Exit Strategies, Part 4: Securing a Legacy with Private Equity

This is the fourth article in a series TCI Magazine is running that looks at exit and succession strategies for owners of tree care businesses. Part 1, “Demystifying Succession Planning: What’s Next for the Future of Your Business?” ran in the May 2022 issue. Part 2, “Demystifying Succession Planning: Keeping It in the Family,” ran in June 2022. Part 3, “Selling the Business,” ran in August 2022.

Legacy is something many business owners want to preserve when they’re preparing to move on to the next phase of life. Andy Felix is no exception. Felix is the owner of Tree Tech, a 35-year TCIA member company based in Foxborough, Massachusetts. Founded in 1986, Tree Tech’s team is 100 strong, with more than 10 certified arborists on staff, and the business has earned both TCIA Residential/Commercial Accreditation and Utility Contractor Accreditation. While this certainly is a legacy worth maintaining on its own, Felix’s family history in the industry brings the idea of legacy into sharper focus.

Felix’s parents, Bob and Pat Felix, were passionate supporters of the National Arborist Association, today known as the Tree Care Industry Association, running the organization together without any staff – just volunteers – for many years. Bob Felix’s dedication to the green industry spanned more than 30 years, including working for a successful tree care business before taking over management of the NAA. After Bob’s passing in 1996, Pat continued to work with the Association until her retirement in 2001. Andy Felix served as chair on the TCIA Board of Directors in 2018 and continues to be involved in the organization.

Andy Felix served as chair of TCIA’s Board of Directors in 2018. He is shown here addressing attendees during Winter Management Conference in St. Kitts in February 2019. TCIA staff photo.

“Because of my family’s long-standing involvement in the industry, preserving our legacy was very important to me and heavily influenced my decision-making process. After a lot of education and much consideration, I felt that private equity was the best option, both for my family and for the opportunities for my team going forward,” says Felix.

A brief overview of private equity

Private equity (PE) is a general term used to describe a pool of money from multiple investors that is used to acquire stakes in companies that are not listed on the public stock exchange. Private-equity firms are not involved in the day-to-day operations of a business. Instead, they’re designed to provide an infusion of capital and a partnering leadership team, to help with growth strategies to increase a business’s value over a period of time. That period of time depends on the partnership terms, with many ranging between five to 10 years.

PE firms can take a majority or minority share, but some perform buyouts of struggling companies. Private equity offers business owners the opportunity to grow the company, effectively using someone else’s financial capital to do so, leaving owners at the end of the partnership with the choice to buy back the acquired share or sell the business to a new owner. It also offers business owners who are looking to take chips off the table and move on to retirement the opportunity to do so, while maintaining a stake in the business through its growth period.

Preparing for an exit

Felix started by hiring a financial advisor. “My wife Meagon and I worked with an advisor to get our estate in order and uncover what we would want out of a partnership, regardless of the format it would take,” explains Felix. “We do have family in the business, but after exploring this option internally and with advisors, we decided that keeping Tree Tech in the family could come off the table.”

Members of the 2018 TCIA Board of Directors posing during that year’s Winter Management Conference are, from left, David White, TCIA CEO and ex officio member, Mundy Wilson Piper, Tim Gamma, Tom Prosser, Andy Felix, Noel Boyer (behind), Josh Morin, Jason Showers, Alan Jones and David Fleischner

Family business was covered in Part 2 in this series on succession planning, “Demystifying Succession Planning: Keeping It in the Family.” While this is a successful option for some families, for others it’s simply not the right choice for a variety of reasons. Family members might be in the business, but are disinterested in ownership or don’t feel positioned to grow the business, and that’s OK, says Felix. “There can be a lot of pressure on family to continue to grow a business and to take care of the owner in their retirement,” suggests Felix. Having these discussions early on will help determine the viability of family succession or free up energy to focus on other exit strategies.

Naturally, with a high-performing business and an industry legacy, there were offers for Tree Tech. The Felixes briefly explored a merger and acquisitions (M&A) offer, but determined it wasn’t the right fit. They also spoke with an employee stock ownership plan (ESOP) attorney to explore the viability of that route, but ultimately decided that that also wasn’t the best fit. “A company called Generational Equity kept inviting me to attend their seminars, and I ended up going and learning a lot about succession planning and exit strategies. After a second seminar, I took the opportunity to explore a few scenarios with them and wound up hiring them as a broker to help us through the process, because I realized I should not negotiate this myself.”

