To say it was a busy 2019 for HeartLand would be an understatement. The company grew 189% going from $55.7 million in revenue in 2018 to $155 million in 2019. They acquired five commercial landscaping companies last year totaling almost $95 million in revenue, while also growing organically, landing the company at No 14.
Kansas City based HeartLand was founded in 2016 by Edward Schatz, Jr., who previously started Austin Outdoor in Florida in 1994. Schatz grew and eventually sold Austin Outdoor to Yellowstone Landscape in 2008, where he stayed on board as regional president until January of 2015 when Yellowstone was sold to CIVC Partners. After Yellowstone and before starting HeartLand, Schatz said he kept hearing the common theme from other owners that there has to be a better way to do business.
“There’s got to be a way to do this right without overleveraging these businesses and becoming an accounting company that mows grass,” Schatz says. “It still gets back to one simple notion that the landscaping business is local and it’s really relationship driven, especially on the commercial maintenance side.”
That notion has been a guiding force for HeartLand’s approach to acquisitions, both before and after making one.
“I think that you are seeing groups and private equity that recognizes that there is power in the goodwill of local brands, but there’s also power in the culture,” he says.
Deals to be made.
Schatz partnered with a private equity firm, Great Range Capital, and made its first acquisition – Signature Landscape in Kansas City – in early 2016 and later that year added Keesen Landscape in Denver. Early in 2017, he was joined by Bill Dellecker, who came on as chief development officer, and then Peter Welch, as chief financial officer; both had worked with Schatz at Austin Outdoor and Yellowstone. The trio started a string of acquisitions that netted them seven platform companies, plus a handful of smaller acquisitions that the platform companies absorbed. Since forming, the company has made a total of 12 acquisitions.
With that much M&A activity, cultural fit could be a huge undertaking. Schatz says HeartLand does a lot of the legwork before a deal is made to make sure the selling owner is aligned with HeartLand’s. Schatz says he seeks out companies across the central United States in the Midwest that fit in with HeartLand’s ideal service mix of 75% commercial maintenance and 25% winter/ancillary services.
“If it’s not a fit from a cultural perspective for HeartLand, then we just won’t move forward with the acquisition,” Schatz says. “We’ve walked away from a handful of deals.” HeartLand’s senior leadership meets with the owner and the management team to assess the fit and the reasons on why the owner is selling.
“Inevitably, all entrepreneurs at some point usually reach their ceiling and where they’re comfortable at in their business. And sometimes for a platform company that could be $10 million and other times it’s $40 million or $50 million,” Schatz says.
“But at some point, as they continue to invest in their business and grow it, they reach a certain threshold that they’re comfortable with and where continuing to grow at the same pace requires significantly more investment. Usually, it’s greater investment in people.”
Once a deal is made, it’s up to the selling owner to determine how to share the news with employees.
“Typically, what we have seen is that owners are usually fatigued by the end of the process with the layers of diligence and financial review that takes place. We call it deal fatigue and it’s inherent in any transaction,” Schatz says. “Post-closing, we give them a few weeks to decompress and say to the management team, ‘You let us know the right time.’ Usually they want to make the announcement internally themselves and they personally want to address their key customers.”
Once the announcement is made, HeartLand makes a presentation to the local management team on what the company is about and what employees can expect after the acquisition. “Most of the time, their concerns are alleviated because it all comes back to managers and employees; they want to understand what the change means for them personally,” he says. “When we say that very little changes post-closing in the way they execute from a day-to-day business perspective, we’ve backed it up.”
Owners will usually stay on a year or two in a transitional role before stepping away. “We don’t want to lose the culture of the business because the owner has changed,” Schatz says. “But for most of the owners, their number two person who was their VP of operations or their COO in some cases, are running those companies now.”
To develop current employees, the company rolled out HeartLand University of Excellence in January of this year. It’s focused on five core courses that have been designed for division presidents, business leaders, operations teams, account management teams and business development teams. Other specialty courses are also being developed. Training takes place at the company’s new headquarters in downtown Kansas City and also using videoconference.
The university criteria were built on years of surveying employees and customers about areas where the company could improve. One common request that came back was a desire for more training.
“It could be as simple as public speaking,” Schatz says. “We’ve got courses designed around account managers engaged in focused client conversations and making presentations; for instance, how to handle when a client puts a project out for bid under various scenarios.”
The trip into Kansas City also allows employees to meet each other and get a feel for the type of culture HeartLand wants to develop, says Rob McDonnell, chief acquisition officer.
“Ultimately, that sort of environment and training strategy lends itself well to enhancing and further creating a culture around all (of our) different businesses,” he says. “It’s an open environment. People stay in touch obviously afterward to share different ideas and strategies around clients and organic growth initiatives.”
Schatz says the goal is to reach revenue of $500 million in 4-5 years. As far as how COVID-19 will affect those plans, he says it’s still too early to know the intermediate revenue implications, but as of mid-April, HeartLand is not experiencing wide-spread service deferrals, scope reductions or cancellations.
One step in reaching that $500 million goal was working with a new investment firm. In August of 2019, the HeartLand leadership team partnered with Westport, Connecticut-based Sterling Investment Partners, who acquired Great Range Capital’s interest, in order to pursue larger growth opportunities.
“One of their key initiatives with us was to bring our M&A in house to develop a team that could handle an aggressive deal flow,” he says.
McDonnell, who worked for BrightView for 11 years, was hired in January to lead the M&A group, which has added a few additional members along with McDonnell. “Rob brings a new dimension to us and we’ve invested heavily in putting an entire acquisition model together and identifying targeted Metropolitan Statistical Areas (MSA) and opportunities within those MSAs across another nine to 12 states, all in similar markets with similar seasons that we have in Kansas City.”
Schatz says HeartLand is looking as far west as Utah and as far east as Pennsylvania. “Not too far north and none too far south,” Schatz says. “If we are capable of growing faster than that, we will, but we’re not going to grow so fast that we put ourselves into a speed wobble.”
Schatz says the company’s focus is to leverage the platform companies to grow organically, and to work more acquisitions at the same time as they recently did with the December 2019 closings on Landscape Concepts in Chicago and Heritage Landscape in Virginia, both with about $30 million in revenue. “It’s really not about increasing the pace or the velocity of acquisitions,” Schatz says. “It’s really about broadening our ability to cover multiple opportunities simultaneously.”