Illustration courtesy of Natalya Kosarevich/iStock.

Private equity (PE) funds control more than $9 trillion in assets and thousands of companies. Not surprising, PE firms and investors have shown an interest in the tree care industry. But whether as a current target or attempting to attract the interest of a PE firm, how can a tree care business owner know whether the firm is a good match?

Research is the backbone of successful deal making. In an industry where timing, accuracy and insights separate top performers from the rest, a rigorous approach to research helps a tree care business owner source the best opportunities, mitigate risk and discover a compatible partner.

Evaluating the financial health and operational strength of a PE firm requires examining its track record and performance metrics, as well as the stability of its portfolio. Tree care business owners evaluating PE firms are looking at how well they understand field operations, services offered and local crew dynamics, rather than just the financials.

At its most basic, evaluating a PE firm or investor should validate the owner’s initial insights and provide a closer look at the potential risks. One of the main objectives when evaluating a potential suitor is assessing the PE firm’s management team.

Evaluating a PE firm’s management, including their track record, leadership style and alignment with the tree care business owner’s aspirations for future growth, can be revealing. A strong leadership team can significantly influence the long-term success of the business.

Defining clear objectives is essential for an effective evaluation. After all, it is those objectives that will guide every subsequent step in the research process, ensuring that efforts stay aligned with the owner’s future plans and goals.

Taking a deeper dive into the PE firm’s operations, financials, legal standing and strategic positioning includes the following:

• Industry analysis: An industry analysis can help a tree care business owner understand the fields the PE firm is currently involved with. Obviously, a PE firm’s investments in other, similar businesses will help evaluate the suitability.
• Financial analysis: Evaluating the economic viability and the performance record of a PE firm involves digging into past and current performance. This knowledge can provide a reliable projection of future performance, sustainability and the risk they’re willing to take.
• Management-team assessment: As mentioned, a PE firm’s leadership can have a significant impact. Whether the PE firm’s management understands which industry credentials are the most meaningful, what services in a company’s book of business are the most profitable and whether the company conforms to standards for safety and professional practice are predictors of how successful it will be managing the business.
• Operational analysis: Delving into how a PE firm functions on a daily basis with its other acquisitions can provide a picture of what to expect down the road. What value do they place on company culture? Do they understand the local market for tree care? Do they empower existing management?
• ESG considerations: Environmental, social and governance (ESG) considerations are important to the owners of many tree care businesses. Evaluating the PE firm’s position on these factors can be used to evaluate the long-term sustainability, ethical standards and social impact of the PE firm.
• Evaluating interested parties: Deciding on the right path for the tree care business and its owner is as important as identifying the types of PE firms that might complement those plans. Is an acquisition or investment by a private equity firm the best path forward? Or would an outright sale, a merger or taking on a partner be a better strategy?
• Evaluating exit strategies: Exit-strategy evaluation is a forward-looking component of PE research. It helps the tree care business owner understand the paths offered and the potential financial return with questions such as:
  • Short- or long-term horizon: Is the PE firm looking to flip the acquired business in three to five years, or do they operate on a long-term horizon, focused on permanent legacy and backing?
  • Owner rollover options: Does the PE firm permit founder/mid-career equity retention (a “second bite of the apple”), or do they demand a rigid 100% buyout that erases local accountability?

Obviously, thoroughly evaluating a PE firm requires the right tools. From gathering data to evaluating deal options, having access to the right resources can make the difference between missed opportunities and a timely, profitable future relationship. Among the available research tools are:

• Software platforms: These tools help identify targets, gather company intel and streamline the sourcing process. Some platforms provide information about the PE firm’s finances, its track record and even an overview of past transactions. Plus, the internet is not only a good source of financial and operating information, it also can help when seeking interested PE firms.
• Valuation analysis: A basic computer program, such as Microsoft Excel, can help build financial models and comparisons of benefits and scenarios.
• Industry reports and market research: Quite a few firms exist that can provide insights, trends and benchmark opportunities.
• Networking: Conferences, trade shows and other industry-related events offer the owners of tree care businesses a chance to uncover leads, test hypotheses and stay current on market conditions.

Each of these tools enhances the depth and accuracy of research into PE firms, their terms and track records. These and other tools help tree care business owners move faster, ask better questions and, ultimately, make more confident decisions.

PE transactions involve high leverage, cash extraction and short-term exit incentives – but all too often hide the risks. Conducting due diligence provides the clarity needed to confirm assumptions and finalize terms with confidence.

Due diligence also can reveal the potential risks of a PE transaction to workers, customers, suppliers and the tree care operation’s creditors. Thus, it reveals the need for selecting the right PE firm, if that is the desired path.

A structured research process is essential in helping the owner of a tree care business stay focused, reduce risk and make more informed decisions. With so many moving parts and options, research is the best tool for evaluating a PE firm and determining whether it is the right path for the tree care business – and its owner.

Mark E. Battersby is a freelance writer based in Ardmore, Pennsylvania. He has contributed tax and financial articles to TCI Magazine for more than 20 years.

This article is the fourth in a series designed to help tree care business owners better understand private equity and related transition options. If you have any questions or feedback about this series, please email editor@tcia.org.