How to acquire commercial landscaping small business and generate $180k/year.

In the heartland of Dallas, Texas, an acquisition case unfolds involving a prosperous small commercial landscape company. With an asking price of $325k and boasting an impressive annual revenue of over $1,080,000 alongside a net cash flow surpassing $225,000, this case study details the acquisition process from evaluation to outcome.

In examining this transaction, we endeavor to provide insight into the following aspects:

1. An overview of the business
2. Strategies for financing the acquisition
3. The proposed deal structure
4. The final deal structure
5. The ultimate outcome of the acquisition

1. The Business

Established in 1984, this enterprise has built a strong foundation with 11 established accounts generating a steady monthly revenue of approximately $33,000. Situated in the thriving heart of North Dallas, the business boasts an impressive average revenue of $55-60 per man-hour of labor.

The company prides itself on its team of knowledgeable and skilled professionals
who are committed to staying with the business, ensuring a smooth transition
and continued success. With a consistent flow of 2-3 weekly leads from both
residential and commercial clients, the business maintains flexible operational
capabilities, running efficiently with teams of either two-to-three or four-man
crews.

Designed for versatile ownership, the business can be run absentee, thanks to an
existing managerial structure already in place. Its year-to-date earnings from
landscaping services have reached approximately $650k, and projections indicate
the potential to achieve around $400k going forward, with a strong profit
margin underscored by a largely recurring client base.

This business presents an ideal opportunity for integration ("tuck-in")
for an existing player in the industry. Stand-alone Seller's Discretionary
Earnings (SDE) are estimated at a ballpark of $250k.

2. Choosing a Financing Strategy

Due to the limited funds of most small business buyers, they typically aim to use minimal personal capital in acquisitions. To achieve this, buyers often opt for a leveraged buyout (LBO) structure and seek extensive financing, with an equity injection usually capped at 10% through a Small Business Administration (SBA) loan.

The SBA's 7(a) Loan Program is designed to support small businesses with
distinctive needs by providing loan guarantees to lenders. When utilizing an
SBA loan for business purchases or partner buyouts, specific criteria apply
based on the ownership situation:

·       For new ownership: A minimum 10% equity injection towards total project costs is required, covering expenses for ownership transition regardless of funding sources.

·       For changes among existing owners: In cases where the 7(a) loan exceeds 90% of a partner buyout price, remaining owner(s) must demonstrate active involvement in operations and consistent or increased ownership over the past two years. Financial records should display a debt-to-worth ratio not exceeding 9:1 prior to ownership change. If these conditions are unverifiable by the lender, remaining owners must contribute at least 10% cash towards the purchase price.

3. Proposed Deal Structure

Upon evaluating the enterprise, the optimal approach for a prospective purchaser is to draft a Letter of Intent (LOI) stating an intent to acquire the Landscaping company through a structured financial plan that includes seller financing, personal equity, and a loan.

a) Seller Financing

An aspiring buyer might suggest a deal incorporating a 10% seller financing
arrangement. The inclusion of seller financing is crucial as it ties a portion
of the payment to the ongoing success of the enterprise. This seller financing
would take the form of an installment loan, to be repaid over several years.

b) Equity Injection

It's anticipated that the transaction will include a 10% capital investment from the
buyer. This equity could come from personal savings or be collected through
contributions from friends and family.

c) Business Loan

The balance of the purchase price, which amounts to 50%, would be sought through a business acquisition loan. Specifically, Jolene and her spouse have chosen to pursue a loan guaranteed by the Small Business Administration (SBA 7(a)) program. Loans secured through the SBA typically offer more lenient criteria
compared to traditional commercial bank loans, and they are known for their
highly competitive interest rates.

4. Transaction Challenges

Challenges during the transaction process included accurately valuing the company, negotiations on the sale price, due diligence complexities, and aligning the timing expectations between buyer and seller. Additional hurdles included maintaining the confidentiality of the sale and ensuring ongoing business operations did not suffer.

5. Final Structure

Adjustments to the initial proposal were made to accommodate due diligence findings and to address financial assessment outcomes. The final structure comprised a blend of bank financing, moderate seller financing, and a sizable buyer’s equity commitment.

·       Initial Investment by Buyer: 10% ($35,000)

·       Financing From Seller: 10% ($35,000)

·       Funding through SBA Loan: 80% ($260,000) with a monthly payment of $3,436 for the next 10 years

Given the business's net cash flow of $225,000 annually, a new purchaser could
comfortably achieve an annual take-home positive cash flow of $180,000 by
investing less than $50k

Conclusion

Acquiring a small business such as a commercial landscape company can serve as a springboard to fulfilling the dream of CEO-ship without the infancy-stage perils businesses often face. This stratagem, known as acquisition entrepreneurship, utilizes an established entity as the groundwork upon which you can build, refine, and expand. Rather than navigating the precarious waters of a startup venture, with statistics skewed towards a high risk of early failure, the acquisition route offers a business with a proven model, existing clientele, and immediate cash flow. Implementing a 'build and grow' strategy, an acquisition entrepreneur can focus on innovation and expansion, steering the business toward new horizons while grounded by its established reputation and operational framework.

Book to read: BUY THEN BUILD

Happy Hunting!😃

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