Looking back at 2019, Lawn & Landscape has reported on more than 20 mergers or acquisitions this year alone, and by the time you’re reading this, that number will have increased.
The success this industry has seen over the last several years has also caught the eye of outside players like private equity firms, who know one thing is for sure: there’s money in mowing.
“Knowing that you can actually develop a game plan to make an acquisition build value by improving the operations of the business and adding acquisitions and then successfully exit within a reasonable timeframe…is a message to all the other investors out there that landscape is probably a pretty good investment,” says Ron Edmonds, consultant with the Principium Group.
We talked to a few green industry consultants to find out what’s keeping the business going and if the trends will continue into 2020.
Where’s the money?
“There hasn’t been anything like this before,” says Tom Fochtman, CEO of Ceibass Venture Partners. “In the past five years, there’s never been a better time to be a seller of a landscaping company.”
At the moment, there are about 20-25 active buyers in the industry, Fochtman says. The buyers are backed by private equity companies who have a good amount of capital to burn, and they want to spend it on landscaping companies. “There’s never been so much (money) available,” he says.
Jeff Harkness at Three Point Group says the number one force driving this M&A surge is private equity companies still raising capital. “(The private equity companies) have people who want to invest,” he says.
The public companies, like BrightView, also have shareholders who want to see them grow in size and revenue because that only increases their price per share, says Greg Clendenin of Clendenin Consulting.
“They care about their company’s value in the eyes of investors right now, and investors are buying to grow the companies,” he says. Fochtman says while private equity firms see that it’s a prime market to invest, the firms are likely invested for the profit margins that come along with the type of revenue streams the industry offers.
“These private equity guys are in it purely for the profit and they're taking the profit and getting out,” Fochtman says. And, while it’s a predictable move, he says the industry is seeing younger companies, about five to seven years old, starting to sell as well. “There's a couple examples of these recently formed landscape holding companies now selling, so the market's still pretty prime.”
With the influx of investors coming in, Edmonds says the demand by investors is currently higher than the supply of landscaping companies readily available to buy, which means some of the appeal for these investors has shifted a bit. It’s also opened the door to competition between investors. Harkness says companies up for sale have the benefit of weighing different offers before making any final decisions. Multiple offers are the norm now for a company on the market.
Investors are looking for recurring revenue, as it’s a proven and reliable source of business. In the green industry, this comes in the form of commercial maintenance, a precedent that Fochtman says was set back when Brickman and ValleyCrest (now merged as BrightView) were purchased, putting commercial landscaping on the map. Clendenin says he’s typically heard buyers asking for companies with a 70 percent maintenance and 30 percent design/build split.
“There are transactions being made where a clear percentage of the business that is pure maintenance is lower than what you might've seen sometimes in the past,” Edmonds says. Edmonds referred to a deal that happened last year that ended up involving a company that was more design/build than maintenance, but still proved to be well worth it. “At one point a few years ago, you wouldn’t have seen anything like that,” he says.
And, going along with the changing tides of the M&A market, he says years ago investors didn’t put much value into the snow industry – something that is also starting to shift as the market becomes more saturated with people ready to buy. “The best managed snow companies, along with that landscape maintenance component, is much more attractive than it used to be,” Edmonds says.
The overall market of the industry is also highly fragmented, Harkness says. Combined with the recurring revenue in commercial maintenance, investors are starting to see a return of four to five times their investment – typically two to three times the investment is considered “good” he says.
Ready your business.
Even if you’re not thinking about selling, you should be preparing your business to sell, says Clendenin. Whether you follow through with a sale or not, readying your business will only cause growth.
“If you get in shape to sell in order to be the most attractive, you’ll grow,” he says. “(Once you do that) you’ve really got your foot on the gas and you'll do better now, but you'll be more attractive as an acquisition later, too.”
With that in mind, Harkness says a lot of companies aren’t where they need to be in order to secure a solid sale based on the age of the business and its earnings alone.
“I don’t really think the luster is going to fall off of commercial landscape anytime soon. It may just slow down a little bit.” Tom Fochtman, CEO, Ceibass Venture Partners
The elephant in the room.
If you’ve watched the news you know we’re supposedly on the brink of another recession. With money moving in the green industry, the experts don’t seem to think the movement in the market will take a hit. In fact, most agree that this industry is, in a way, resistant to the downfalls of an economic recession.
“I don't really think the luster is going to fall off of commercial landscape maintenance anytime soon,” Fochtman says. “It may just slow a little bit.”
Edmonds says his long-term outlook for the industry is good, and he sees activity increasing within the next five to 10 years. He’s also optimistic about the market surviving the next possible recession. “In my opinion, one of the reasons that there's this been as much investment in the industry as there has been, is that the industry performed markedly better during the Great Recession than many people would have thought that it would,” he says. It’s no surprise, either, that the appealing part of the industry – the recurring revenue – is what will bolster the market in any sort of economic recession.
“Homeowners will cancel their lawn service and mow their own lawn when things get really tough,” Fochtman says. “But the building owner is not going to start mowing his own lawn…so commercial just has the aspects and those dynamics to it that make it a little bit bulletproof.”
And, there may be a silver lining that comes out a potential recession. Fochtman says he thinks we will see some interest spike when it comes to the residential maintenance segment of the industry. It will be a bit more challenging because of how highly fragmented it is, but Edmonds echoes his sentiment as well.
“I think we will see some figures emerge in the lower end of the residential market, which a lot of people thought would not happen,” Edmonds says. “There’s a lot of money to be made there.” A potential shift of the spotlight to residential maintenance could be due to the marketing efforts those companies push.
Advertising weekly mowing programs can lead to building up a dense customer base, which Edmonds points out circles back to the allure of recurring revenue. He admits it would take a larger player to invest in that type of business, but sees it as a viable possibility.
Fochtman says, “There’s still going to be a lot of capital available and a lot of good deals to be done.”