Demystifying Succession Planning: What’s Next for the Future of Your Business?

This is the first in a series TCI Magazine will run in the coming months looking at exit and succession strategies for owners of tree care businesses. The series will delve deeper into some of the options discussed in this first article, as well as other methods of transition.

Jeff Pfeil, on left, founder of Bozeman Tree Service, an accredited, 19-year TCIA member company, shaking hands with SavATree’s Kelly Gouge. Pfeil sold his company to SavATree in January 2022. Photo courtesy of SavATree.

Starting a business begins with identifying an opportunity to fill a need. Success is built on internal and external relationships that grow the business. But what happens when it is time for an owner to pass control on to a new generation or cash in on that success? While there are benefits to building generational wealth, what happens when the kids aren’t interested in taking over the business? What if there are no kids?

According to research from a variety of sources, approximately 65-75% of business owners are not familiar with their exit options, despite planning to exit the business within five to 10 years. “Many business owners think about selling their company when it’s too late, such as when they’re in a situation forcing them to make an exit, as opposed to being purposeful and planning it,” says Daniel Van Starrenburg, executive chairman with SavATree, an accredited, 36-year TCIA member company headquartered in Bedford Hills, New York.

Every integration at SavATree comes with its own first-100-days playbook and a team to check in and make sure that the new team is successful. “Everyone can see the plan and understand the logic of why we’re doing what we’re doing,” says Daniel Van Starrenburg. Photo courtesy of SavATree.

Proactively doing the research and planning well in advance of retirement not only supports an eventual exit, it also can help build a growth strategy for the business that amplifies the financial rewards upon that exit. However, when an owner is further along in business ownership and ready to start taking chips off the table, or is ready to walk away altogether, a quicker turnaround may be just the ticket.

Regardless of which stage an owner is in, there are options for setting up the business for success in a way that supports the employees, establishes a legacy and generates a financial solution to support the owner’s next phase of life.

Bartlett’s Jim Ingram, from left, with John and Josh McClenahan and Bartlett’s Peter Andreucci, after Bartlett’s purchase of S.P. McClenahan Company, now Bartlett Tree Experts – Portola Valley. Photo courtesy of Bartlett Tree Experts.

Empowering employees with ownership

An employee stock ownership plan (ESOP) is a valuable and flexible tool for an owner to use to empower their team to take the business to the next level. It’s an attractive hiring and retention tool, and helps reduce economic inequality by putting more money in the hands of more people. There’s no change in management with an ESOP. If an owner wants to stay on full time or part time after the sale, they have the flexibility to take some chips off the table and have a liquidity event, giving them time to plan a true exit. ESOPs don’t pay out immediately, so for those owners looking for a quick exit with profit, an ESOP might not be the best fit.

Converting a business to an ESOP involves selling the business to a trust, and, over a period of time, shares get allocated to employees. In retirement, the employees sell those shares back to the company. It’s similar to a 401(k), but the shares are in company stock as opposed to mutual funds. ESOPs are a 100% employer-driven benefit. Employees keep everything from their paycheck, and they also get an ESOP contribution and allocation every year. However, it can nicely complement a standard 401(k) for those companies that want to further diversify retirement-earning options for their teams.

Research has shown that with an ESOP, employees stay longer, the company performs better and everyone in the program will have more money in retirement than they might with some other options. Within the ESOP space, there are tax incentives and flexibility in how to structure the program to optimize outcomes for both the employees and the owner looking to step back or exit.

“Understanding an ESOP is like peeling an onion,” says Josh Zeidman, CPA and managing director with Lazear Capital Partners, a three-year TCIA corporate member company based in Columbus, Ohio. Lazear is a boutique investment-banking firm focused on advising and guiding privately held companies in their ESOP succession and exit planning. “It’s on us, as a firm, to peel back the layers one step at a time to help you understand how to maximize the sale for you while also setting up a program that fortifies your legacy and sets your employees up for a secure future. If you harness the power of an employee-ownership culture, you will see incredible results with employee satisfaction, retention and the bottom line.”

Setting up an ESOP does require expertise. Firms like Lazear understand the intricacies of the tree care industry and offer an all-inclusive experience, with a team of experts to custom-craft the sale and any restructuring. However, it’s feasible to complete the process with a trusted CPA and an attorney with experience in the space. Each has its merits, and the end goal is to set up a sale to the employees that is beneficial for both the owner and employees and causes the least disruption to operations. When done the right way, converting to an ESOP frees up capital for the company to invest in other things to further support business growth.

