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Buying a Lawn Care and Landscaping Business

Posted By admin On August 14, 2010 @ 3:09 pm In Articles | No Comments

Potomac’s outsourced corporate development program is tailored to meet the needs of regional and middle market lawn and landscape contractors that, unlike the large national firms, do not have a full-time, in-house corporate development staff. Many middle market landscape companies understand that acquisitions are often the fastest, most cost-effective means of growing their businesses, but lack in-house expertise, cannot afford to divert key employees from their normal responsibilities or justify the expense of employing dedicated staff to run a value-creating mergers & acquisitions program.

In this role, we assist management by providing industry assessments and strategic alternative studies in order to thoroughly evaluate acquisition and other growth opportunities from a strategic, economic, tax, and financial accounting perspective. We manage the entire acquisition process from initial strategy determination through closing. Through this customized program, we provide any size lawn and landscape company with the buy-side expertise that rivals that of the large, national providers.

The highlights of this service include:

♣ Assist client in establishing internal acquisition committee
♣ Developing strategic plan / acquisition plan 

Proprietary Deal Flow
♣ Identifying, evaluating and prioritizing potential acquisition candidates
♣ Contacting targets and analyzing business and operations 

Valuation and Returns Analysis
♣ Analyzing the financial implications of any potential transaction

Due Diligence
♣ Outlining and managing the due diligence process
♣ Conducting financial, accounting and operational due diligence and preparing a diligence report for management and its advisors

Negotiation, Documentation and Closing
♣ Structuring the deal and drafting letters of intent
♣ Managing the definitive purchase agreement process
♣ Developing a financing package to secure funding for the transaction if necessary
The Acquisition Process

Step One: Setting Objectives and Creating the Acquisition Plan

The first step in the acquisition process is to set clear objectives and to completely answer the question, “Why are we looking to make an acquisition?” The answer to this question should be an integral part of the company’s overall strategic plan, which determines the role of acquisitions in attaining the company’s goals. Key steps that must be taken at this phase of the process include:

1. Establish Strategic Plan
The first step in the acquisition process involves an operational and strategic analysis of the acquirer. Upon engagement, Potomac performs a valuation of the client company to determine: (a) cost of capital and hurdles rates; (b) initial valuation; (c) risk profile; and, (d) the company’s return on investment. The insights garnered from the valuation and operational review will be used to build a strategic plan, which will ultimately result in an acquisition plan. 

2. Determine Acquisition Strategy, Criteria and Evaluation Parameters 
Immediately upon engagement, the Potomac research group will conduct diligent industry analysis and market research in order to prepare a report on all potential acquisition targets in the Company’s geographic target area. 

The business valuation and industry research will act as the cornerstone of the acquisition plan, assisting management in understanding the current M&A environment, industry trends and the competitive landscape. This research will be used by Potomac and management to establish a set of criteria by which all acquisition candidates will be evaluated.

We feel it is absolutely necessary for the Company to establish a specific set of acquisition criteria before targeting potential acquisition candidates. This ensures that the acquisitions remain consistent with the Company’s overall strategic plan as well as it keeps the Company from making the wrong acquisition or overpaying for the right company – purchasing the right target is still a horrible investment if you overpay for it. While the acquisition team’s strategy should flow from the Company’s overall strategic plan, specific objectives for each acquisition should be required to both justify and focus the process. These acquisition criteria should leverage the Company’s current strategic advantages, including surplus cash, management, processes, and market strengths. Potomac will assist management in establishing criteria that include a minimum required rate of return on invested capital. The return should be measured as net cash flow with equal attention given to the timing of the cash inflows and their anticipated rate of growth.

Typical acquisition criteria include parameters on the size, location, and market position of the target as well as performance goals. For example, the required market position may be first or second in sales in a given market, or the high-quality service leader in a specific geography. In establishing these criteria, the target’s current and forecasted growth must be assessed against these parameters.

The criteria also should be assessed from the perspective of risk tolerance. That is, management should consider the potential least favorable outcomes and the company’s ability to respond to downside conditions. 

3. Determine Acquisition Deal Team and Roles
The Potomac Company staffs its buy-side transaction team with one senior level investment banker and one buy-side valuation expert (a certified and accredited business appraiser) in addition to necessary support staff and research analysts.

Proper focus is the key to making successful acquisitions and we recommend that the Company initially appoint at least one internal deal team leader that can devote considerable time to the process. As the acquisition process progresses, we feel it is often necessary to include managers from several functional areas, including sales and marketing, operations, human resources and finance. Each of these disciplines provides a different focus on a target as these managers bring different concerns to the evaluation process. A blend of background and knowledge combined with open discussion of each member’s concerns usually results in a more thorough and accurate analysis. 

