How much goodwill do you have in your business?
The term “goodwill” is often thrown around in conversation as though it is a subjective description of how much your customers like your business.
In fact, when it comes to valuing your business, there is nothing subjective about the definition of goodwill. It is defined as the difference between what someone is willing to pay for your company minus the value of your hard assets.
Let’s imagine you own a plumbing company and the main physical assets in your company are the five vans you own and some tools with a total value of around $100,000. If you sold your plumbing company for $1,000,000, the acquirer would have paid $900,000 in goodwill ($1,000,000 – $100,000).
When a company sells for the value of its fixed assets, it is often a distressed business one step away from closing down. One way to think about your job description as an owner is to maximize the difference between what your business is worth to a buyer and the value of your fixed assets.
Marriott buys more than bricks and mortar
For an example of the difference between valuing a business for its hard assets vs. its goodwill, take a look at the recent acquisition of Starwood Hotels & Resorts Worldwide by Marriott. Neither Starwood nor Marriott own many of the hotels that bear their name. Instead, they license the name to operators, franchisees and the owners of the bricks and mortar.
So why would Marriott cough up $13 billion for Starwood if they don’t even own the hotels they run? In part, Marriott wanted to get its hands on the Starwood Preferred Guest program, a loyalty scheme which has proven more popular than Marriott’s program for frequent travellers.
Similarly, Uber is worth something north of $50 billion because more than one million people per day hail a ride using Uber, not because they own a whole bunch of cars.
Chasing hard assets at the expense of goodwill
Many owners focus on building their stockpile of hard assets, not understanding the concept of goodwill.
Accumulating hard assets like land and machines and equipment is fine, but the savvy owner, looking to maximize her value, focuses less on the tangible assets and more on what those assets allow her to create for customers. There is nothing wrong with owning hard assets unless they take away from capital you could be investing in creating goodwill. Then the opportunity cost may exceed the value of owning the stuff.
Arguably both Uber and Starwood would be a shadow of the companies they are today had they pursued a strategy of accumulating hard assets. Would Uber ever have made it out of San Francisco if they had to buy a Lincoln Town Car every time they wanted to add a driver to their network?
In your case, focus on what creates value for customers and you will maximize the value of your business far beyond the value of your hard assets.
By Richard Helling
Many volumes have been written about the two presidential candidates over the past few months and as the election grows closer there will undoubtedly be many more volumes written. While there is much to say about both candidates, Donald Trump provides an interesting example of what most small business owners should try to avoid.
I can already hear some of you sharpening your verbal machetes to provide full-throated defenses for or against him becoming president, but I promise this is not that type of article. Let me explain.
Generally speaking, every president (with the exception of Barack Obama, because of the nature of his assets) since Lyndon Johnson in 1963 has placed his assets in a blind trust to avoid even the appearance of impropriety by using the enormous powers of the presidency to gain personal financial advantage. Actually, when you think about it, this makes good sense. I believe we all can agree that a president is supposed to represent the United States and do what is best for the country, not what is best for his bank account.
This is what makes Donald Trump (and to a lesser extent Hillary Clinton) such an interesting case study.
Whether you love him or hate him, Donald Trump is a master at branding and his biggest and most successful brand is himself. As has been noted by countless news organizations, he has “Trump” branded everything from casinos and golf courses to a university, steaks and bottled water. The Trump brands include clothing, publications, TV shows, fragrances, restaurants and, yes, even ice skating rinks.
So what’s the problem? He has generally done quite well for himself with his branding ability.
The trouble arises for him when he has to remove the most important piece of his brand from the brand itself. And clearly the most important part of his brand is the man himself. No doubt, he has countless talented individuals working for him and I’m sure they are excellent at their jobs. But people are not buying Trump products because of highly skilled workers in a high rise building in Manhattan. They are buying these products because they believe in the Trump brand and the success that they believe it represents.
So the question is this: Can the brand stay strong if the man who is the brand is no longer in control of the business that bears his name? The answer, of course, will only become completely apparent if and when he is elected president. Should that happen, it will certainly be interesting to see how he untangles himself from any conflicts of interest that could arise if he is elected president.
While this question of untangling potential presidential conflicts of interests is an interesting mental exercise, it also has serious implications for small business owners as well. Given the scenario presented above, small business owners should absolutely consider whether their brand is tied directly to their name and personal relationships with clients, or if the reputation or brand of the business is independent of any one person and can continue with any competent leader at the helm.
As with many nuanced situations, the answer is probably “A little bit of both.” It is unlikely that a person who has built any successful business has done so without having a strong reputation that has been developed and hard-won through years of professionalism and hard work. No doubt many of your clients know you personally and they know that if you give your word, the job is taken care of and they don’t have to worry about it. This is how many successful businesses have been built. However, this type of structure begs a question that many business owners do not fully appreciate and it is this: “If you wanted or had to sell your business tomorrow, would someone buy it? How much is your business worth without you? Have you built a brand that revolves almost entirely around you and your personal reputation?”
