Exit Strategies, Part 3: Selling the Business

This is the third article in a series TCI Magazine will run in 2022 looking 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 the June 2022 issue.

Mergers and acquisitions (M&As) sometimes get a bad reputation. Plenty of news stories circulate when a big deal goes wrong: Clashing cultures, lack of due diligence, not understanding the industry, poor process integration, overestimating synergies and many more missed opportunities contribute to why botched deals hit the news. Strangely enough, research published by the Proceedings of the National Academy of Sciences (PNAS) has shown that negative news evokes a stronger psychophysiological reaction than positive news, which could contribute to why headlines don’t often include reports of successful mergers. This is just to make the point that not all mergers are bad; we just don’t hear about the good stuff because readers tend to be unconsciously biased, and that often drives what outlets publish. In short – it’s all for the clicks.

As the busy owner of a thriving tree care company, considering what the future of the business could look like might not be your top priority – until it is. Whether that future is six years or six months away, there are plenty of things that can, and should, be done to prepare the business for an eventual exit.

Consider the reasons for leaving – poor health, retirement, a desire to pursue other things, family or other sticking points. Define what a successful outcome looks like, both as an individual and for the team that will stay behind to carry on the legacy. Ask yourself: Do you want to stay on for a period of time to help with the transition? Or do family commitments or health issues dictate the need for a clean break? Who is the best partner for your business?

The first article in this series identified several viable exit strategies, including selling the business, where we addressed the cultural aspect of finding the right partner. But before the cultural fit can happen, there are a number of key things to do to prepare for a sale, both personally and professionally.

Be patient

While shorter timelines are possible, most mergers and acquisitions average around 12 months to complete. “Sometimes it can be quick, in the span of just a few months, or it can take years,” says Carmine Schiavone, CEO of SavATree, an accredited, 36-year TCIA member company headquartered in Bedford Hills, New York. “It depends upon the complexity of the business, but also the owners and where they are. There are a lot of variables that affect the timeline, and it is different for each partnership.”

Valuation

Understand the value of tangible and intangible assets. Fleet, property and buildings, equipment and inventory are tangible assets that contribute to the value of the business. However, buyers also look at customer relationships, contracts and agreements and brand recognition. “We consider a variety of things, including geographic location, company culture, the talent level of existing employees, service lines, safety record and reputation in the community,” says Gregory Daniels, vice chairman and chief business development officer for Bartlett Tree Experts, an accredited, 48-year TCIA member company based in Stamford, Connecticut. Establishing a clear outline of tangible and intangible assets determines the current worth of the business. Having that outline ready when walking into conversations with prospective partners can help the timeline.

Get the books in order

The best advice is to always run the business as if it will go through due diligence tomorrow. Ensuring the business is running well financially and operationally, and showing proof of that success, is key. Investors want to bring on a profitable business that is running well.

This is the time to make sure there are no skeletons in the closet, including ensuring that financial records are current and accurate. This also could present opportunities to find ways to reduce costs and create efficiencies, and for those with a longer timeline, add revenue streams. Additionally, establishing processes and documenting clear plans for fleet maintenance, PHC/chemical storage, safety and risk assessment, HR practices and more will go a long way in supporting the eventual sale of the business.

Daniel Van Starrenburg, executive chairman of SavATree, offers a few easy examples. “On the HR side, annually audit your I-9s, and make sure they’ll stand up to the scrutiny of the audit. Financially, your bookkeeping should be solid. If you have audits for sales or other taxes, ensure those are cleaned up and handled. Don’t accept cash payments from customers. The consideration you get for cash in the world of these partnerships is zero. On the DOT side, collect fleet and safety metrics, and ensure your business and crew have the right licenses and certifications in place.”

Engage professional partners

Selling a business is a big undertaking, both personally and professionally. It’s never too late to reach out to the company’s accountant, attorney and any other business advisors to discuss the possibility of selling. It also helps to have personal financial goals outlined, which can be clarified with the help of a personal financial advisor. “More and more, there’s complexity to the sale of a business, including tax consequences and the best way to market it,” 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. “Even if a prospective partner has trusted advisors and attorneys, their advisors might not have M&A experience. It can often improve the seller’s experience and deal efficiency to add an M&A attorney or advisor who has been through a few transactions to the seller’s existing accounting or tax team, although it’s not a requirement.”

Rally the troops

Engage the leadership team to help plan for the future, including leveraging them to announce the transition. Employee turnover is a natural part of business acquisition. Keeping the team in the loop as much as possible, and crafting a transition plan with the purchasing partner to ensure clarity as the systems and processes employees have become accustomed to change, will go a long way in helping reduce stress.

“It’s important to get ahead of it and not have to play catch-up. Our departments begin working on their transition responsibilities as soon as we feel comfortable that a purchase will occur,” says Daniels. “Ideally, you like to get the acquired company’s employees in a transitional mode before the deal is announced publicly. It can get a little tricky to determine when that time is right. Many owners don’t want to tell their employees what they’re doing, which is understandable, but at some point, they should bring their management team into the process so they are not blindsided with the announcement. When an owner is confident the sale will happen, notifying the employees will be a big assist to the owner in transitioning the business to the new buyer.”

Playing the long game

For those companies with a long-term strategy to grow the business and set it up for the best possible success to sell later, buying another business is a great way to expand services, client lists and geographic footprint.

An example of this strategy is Chippers, Inc., an accredited, 22-year TCIA member company headquartered in Woodstock, Vermont, that was acquired by Davey Tree in 2021. In a blog post published on their website March 8, 2021, announcing the transfer of ownership to Davey, Chippers highlighted strategic expansion through integrations and acquisitions since 2000. This included growing their footprint as well as adding turf, garden, snow blowing and irrigation services. Meanwhile, the team was busy discussing how to make Chippers an employee-owned company, eventually realizing that through the partnership with Davey.

Arbor Image Tree Care, a six-year TCIA member company headquartered in Moore, Oklahoma, is in the process of strategically expanding the business, starting with a partnership with Zion Tree Service in April 2022. “The merger was driven by continual growth, demanding the additional staff, management and equipment required to handle the expanding business,” says Dewey Beene, business manager for Arbor Image. “The owner set his eyes on finding a competitor who would consider a merger offer. He knew it had to be the right company with all the criteria in place, and be presented at the right time for an unsought offer to be considered.”

“We wanted to align with a business that had strong staff, processes and procedures in place. The culture that Josh (Johnson, Zion owner) instilled in Zion Tree Service is what got our attention,” says Koree Vazant, owner of Arbor Image. “He created a business that feels like family to both his staff and clients. That’s what we were looking for.” The merger enabled Josh Johnson to move forward with upcoming relocation plans for his family, while at the same time ensuring that Zion’s entire staff would be taken care of when the merger took place. With no disruption to the schedule or pay rates, Zion’s team now falls under the Arbor Image umbrella. Making the transition even more seamless, the team will still report to Johnson, who agreed to a one-year retention with an option for a second.

“In any business, growth often isn’t planned for. People build to their current capacity, and it can be painful to grow beyond that,” continues Beene. “We look at what our projections say based on what we’ve done, and are building something that we can comfortably grow into, but not so far that we’re unable to sustain it. We have plans to continue partnering with aligned companies every year or so. The goal is to establish a consistent thread, so that five or six years down the line we can show a track record of successful partnerships. We’ve already been approached by a couple of the bigger companies in the industry, but we’ve let them know we have more work to do. This makes us more conscious of our decisions moving forward. Meanwhile, we’ve built processes to ensure we’re well positioned to sell when the time is right.”

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.

Leave a Reply

Your email address will not be published.

Click to listen highlighted text!