There are several good reasons why now is a good time for a landscape company to consider making an acquisition. Let’s take a look at some of the most compelling reasons that landscape business owners should seriously consider making a move now.
1. Valuations remain attractive for acquirors
Typical valuations in the green industry remain highly attractive for acquirors. A combination of relatively few transactions during the downturn and the challenging financing market in recent years have combined to keep valuations quite attractive for acquirors in the lawn and landscape industry, particularly compared to the periods of rapid consolidation a few years ago.
2. As the market improves, there is an opportunity to increase market share
The landscape services industry is expected to have solid growth in 2012 and better growth in 2012. Industry projections call for industry-wide revenues to grow over 4% in 2012 and over 7% in 2013. In prime markets, operators can expect growth to exceed these levels. A well-orchestrated acquisition may allow an acquiring company not only their share of industry growth but growth based on a target company’s market share as well. This can have the effect of significantly increasing the return on investment associated with an acquisition.
3. The opportunities may be greatest for comprehensive landscape services companies with a design-build segment
During the recession, competition became very acute within the commercial landscape maintenance segment, compressing margins for many companies. Although design-build companies in many (but definitely not all) markets experienced sharply reduced demand, margins have often remained much higher than in the maintenance segment. Although various factors have lessened the demand for design-build companies as acquisition targets, in select situations, the returns may be substantial. Valuations have been most constrained for these companies, but in many markets, their business has rebounded considerably with the economic recovery as both commercial and residential customers are beginning to take on projects that were delayed during the recession. In addition, homeowners who are tending stay in their homes for a longer period due to lower home values are taking on home improvement projects including, in many cases, large landscape projects. As a result, buyers may be able to quickly recoup the acquisition costs of strategically placed design-build firms.
4. There is an increasing supply of quality acquisition targets to consider
As we have noted in the past, there are almost always more buyers than sellers for landscape services businesses. Typically business owners are reluctant to consider the sale of their business unless personal factors such as health, family issues, retirement, etc. come into play. Because relatively few transactions have been completed in recent years, there is a backlog of companies who have a reason to need to pursue a sale opportunity. As a result, we believe there are more potential acquisition targets available now than in recent memory.
5. Pending tax changes may make sellers more motivated this year than they will be in the future
In addition to the backlog of transactions, potential sellers are concerned about the potential for significant increases in tax rates associated with transactions. Unless there are changes made this year, long-term capital gains tax rates are scheduled to increase from 15% to 20% effective January 1, 2013 and the maximum ordinary income tax rate is scheduled to increase from 35% to 39.6%. The specter of higher tax rates will cause even more potential sellers to seriously consider a transaction in 2012 that will avoid these scheduled tax increases.
6. The financing market has improved considerably
Acquisition financing is available from a number of sources. The US Small Business Administration guaranteed over $30 billion in loans to small business in 2011, an all-time record for the agency. SBA loans are made by commercial banks and some non-bank lenders. Under the program, the SBA guarantees 75% of the loan amount against payment default. Most US banks participate in SBA lending programs. The SBA’s 7(a) program is often used for business acquisitions. If SBA loans are not right for your business and transaction, there are often other loan options available for financing acquisition transactions.
As you can see, there are lots of reasons for a landscape business to consider making an acquisition in 2012. While many business owners are understandably cautious coming out of the economic downturn, the opportunity to make an acquisition that can positively affect a business is significant right now. As one friend of mind says, these are the times that businesses are built.