These are difficult questions and unfortunately there are no simple answers. However, like most difficult or complex situations, there are strategies that can be implemented that can help mitigate some of the pitfalls and allow you to not be boxed in by what has made your business most valuable.
We would welcome a chance to discuss these complex issues with you and we promise not to discuss politics!
Are you stuck trying to figure out how to create some recurring revenue for your business?
You know those automatic sales will make your business more valuable and predictable, but the secret to transforming your company is to think less about what’s in it for you and more about coming up with a reason for customers to agree to a monthly bill.
Take a look at the transformation of Laura Steward’s company, Guardian Angel. Steward had gotten her IT consulting firm up to $400,000 in revenue when she called in a valuation consultant to help her put a price on her business. Steward was disappointed to learn her company was worth less than fifty percent of one year’s sales because she had no recurring revenue and what sales she did have were dependent on her personally.
Steward set about to transform her business into a more valuable company and made three big moves:
- Angel Watch
The first thing Steward did was to design a monthly program called Angel Watch, which offered her business clients ongoing protection from technology problems. Steward offered her Angel Watch customers ongoing remote monitoring of their networks, pre-emptive virus protection and staff on call if there was ever a problem.
Steward approached her clients with a calculation of what they had spent with her firm over the most recent 12-month period, including the cost of her customer’s downtime. She made the case that by signing up for Angel Watch, they would save money when taking into consideration both the hard costs of her firm’s time and the soft costs associated with downtime.
90% of her customers switched from hourly billing to the Angel Watch program.
- Doubling Rates
Next Steward doubled her personal consulting rates. That way, when one of the customers who decided not to opt into Angel Watch called her firm, they were quoted one rate for a technician’s time or twice the price to have Steward herself. Not surprisingly, most customers opted for the cheaper option and others chose to re-consider their decision not to sign up for Angel Watch.
- Survivor Clause
Steward also credits a small legal maneuver for further driving up the value of her business. She included a “survivor clause” in her Angel Watch contracts, which stipulated that the obligations of the agreement would “survive” a change of ownership of her company.
Steward went on to successfully sell her business at a price that was more than four times the original valuation she had received just two years prior to launching Angel Watch.
Tulsa-based LawnAmerica has merged with Colorado’s Swingle Lawn, Tree and Landscape Care. This merger c0mbines two large regional lawncare companies with Swingle being ta leader in Colorado and LawnAmerica being a leader in Oklahoma.
Here is the text of the press release announcing the merger:
Denver, Colorado, USA, September 20, 2016 – Swingle Lawn, Tree & Landscape Care, now celebrating 69 years in business, today announced that LawnAmerica has merged with them. The merger results in Swingle Lawn, Tree & Landscape Care owning the majority of the assets of LawnAmerica, an Oklahoma based lawn care business. LawnAmerica has been in business since 1999, employs approximately 60 people and is active in the Tulsa, Oklahoma City and portions of the North Carolina/South Carolina markets. They are leaders in turf care and are also a Christmas Décor franchise.
Brad Johnson, founder and former majority owner of LawnAmerica, said “In order for our business to continue to grow and prosper, we are merging with a larger company out of Denver, Colorado, SwingleLawn, Tree & Landscape Care. Swingle has been in business for nearly 70 years, and are well respected in their market and nationally. After lengthy discussions with many industry advisors, I’ve decided Swingle is the best fit for the next steps for LawnAmerica.”
Both companies will continue to operate as independent businesses. Each company remaining committed to providing their respective customers with industry-leading services, while also exploring new ways to combine resources, experience and sharing of best practices to improve efficiencies where possible.
“A twenty-year industry friendship between Brad Johnson and myself has provided the foundation for this excellent opportunity. Combining our businesses provides an opportunity to grow stronger as multi-regional businesses, providing additional opportunities for team members and expanded service offerings to customers. We appreciate the amazing work Brad and his team have done, and together we plan to build on this success”, said Thomas R. Tolkacz, CEO of Swingle and new majority owner of LawnAmerica.
Founded in Denver in 1947, Denver-based Swingle Lawn, Tree and Landscape Care has grown to become the leader in residential and commercial lawn care, tree service, and holiday lighting in the Front Range of Colorado.
There’s a steady breeze from the northwest, which cools the warm Caribbean afternoon. Framed between a palm tree and the turquoise water, you notice a man reading. He appears to be working, which seems strange given his appearance: shaggy blonde hair, linen shirt, surf shorts and flip-flops.
You squint and realize the man is Richard Branson and he just happens to be running Virgin Group Ltd., a multibillion-dollar conglomerate. He is working where he usually does, at Necker Island, a 74-acre retreat he owns in the British Virgin Islands.
