Two of the most common questions I get each month are: 1. How in the world do I make money in this business? 2. How do I get out of this business? Both questions speak to the essential command, "Ed, show me the money."
The key to understanding begins by asking: What makes a landscaping company valuable and, eventually, something that somebody
would pay a premium to buy from you?
Three "R's" unlock the essential issue of worth, says Don Delaney, my partner in business brokerage through Grassroots -
Top Dollar. The 3 R's are revenue, relationships and reputation.
RevenueWith revenue, we're talking three things: profitable revenue, right revenue margins and recurring or onetime revenue. The
nutrient value of revenue, like a growth agent, is all in the mix. A nurturing revenue mix begins with real net profit, meaning
owner's perks are added back in, before tax and debt service. A growth-promoting target for profit is in the 10% to 20% range.
Next is having generous gross margins, which is revenue minus direct costs. The wider the margins, the wider the margin of
error you can absorb. High margins lower risk and raise value. Healthy gross margins create a cushy cash flow.
Lastly, seasoned buyers or sellers zero in on the ratio of recurring maintenance to design/build revenue. Recurring revenue
has a service contract. It's repeat business month after month. Service contracts add value and improve salability. The percentage
ratio I like is 70:30 service contract revenue to onetime jobs.
RelationshipsThere are also three types of relationships - customer, employee and vendor. How tied are your customers to you? Customer
dependence adds value to your company. Build this dependence by delivering indispensable expertise, quality, responsiveness,
trust and a service contract. Low price isn't on the list.
Don't overlook the asset value in your employees. Their loyalty, ability, dependability and customer service skills build
value in your company. Then there's mutually beneficial vendor and referral sources. These relationships can drive down marketing
costs and drive up revenue. Include them in your asset list.
ReputationRegarding reputation, what unique service or expertise do you bring to the marketplace? When you're recognized as a leader
in a particular field of expertise, you can charge more; generalists are a commodity, with a lower value. By leveraging your
reputation, you can open cross - and up-selling opportunities.
Your third grade teacher told you the 3 R's would take you far. She knew what she was talking about. Follow the principles
presented here. You'll be able to show me the money now and when you sell your firm.