4. Determine Acquisition Timetable
A significant advantage of working with Potomac is our ability to work on an expedited timeframe. Within 24 hours of engagement, our research staff begins conducting diligent market and industry research, which will ultimately become the cornerstone of the acquisition plan.

Step Two: Identifying and Approaching Targets

A focus on proprietary deal flow lies at the heart of Potomac’s buy-side advisory services. The best acquisitions candidates are not currently on the auction block, they are discovered through hard work, qualified research and relentless follow-up. Our goal is to provide you with a steady supply of high-quality, propriety deal flow in order for the Company to increase its bargaining leverage through the availability of multiple opportunities.

Potomac compiles broad lists of potential acquisitions targets from the following sources:

1. Potomac’s proprietary database of over 12,000 US-based and international lawn and landscape companies
2. Commercially available databases to which Potomac subscribes
3. Industry relationships that Potomac has built over the years as the premier investment bank serving the landscape and allied industries

After reviewing our initial findings with your business development team, Potomac begins to narrow down the list based on the predetermined acquisition criteria. In light of our findings, we determine potential synergies and rank the prospects based upon wants and needs. Then, Potomac senior bankers directly contact the shareholders of each prospect exclusively on your behalf to determine potential interest.

Direct solicitation of prospective acquisition targets demands a structured, deliberate, and consistently applied plan. We find that this is by far the most effective way to generate a stream of proprietary deal flow and to avoid bidding in controlled auction scenarios. Over the years, we have determined that this process is most effective when calls are made by senior level deal team members as apposed to junior professionals or support staff. All initially unsuccessful attempts must be followed up by a letter to the shareholders and a subsequent follow-up call. Prior to making initial contact, it’s very important that the Company and Potomac establish a strategy that provides a guideline for communication, for example:

1. What information about the Company can be discussed
2. What strategic goals of the Company, if any, can be discussed with targets

We encourage our clients to work with us in putting together an abbreviated business profile that can be provided to potential acquisition targets. We find that this helps build credibility in the eyes of the acquisition targets, by assuring them that our client is a reputable, financially capable acquirer with a well-reasoned strategy.

Upon indication of interest from the prospect, Potomac enters into a confidentiality agreement with the prospect and requests information such as financial statements, operations management software printouts and summaries, organization charts, promotional and marketing materials and any other information deemed necessary to prepare an initial evaluation of the target.

In order to assist the Company in its evaluation of each candidate, Potomac works with the shareholders of each target to prepare a company profile that includes a summary of operations, recast and normalized financial statements, customers, employees, facilities, growth prospects, and motivation for sale.

Step Three: Evaluating Targets

The evaluation process begins with a careful review of the target profiles that have been prepared. At this point, the Company should be in a position to further narrow down the list of potential candidates. Facility tours and meetings with management are arranged with the top prospects as Potomac begins to prepare preliminary valuations of each chosen target.

Valuation Methodology
Potomac believes that an acquisition is no different than any other capital budgeting decision and the focus of the acquisition program should be to increase shareholder value. We emphasize this point because acquirers often lose focus on the underlying goal of making an acquisition; while an acquisition may expand a company’s products or services, provide a new distribution channel, or experienced personnel, none of these should be the ultimate goal. The ultimate goal of an acquisition is to increase shareholder value by reducing the company’s risk or increasing its net cash flow to invested capital.

Potomac’s valuation process begins by answering the question:

“What is the target worth to its current shareholders?” as opposed to “What is the target worth to us the acquirer?” Although the target may be more valuable to the acquirer than it is to its current shareholders, the reality is, the value that the business creates for the current shareholders is all that they really have to sell. After all, acquiring the best strategic target in the world is still a horrible investment if we overpay for it. When a strategic acquisition is made, certain synergies or cost savings may be created through the acquisition – usually the buyer creates these synergies, and if so, we don’t believe that the buyer should pay for them.

In order to keep from overpaying for an acquisition, we believe that acquirers should begin negotiations based on fair market value. Potomac prepares a fair market valuation of each target utilizing various valuation techniques. Your management team will work directly with Potomac on all assumptions used to establish a fair market value, which will serve as the basis for the pricing in the Letter of Intent (LOI) to purchase. Our buy-side valuation technique relies heavily on discounted cash flow analysis and internal rate of return analysis. Our offers are based upon fair market value and what the “next likely buyer” would have to pay in order to be successful in the acquisition.