“There are wonderful tax incentives to ESOPs, including the opportunity for the company post-closing to not pay federal or state income taxes, freeing up significant yearly cash flow to fund future growth, provide employee benefits or to otherwise spend, as well as the potential for the seller to defer capital gains taxes. Beyond that, ESOPs give you the opportunity to preserve what you’ve built while passing the torch on to those who’ve helped you get there, and who will continue to take the company forward,” says Zeidman. “When you want to treat employees well, especially those who have been with you for a long time, ESOPs enable you to provide for a liquidity event in a tax-advantaged manner and preserve the culture, all while providing a retirement benefit that your employees would not receive otherwise.”

Perspective from those who’ve completed this process is important. “I’ve always wanted to transition into an employee-ownership program,” says Randy Owen, president of Owen Tree Service, an accredited, 31-year TCIA member company based in Attica, Michigan. “The ESOP gives me the option to work in the company as long as the rest of the staff would like me to be there, and the financial and operational benefits are nice for the team.”

“We chose an ESOP to put our employees first,” says Bruce Berard, vice president and COO of Stanley Tree Service, Inc., an accredited, 32-year TCIA member company based in Smithfield, Rhode Island. “It was important to ensure the best possible outcome for those who chose, and will choose, to make a career with Stanley Tree.”

Bartlett Tree Experts acquired Buena Vista Arbor Care in Corvallis, Oregon, in December 2021. Photo courtesy of Bartlett Tree Experts.

Preparation for converting to an ESOP includes compiling financials, clarifying the organizational chart and collecting other corporate documentation. Selecting the right partner to help through the transition, combined with having the right leadership team in place and informing them earlier in the sale, can help when the time comes to communicate the shift in ownership to the rest of the team. Owen explains, “We worked with a CPA to build a comprehensive guide to clarify the long-term value of an ESOP rather than letting the staff wait to see growth in the stock’s value in a few years.”

“The trustees and board of directors at Stanley Tree continue to participate in discussions post-sale about best practices,” says Berard. “There also has been an open conversation with the trustees and mid-level managers to answer any questions, and we have several internal initiatives to keep managers and their employees engaged. We’ve been grateful for the support received both during and after the sale.”

Bringing on a financial partner

For owners interested in building a longer off ramp, bringing on a financial partner can help accelerate growth without fully selling to a large acquirer. Private-equity firms are uniquely positioned to partner with entrepreneurs to offer an infusion of capital while lessening the financial burden on the owner.

“A partnership with a private-equity firm can offer a solution for entrepreneurs who may want to diversify their wealth, while retaining a sizeable investment in their business and continuing to remain in control day to day,” says Zach Wells of Clairvest, a 35-year-old private-equity firm based in Toronto, Canada. Within private equity, entrepreneurs have the choice between partnering with a majority/control or minority/non-control investor. Majority investors often seek to purchase 70-90% of a company and can even allow owners to take a less-intensive leadership role, such as a chairperson position. Minority or non-control investors like Clairvest seek to equip entrepreneurs with capital to invest in the business while letting them retain day-to-day operational control.

There are many private-equity firms in North America, so owners can assess which firm is right for them. It is important to understand a firm’s knowledge of the tree care industry and experience investing in similar industries, according to Wells. “A financial partner should not necessarily know the names of all your crew supervisors, but they should understand the value of a good PHC (plant health care) program, for example,” says Wells. Further, connecting with a private-equity firm’s current and former partners creates the opportunity to ask candid questions about the process and their experience. Getting clear on the potential length of the partnership is also important. “We typically approach a new partnership with the expectation of working together for at least five years. Our average in practice has been about six-and-a-half years,” says Wells.

Options at the end of a private-equity partnership include selling the business or even buying back the private-equity-owned share. “Our goal is to more than double the size of the company during our partnership,” says Wells. “In addition to the company’s growth, we strive for improved quality of the business through better systems, a larger employee base and a diversified set of repeat customers.”

Selling the business

Aside from passing the business down through the family, perhaps the most common, albeit misunderstood, selling tool is a mergers and acquisitions (M&A) transaction. Selling the business is not reserved for owners who want to retire – it can be an effective tool for those owners who want to benefit from the structure and resources that a larger company can offer.