Branson, of course, is far from a negligent founder, he has managers running the various businesses that make up the Virgin Group and visits his companies regularly, but he does not manage the day-to-day operations of any of his businesses, which frees up his time to think.
The train conductor vs. the thinker
Your role as a CEO can be divided into two buckets: one for managing and the other for thinking.
The managing bucket is where, metaphorically speaking, you ensure the trains all run on time. In this role, you’re establishing goals for your employees and holding them accountable for achieving their targets. You’re making sure your products and services are of a high quality and that your biggest customers are happy.
When you’re wearing your manager hat, you’re scouring your company looking for small enhancements every day. This obsession with continuous improvement is what big companies call “six-sigma thinking,” but you probably just think of it as building a great company.
The other bucket is reserved for thinking and it’s where you create the future of your company. In this visionary time, you get to design new products, imagine new ways of serving customers, or contemplate where you could take your business in the years ahead.
Your visionary hours are spent dreaming and imaging what your business could be, instead of worrying about what it is today.
The most valuable companies
The question is, how much of your time should you devote to each role? If your goal is to create a more valuable business—one that someone might like to buy one day—our data reveals that you should start gradually increasing the time you spend on thinking and hire someone else to do the managing.
For example, after analyzing more than 20,000 businesses who have received their Value Builder Score, we have discovered that companies of owners who know each of their customers by first name (i.e., managers) trade at just 2.9 times their pre-tax profit, whereas the companies of owners who do not know their customers’ first names (i.e., thinkers) trade at closer to 5 times pre-tax profit.
Further, companies that would suffer if their owners were unable to come to work for three months, receive significantly lower offers when compared to companies that would not feel the absence of the owner for a month or two.
Finally, in a recent survey of merger and acquisition (M&A) professionals, we asked who they like to see an owner hire if they can only afford one “C-level” executive. The M&A professionals overwhelmingly identified a general manager/second-in-command as the most important role a founder can fill ahead of a chief revenue, marketing or financial officer.
In short, the owners of the most valuable businesses have found managers to ensure the trains run on time while they spend an increasing amount of their energy thinking about what’s next for their business.
The Davey Tree Expert Co. has acquired the assets of Jones Bros. Tree & Landscape, a residential tree care company based near Memphis, Tennessee.
Jones Bros. has been providing residential tree assessments, tree care and tree removal to its clients in Memphis and the Mid-South since 1938. Davey’s Memphis office opened in 1990, giving both companies a combined 100-plus years of experience serving the market.
“This new chapter of Jones Bros. will help us deliver even better tree care to those in the greater Memphis area,” said Bob Jurgens, owner and president of Jones Bros. since 1975.
Davey and Jones Bros. share many of the same core values, said Jurgens. “We were already aware of Davey’s reputation for integrity, innovation and leadership within the green industry. As we learned more about the company, and its focus on safety and stewardship, a partnership seemed like a natural fit.”
“By aligning with Davey, our entire company will benefit. With access to the Davey Institute, the company’s premier research, development and innovation division, our arborists will be better able to diagnose their clients’ tree conditions. Our 30-plus employees will also have the opportunity to become employee-owners at Davey, one of the largest employee-owned companies in the U.S.,” added Jurgens.
Jim Stief, executive vice president, U.S. residential operations, said Davey is committed to future growth – organically and through acquisitions. “We will continue to focus on high-quality companies with customer demographics that are similar to our own, within markets where we want to grow density,” he said. “Our intent is always to pick up talented, safety-conscious employees intent on providing a high level of customer service.”
Jurgens, a University of Florida forestry graduate, will serve as the district manager of the combined office. He is an International Society of Arboriculture (ISA) Certified Arborist® and holds a commercial pesticide license. Current Davey District Manager Nathan Baker will join Michael Jurgens as assistant district manager. Both Baker and Jurgens are ISA Certified Arborists®.
“Jones Bros. is a welcome addition to the Davey Tree family,” said Stief. “Like Davey Tree, Jones Bros. provides excellent tree care while concentrating on the client experience and quality control. Now, we can focus on sharing our mission with the greater Memphis area – together.”
Whether you want to sell your business next year or a decade from now, you will have two basic options for an external sale: the financial or the strategic buyer.
The Financial Buyer
The financial buyer is buying the rights to your future profit stream, so the more profitable your business is expected to be, the more your company will be worth to them. Strategies that are key to driving up the value of your business in the eyes of this buyer include de-risking it as much as possible, creating recurring revenue, reducing reliance on one or two big customers, cultivating a team of leaders, etc.