Potomac is never a price advocate, we provide our findings and analysis and the Company makes the final determination as to pricing and terms.

Before Potomac submits an indication of interest or letter of intent to the target, we work with the acquirer to determine a “walk-away price,” the price at which we can no longer negotiate a specific transaction because it does not make financial sense to do so. This walk-away price is important to establish before negotiations begin and emotional factors take over. It is at this point when acquirers sometimes become more focused on “winning the deal” than creating value. When sellers begin to demand a price that is too high, it is much better not to proceed and simply look for a target with a better potential to create value. 

Step Four: Negotiating the Deal

Our focus is to put our client in a position to be able to negotiate with multiple targets simultaneously, thereby creating a reverse auction.

The Potomac Company negotiates solely under the authority and direction of the client at all times. As the Company’s lead negotiator, we are able to mitigate the emotional aspect of the deal process. All deal flow generated by this project is for the exclusive use the client and Potomac will do everything possible to assure that the Company is the only bidder at the table (provided the deal was not sourced through another investment bank).
Step Five: Due Diligence, Documentation, and Closing

The Due Diligence Process

Immediately after both parties execute the LOI, Potomac will:

1. Assemble a comprehensive due diligence request list encompassing financial, accounting, legal, operational, marketing, distribution, intellectual property issues, etc. 

2. Create a “Working Group List,” which is a contact information directory of all deal team members and their advisors on both sides of the transaction. This is circulated to all members immediately. 

3. Coordinate with the client’s legal advisors to begin establishing the terms of the purchase documentation. 

4. Work with the client’s business development and finance staff to highlight key due diligence issues. 

5. Work with the target’s management to assemble a data room of all requested information.

6. Orchestrate environmental studies and real estate appraisals if necessary. 

7. Prepare bank and mezzanine financing documents if necessary. 

8. Bring in and organize outside auditors and transaction service professionals if necessary.

Throughout the diligence process Potomac’s experienced audit professionals are with you every step of the way. From staffing data rooms to preparing reports for the Company’s accounting and finance professionals.

Documenting the Deal and Closing the Transaction

As the due diligence process proceeds, attorneys will begin to draft the Purchase Agreement. Potomac is not a legal advisor and strongly recommends to clients that they engage a local, competent law firm to represent their interests throughout the purchase process. Potomac can make referrals to competent legal advisors upon the client’s request.

One side of the transaction is generally responsible for the initial drafting of the purchase documents, and we believe that the party in control of the initial drafting has an advantage in the process; therefore, we strongly suggest to the Company that it takes control of drafting the purchase documentation from the onset. If both parties to the transaction engage legal counsel, Potomac will, at the client’s request, draft the initial purchase agreement provided that attorneys on both sides of the table review the document.

The Potomac Team

The Potomac Company, headquartered in Philadelphia, PA, is the only investment bank in the US with a transaction services and valuation team dedicated exclusively to the lawn, landscape, pest control and integrated facilities services industries. The Potomac Company is comprised of three investment banking divisions: Valuation, Buy-Side Mergers & Acquisitions, and Sell-Side Mergers & Acquisitions. The Potomac Company has completed valuation and M&A projects in North America, South America, Europe, the Middle East and Africa.

Advising on the buy-side requires a very different skill-set than advising on the sell-side. That is why Potomac’s buy-side advisory team is composed of experts who have always worked on the buy-side. These advisors come from bulge bracket investment banks such as Credit Suisse First Boston and Goldman Sachs, and private equity firms such as GTCR and American Capital, an S&P 500 member and the largest U.S. publicly traded private equity firm with $19 billion in capital resources under management.

Paul Giannamore is the head of our Global Industrial and Services Group and draws on tremendous transactional experience both as an investments banker at Potomac and Credit Suisse First Boston as well as American Capital, the largest public buyout / private equity firm in the United States. Mr. Giannamore was educated at Cornell University, where he graduated in the top 1% of his class, and Stanford University. He is a certified business appraiser, holding the Accredited Valuation Analyst credential from the National Association of Certified Valuation Analysts and a level 2 Chartered Financial Analyst candidate. He is accredited to practice before the Commissioner of the Internal Revenue Service as well as many state and federal courts. He is an Italian national and speaks English, Spanish, Italian, French and Arabic.

A Customized Solution
The Potomac Company advises lawn and landscape companies of all sizes across the globe. Our corporate development programs are customized to meet the needs and goals of each unique client. Certain clients require a full-service, comprehensive buy-side program whereas others choose to engage us to advise in specific areas where they lack in-house expertise, such as valuation or due diligence.

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