My phone rang. It was Ray. Suffering with terminal cancer, he didn’t have long to live. Ray owned a well-established, profitable tree farm with a solid wholesale customer base. He was concerned that if he didn’t sell his nursery before he passed on, his daughters (who were not involved in the business) would have an auction of the equipment and inventory for pennies on the dollar. Then they would put up a “for sale” sign for the real estate, likely ending up with 20% of it’s real worth. In exploring his cash flow, management team, customer mix and history, we concluded it was ready to sell.
He had a customer offering to buy it. He wondered how much he should ask. After a couple more questions, I gave a value, what I thought it was worth. He was quiet for moment and then said that is almost exactly what he planned to offer. I said, “SELL!” His daughters inherited far more than they would have if he had hesitated. Right company, right buyer, right price and a quick close.
Reliable cash flow
Years ago, it was difficult to sell a garden center or a production nursery to an outside investor. Sure, a neighbor or competitor might buy it. The investor market looked down on the industry. It was considered high risk with low return. Not anymore.
There is a great deal of money and people hungry to find sound investments with good solid reliable cash flow, stability and growth. The stock market is volatile. Crypto, gold and other safe havens where money looks for places of refuge in the past are undesirable for investors looking for solid returns and growth. Bank interest and CDs are low yield. Bonds are unattractive with rising interest rates. Where to go if you have money to invest?
The horticulture industry has experienced some good years. The future in horticulture doesn’t have as many storm clouds as other parts of the economy. Indicators show younger people as they age are willing to invest in green goods. It’s not all big-box stores. The retail garden centers that survived the hard days are prospering greatly.
At the same time, owners of garden centers, nurseries and greenhouses are reaching an age where, without a family member or employee as successor, they are considering the task of finding a buyer for their enterprise.
There are private equity groups and family offices prepared to own and operate these businesses. They want a good deal and are willing to pay for it. There are individual investors, but many lack the financial depth to step in.
As a mergers and acquisition advisor, we know the profile they are all looking for. The ideal investment for these groups has these five qualities:
- There must be a minimum free cash flow (EBITDA) of at least $400,000 per year for the last five years. A longer track record increases value. This amount can be adjusted for discretionary withdrawals that an owner takes out to keep the impact of taxes low. This number is best evaluated by an independent appraisal of the operating statement, operating conditions, market sector, competition and management team.
- This should be a retirement situation. They do not want an escape clause seller, someone who just wants out. The owner that is retiring should be more than 55 years old. It is preferred a business has only one owner, but two is OK if they are in agreement. Selling “your shares” doesn’t work unless it is to a remaining partner.
- The company has been in business at least 15 years. Longer is better.
- The owner(s) must show a willingness to work with the new buyer for a minimum of one year in transition. Two is better.
- There must be a deep bench in management. Buying a business and then having everyone walk away is a fear for outside investors. If everything in the company depends on the selling owner that can kill a deal. The best deals are nearly absentee in operations.
The more solid and predictable the cash flow is, the better the chances are to sell the company. The longer the company has been in business the better. The ease in transfer of ownership from the owner to the buyer, the better the deal can be. There must be assurance the owners are not going to go down the road and set up shop elsewhere. The closer the company looks as potential for absentee ownership the better.
The most important thing for the seller of a greenhouse, nursery or garden center to know; assets are less important than positive cash flow. Assets matter so the new buyer doesn’t have to invest a lot of money in new equipment and systems. There also needs to be ample inventories to sustain the business after purchase without a huge investment. Too many nurseries rely on the inventory and equipment for value when trying to sell. Investors are not interested in your assets -- that is what auctions are for. Investors want your cash flow. They want a profit producing machine that works every year spinning off cash. And they would really like it if it operated without their direct everyday oversight.
How much you can get for it in the end is all about quality of the business returns, not the quantity of the assets.
In the last 12 months we have been involved in the sales of 12 greenhouse and nursery businesses. For all these companies we are bound by a non-disclosure agreement, or we would name them. There are several different types of buyers, from private equity investors to family offices. Some acquisitions are peer-to-peer transactions, one nursery buying another, for instance. Several investors are outside the industry. Others are succession purchases by heirs. This activity is just in our firm. There are other M&A advisory firms helping investors find businesses in horticulture to buy and helping nurseries find new owners.
Now is a key time to strike, while the iron is hot. The right operating profile is essential. The next move is up to you. There may never be a better time.
Explore the January 2023 Issue
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