Exit Planning: Attracting Buyers and Investors
Is it time to sell? Use this checklist to see if you’re ready to put your nursery on the market.
Uncertain economic conditions in the past several months have created new opportunities for owners of businesses who are able to produce cash flow. They can cash out now. The time has not been this pregnant with opportunity for years. Why?
It’s all about rates and returns. A key number considered when placing a value on a business is the interest rates available in the open market. Many times, the Treasury Bill, or T-Bill rate, is referenced. The lower the interest rate, the higher the value of a business. For some time to come, it will be hard to achieve more than 1% return from interest even in the long term. The Federal Reserve has telegraphed that for the next two years, they will keep interest rates near zero. Investors are seeking better and more reliable returns on their money. They are dissatisfied, keeping it on the sideline, earning almost nothing in interest. Right now, there is enormous liquidity in bank accounts looking for a home. Warren Buffet is reported to have two major holdings — one is Apple, and the other is cash. This legendary investor can’t seem to find a suitable place to park his money for a return.
Many horticultural businesses have reliably generated predictable positive cash flow over the years. The ability to generate significant repeatable positive cash flow year in and year out is highly desired when looking at any business to buy or invest in. If you own one of these companies, it might be high time to sell. For many, it has been a great year, while others have suffered losses.
In horticulture, there is a skill level a buyer or investor must have to own and operate a green-industry business, or at least be able to hire qualified expertise. That is also true in pharmacology, technology, and finance. All those hot categories are driven by superior expertise and innovation. Good people are like gold in this market. Some company owners have visions of their children taking over. Historically, it is unusual for a second generation and even less for a third generation to do as well as the founder did. The old adage “rags to riches to rags in three generations” is still true in many cases. It might be better to find a buyer and leave your grandchildren with cash and not a business to run. There are exceptions, but few.
See How You Measure Up
Deciding you want to sell your business or attract an investor is the first step. Once that decision is made, you need to get the company ready for a sale. A careful evaluation of the things that add or subtract from/to your business value will need review. Investors know what they are looking for in buying a business.
On a scale of 1-10, these are the key issues an investor considers in buying or putting money into a horticultural business. How does your company measure up? Score yourself:
A: Size of business (compared to others in the space): 1 – Small, not a big player in the market. 10 – We are one of the largest and most successful in our space.
B. Quality of the financial records: 1 – Pretty scattered and fragmented, a bit better than a shoebox full of receipt slips. 10 – All our records are computerized, complete, and reviewed; our CFO keeps us well informed.
C. Positive cash flow and potential increases: 1 – Not generating significant cash flow or profit. 10 – We are a cash cow; lots of room to grow and even double our net revenues.
D. Need for capital investment: 1 – Will need significant upgrades; will need capital soon. 10 – All our equipment and infrastructure are up to date and paid off; no needs on the horizon.
E. Credit line requirements: 1 – We use a large credit line and sometimes have difficulty paying it back sometimes. 10 – We don’t need a credit line, and have significant cash resources to back up.
F. Owner centric – management team: 1 – This company can’t exist without me there every day; only I know how it works. I don’t have anyone to back me up when I am sick. If I died, this company would die. 10 – If I never showed up again, it will work just fine. This is nearly a passive investment. I have great people. If I retired tomorrow, I have a team who can pick up where I left off and maybe make it better.
G. Workforce quality and access to labor as needed: 1 – We just can’t find anyone who wants to work anymore. 10 – There are a lot of good people in our area. Hiring is easy because people want to work for a company like ours.
H. Customer concentration and loyalty: 1 – The bulk of our business comes from a handful of steady customers. There are a few that buy once and never come back again. 10 – Our top 10 customers only make upon 5% of our total revenue. Losing a customer is not a death sentence. Our customers see us as an essential primary vendor. They come back again and again.
I. Competition in the market for the dollar: 1 – Lots of aggressive competition; we have to discount deep to make deals. 10 – We are the competition. In our space, we make the rules.
J. Compliance with environmental, labor, immigration, OSHA, and EPA regulations: 1 – We fly under the radar and keep the feds at bay. 10 – We try to make sure we are never vulnerable to the violation of any regulations that could shut us down.
Obviously, no company on the planet can score a 10 in every category, but the closer to 100% in each of these important areas, the more valuable your company will be in the eyes of a buyer.
You can’t bluff. Due diligence will uncover the truth. You can’t claim what you can’t prove. An objective business appraisal and valuation can help substantiate your asking price. This checklist can reveal things that need time and attention. The market is ripe, and there are rollups taking place. You can cash out now if you look sharp.
The most important of these is positive cash flow. Positive cash flow is the amount of cash generated that might be used to buy equipment, pay surplus salary, money used in discretionary ways like travel, pays interest on debt, and income taxes. The term used is EBITDA (earnings before interest, taxes, depreciation, or amortization). Investors use this to compare companies’ financial health and evaluate firms with different tax rates and depreciation policies, as well as future earnings potential. There will be many mergers and acquisitions in horticulture for 2021. It is time to consider your future and the future of your company. There has never been a better time.
Gene Redlin, CAGA is the owner of Redlin & Associates and is a BEST Strategic Partner in Exit Planning. He is a certified personal property appraiser specializing in nursery business appraisals. Email: firstname.lastname@example.org.
The single largest financial transaction of your life deserves special attention.
Are you planning to exit and sell your business? Exit planning is quickly becoming a buzzword in the legal and financial communities. Your professional advisors are positioning themselves to provide tax, risk management, wealth management, and contract preparation services. BEST Exit Plan Advisor has been trained to manage your team of tax, legal, business, and financial planners to navigate your exit strategy. Click here for our Special Section on Exit Planning for more details and a video on how to get started.