“Every seller is different, and their motivations are different. When considering a partnership, elements such as their emotional, financial and long- and short-term objectives are important. We appreciate these differences, and, as a result, we do not want to take a cookie-cutter approach,” says Patrick M. Covey, president, chairman and CEO of The Davey Tree Expert Company, an accredited, 49-year TCIA member company headquartered in Kent, Ohio.

Jim, left, and John Wickes show off their new company logo after their company, Wickes/arborists, of Spring Valley, New York, was acquired by Davey Tree in 2020. Photo courtesy of Davey Tree.

“It’s a great advantage for us to be able to offer more to the teams that partner with us. We try to maintain the local and small-business feel, with the advantages of operating on a national level,” says Covey. “With multiple offices in the same market, employees have the flexibility to move around and up within the company. And, as a large employee-owned company, we can offer many benefits and options that many other companies cannot.”

These large, national and even international companies look for a variety of criteria when considering a partnership. “There are a lot of factors, both tangible and intangible, that are important to us and that don’t show up on a P&L statement,” says Gregory Daniels, vice chairman and chief business development officer for Bartlett Tree Experts, an accredited, 47-year TCIA member company based in Stamford, Connecticut. According to Daniels, these include company culture, geographic location, services offered, the company’s history and reputation, the existing client base, safety policies and procedures, the talent level of employees and the owner’s readiness to sell the business.

“The thing that elevates a company for consideration for Davey is the people. Are we onboarding a good, safe and legal workforce?” explains Covey. “We rely on TCIA Accreditation. Those companies have shown an appetite and desire to have a well-rounded company that complies with a certain set of standards, and that’s who we want to be. We know they’ll have safe practices and are selling to clients we can sell to.”

To clarify, all three companies interviewed about M&A transactions emphasized that it’s important for everyone involved to think about the purchase as a partnership. These companies are very invested in identifying a culture match, to give each partnership the best possible outcome for success.

“We’ve observed that the number-one thing owners care about is ensuring the relationships they’ve built with employees, customers and vendors are preserved,” says Carmine Schiavone, CEO of SavATree. “There is definitely a money component, but most people are looking for help in navigating change management and preserving their legacy while ensuring their employees and other key relationships are nurtured and cared for.” By focusing on culture, the owner can feel confident they’re leaving their business and employees in the best hands, whereas the new owner can feel confident that employees and clients will stay to support the future of the business.

“Selling a business can appear to be intimidating. I want to emphasize that anyone selling their business should not be intimidated by this process,” says Daniels. “The most important thing we do is offer a list of referrals of like-sized businesses in a very similar situation for owners to contact. Those people are willing to talk about their experiences, which really helps the seller gain confidence in the process, as well as eases their fears of the road they’re going down. We want the seller to feel comfortable with their decision to sell their business.”

The time it takes to sell a business is entirely led by the seller. According to the contributors for this article, a sale can take as little as 30 days for a simple client-list transaction and as long as six months, or even longer, for more complex acquisitions. The time it takes is driven by how well prepared the seller is with financial, safety, sales and other records used in the due-diligence process, as well as how mentally and emotionally prepared the owner is to sell. Another element to consider is when and how to break the news to employees of the sale.

Swingle, Mountain High and SavATree trucks and teams. Photo courtesy of SavATree.

“Being thoughtful about sharing the news with employees is important. It’s normal to wait until the deal is somewhat structured to tell the key managers, and then telling the rest of the team so they’re aware of the process,” says Covey. “We’re focused on being open and communicative and on building trust, while also clarifying all the career and salary opportunities available to the new team. Everything we can bring to the table helps tremendously with this discussion.”

Daniels clarifies, “Some potential sellers approach us as much as three to five years before they intend to sell. We will advise them on what we look for in a company. When the time for a sale comes, we have internal resources to offer the sellers to help them through the process, plus we have a dedicated team that helps transition the company to Bartlett after the sale.”

“Selling a tree care company is such a great way for someone to monetize what they’ve built,” says Van Starrenburg. “To reference a conversation I had with TCIA leadership many years ago, it’s the ultimate compliment to an entrepreneur when some day someone wants to buy their business, because it represents the success of their life’s work.”

It’s never too late to start succession planning. Whether an owner is proactively considering the future of the business or it’s time to start transitioning to the next phase in career and life, know that there are a variety of favorable options available. Succession planning can easily begin with just a few phone calls.

Emily W. Duane is a freelance writer specializing in business and marketing topics for the outdoor trades and recreation industries. She is currently based in Denver, Colorado.

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