Brokers, while not cheap, are valuable resources for business owners looking to plan an exit, because they can help represent the business to its best advantage. Felix’s broker prequalified Tree Tech by conducting site visits to see the facilities and equipment, then dug into the financials and evaluated the overall professionalism of the brand. Then, they put together a marketing package for Tree Tech and released it anonymously on the marketplace to assess interest. “Despite the anonymity, I got calls from people in the industry asking if it was Tree Tech,” recalls Felix. Tree Tech received 11 offers, which the broker then prequalified. “They made sure the prospective partners had the financial capital to make an investment, to ensure no one was wasting time. It was pretty intense,” says Felix.

Selecting the right partner

It turns out that the highest offer was also the best cultural fit. “It wasn’t about the money. It was about preserving our culture, securing resources to make the company stronger and making sure key people at Tree Tech would be taken care of and have better opportunities in the future,” emphasizes Felix. The Felixes decided to work with CPS Capital, aToronto-based private-investment firm focused on investing in service companies. “Meagon and I liked them so much that we wanted to stay involved financially. We’re retaining a minority share in Tree Tech because we’re optimistic about CPS’s ability to scale the business.”

“We were extremely impressed with the quality of the Tree Tech team and culture, as well as the company’s strong reputation with its clients,” says Michael Arblaster, founding partner of CPS Capital and a director of Tree Care Partners. “We look forward to working with the Tree Tech team to continue to invest in talent and cement Tree Tech’s reputation as the premier tree care company in New England.”

In the first article in this series, we briefly mentioned the importance of partnering with a private-equity investor who understands the value of a tree care business without necessarily understanding the day-to-day operations. “I drew parallels between tree care and CPS Capital’s investments in HVAC companies,” says Felix.

Similarly, the team at Clairvest, highlighted in the first article in this series, explained the connection between tree care and waste management. “We understand the importance of route density and building a client base in a smaller geographic area, because this is similar to how our waste-management
clients function,” says Zach Wells of Clairvest, a TCIA corporate member based in Toronto, Canada. A simple way to assess synergies is to ask the PE firm for a list of referrals; any potential partner will be more than happy to provide referrals for you to have candid conversations with.

What’s unique about this private-equity partnership is the creation of Tree Care Partners, an arm of CPS designed to bring in arboriculture businesses with successful legacies and branding and work with them to transition leadership to the next generation. This may mean helping train an internal successor or bringing in external talent, while continuing to run the acquired companies under their original brands to preserve their unique qualities. Tree Care Partners intends to hold onto the companies it invests in, with no plan to resell them. Many other private-equity firms grow businesses for five to 10 years, then sell them.

“We most often acquire 100% of the companies we partner with, but we also can acquire a smaller percentage and partner with the existing mid-career tree-company owners to invest in more rapidly growing their business,” explains Arblaster. “This allows us to focus on offering a tailored succession-plan solution for tree care company owners, allowing them to maximize the value of their companies on a sale and ensure their teams, clients and brand reputations are cared for.” Felix retains a minority share of Tree Tech, and has been asked to join the Tree Care Partners Board of Directors to help CPS Capital better understand subsequent tree care companies they partner with from an operational standpoint.

Three of Tree Tech’s 100 employees on a job. “We never could have built Tree Tech without our team, and taking care of them was an essential part of this partnership,” Andy Felix says of the employees. Photo courtesy of Andy Felix.

The future of Tree Tech

The Tree Tech/CPS deal closed in July 2022, and Felix is now in the transition stage of handing off his leadership role. CPS conducted a national search for a new CEO, who came from the pest-control industry, as well as a new CFO. “They’re movers and shakers,” says Felix. “The new team is young, and they understand the importance of culture. They’re bringing fresh ideas and a certain amount of fearlessness to try new things. Their ability for interpersonal relationships is incredible, and I feel very lucky.”

As for Felix’s continued involvement with Tree Tech as a minority shareholder, he says, “I’m sticking around as a consultant because my continued presence is a comforting factor for the team. We never could have built Tree Tech without our team, and taking care of them was an essential part of this partnership. We’ve worked together with CPS and our broker to build a retention fund to compensate employees for their continued service through this transition. Additionally, key people from the Tree Tech team will have leadership roles in Tree Care Partners.”

Last thoughts

Learning from the people who have gone through the process is much easier than recreating the wheel. When asked if anything about the succession-planning process surprised him, Felix says, “The financial part, undoubtedly. It really behooves business owners to have a solid focus on your accounting practices and job-costing processes. We went into this process being TCIA accredited, which certainly helped us. If you’re not accredited, being very organized will help the process go much smoother.”

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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