The Strategic Buyer
The alternative is to sell to a strategic buyer. They will care less about your future profit stream and more about what your business is worth in their hands, typically calculating how much more of their product they can sell by owning your business. Strategic buyers are usually big companies, so the value of being able to sell more of their product or service because they own you can be substantial. This often leads strategic buyers to pay more for your business than a financial buyer ever would.
For example, Nick Kellet’s Next Action Technologies created a software application that takes a set of numbers and visually expresses them in a Venn diagram. Next Action Technologies was generating approximately $1.5 million in revenue when they received their first acquisition offer; Kellet’s first valuation was for $1 million, a little less than revenue, which is a pretty typical from a financial buyer.
Kellet knew the business could be worth more to a strategic buyer, so he searched for a company that could profit by embedding his Venn diagram software into their product. Kellet found Business Objects, a business intelligence software company looking to express their data more visually. Business Objects could see how owning Next Action Technologies would enable them to sell a whole lot more of their software, and they went on to acquire Kellet’s business for $8 million, more than five times revenue – an astronomical multiple.
In an example much closer to home, lawn care companies sometimes have sold for what might seem like astronomical multiples. This phenomenon developed during a period in which there were very active strategic buyers (including TruGreen, Scotts LawnService and others) actively buying and often competing against each other driving up valuations. Today, TruGreen and Scotts LawnService have combined. For now, they are not doing other acquisitions while they are focusing on integrating the two companies. Finding a strategic buyer for a lawn care company is not very easy right now. Values have fallen because most opportunities are with financial buyers and the competition is lower. Many lawn care company owners have assumed that the value of their business was based on a multiple of revenue that was being paid a few years ago. Those values may be pretty unrealistic today.
Preparing For Every Eventuality
The question is: why bother making your business attractive to a financial buyer when the strategic buyer typically pays so much more?
The answer is that strategic acquisitions are very rare. Each industry usually only has a handful of strategic acquirers, so your buyer pool is small and subject to a number of variables out of your control; the economy, interest rates, the competitive landscape and a whole raft of other variables can all impact a strategic acquirer’s appetite to buy your business.
Think of it this way: imagine your child is a promising young athlete who’s intent on going pro. You know that becoming a professional athlete is a long shot, fraught with unknown hurdles: injury, the wrong coach, or just not having what it takes to compete at the highest levels. Do you squash her dream? No, but you do make sure she does her homework, so if her dream fades she has her education; you make sure she has a back-up plan.
The same is true of positioning your company for an exit. Sure, you may want to sell your business to a strategic buyer in a spectacular exit, but a financial acquisition is much more likely, and financial buyers are looking for companies that have done their homework – companies that have worked to become reliable cash machines.
TruGreen Lawncare has completed its previously announced merger with Scotts LawnService. The merger creates the nations largest lawn care company with 2.3 million customers.
Here is the text of the press release that TruGreen issued.
MEMPHIS, Tenn., April 13, 2016 /PRNewswire/ — TruGreen today announced it has completed its merger with Scotts LawnService to create North America’s premier lawn care company. Scotts LawnService is a former subsidiary of The Scotts Miracle-Gro Company (NYSE: SMG). The merger of two industry leaders in professional lawn service will bring more resources, local experts, enhanced service and innovation to customers, with a shared belief that life is better lived outside.
As a result of the merger, TruGreen is expanding its leading services in lawn, tree and shrub care to approximately 2.3 million residential and commercial customers across the U.S. and Canada. TruGreen President and CEO David Alexander leads the newly combined company, which will operate as a privately held company under the TruGreen brand and remain headquartered in Memphis, Tennessee. Jim Gimeson, former president of Scotts LawnService, joins as Chief Operating Officer, and John Compton, a Clayton, Dubillier & Rice (CD&R) Operating Partner and former PepsiCo President, will continue to serve as TruGreen’s Chairman.
“TruGreen is proud to complete this milestone merger with Scotts LawnService, bringing together the two most trusted, innovative and service-oriented lawn care companies in North America,” said David Alexander, TruGreen President and CEO. “This continues the significant momentum we have experienced since becoming a standalone company, and we’re excited to expand the capabilities we can bring to our customers to help them live more of their lives outside.”
Memphis, Tenn.-based TruGreen is the nation’s largest lawn care company, serving more than 2.3 million residential and commercial customers across the United States with lawn, tree and shrub care. TruGreen believes more life should be lived outside and is committed to providing a beautiful lawn to serve as the foundation for outside experiences and lifelong memories. As the leader in the professional lawn care industry, TruGreen helps define responsible lawn care practices, conducts industry-leading education and training for our people, pioneers new application technologies and educates our customers on proper mowing and wise-use watering techniques. Today, there are more than 260 TruGreen lawn care branches and satellite offices in the United States and Canada.
The post TruGreen Lawn Care Completes Merger with Scotts LawnService appeared first on Principium Group: Mergers & Acquisitions.
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