity will be restricted based on recent advice that 7A loans are included in the PPP allocation. First, this could easily change with another government program and second, there are other sources of money available.
The range of multiples for “Main Street” sized companies probably won’t change dramatically. However, net income probably will. Therefore, your estimation of value (the price you could get for the company) will be affected.
Some things won’t be likely to change, though, based on our experiences from the past several “crisis” that we’ve weathered. These guidelines still work when thinking about valuations/pricing for your company. Value is based on future cash flows, just like other investments. You expect to put money into your company and receive a return in the future on that investment. (Return on Investment)
As the world gets back to its “new normal”, we expect the landscaping industry will have future cash flows more similar to those of prior years than some other groups (sit-down restaurants, for example). Revenues are still being generated and businesses will figure out how to grow and optimize their bottom line the longer this goes on.
Compared to prior years, it is likely that your revenues will be decreased and your expenses will be increased. Your net income will change. Keep in mind that your company’s valuation is not based on one year’s experience. It is usually based on the experience of past years, projected into the future and discounted back to present dollars. A change for one period may be eliminated. It is important that the owner can explain why and how the temporary blip occurred and what the plans are for recovering from it. The Big Unknown is the future–when and how will we be recovering from this pandemic? Cash flow projections will need to be prepared based on several scenarios—base, worse and best cases.
If you are a buyer or seller in this market, now is an ideal time to make a plan.
- Assess your most likely result
a. For sellers- Is the minimum price worth pursuing in your current state? If important measures like your Gross Margin are not optimal, should you invest in improvements before selling?
b. For buyers- although we may be moving to a buyers’ market, there will be a finite amount of inventory in landscaping companies for those buyers looking for companies of significant size/location. Will competition drive prices up in spite of the market?
- Decide whether/how to move forward.
a. Get educated on the process
b. Build your team and begin putting your scenarios together so you will be poised to take action.
Harvest the Green Partners works with both buyers and sellers exclusively in the landscaping and green industry as they work through preparation for sale through to completion of the transaction. Please do call Alison at 224-688-8838 or [email protected] if you would like to discuss your situation.