There is power in pondering answers to good questions. Here are two questions that I have been pondering:

• Why do some landscape companies have an operating profit that consistently exceeds 10 percent of revenue while the remaining companies collectively average less than 5 percent?
• What makes the landscape industry so attractive to private equity investors?

These questions have the same answer. We will explore part of that answer in this column.

The Herring Group recently completed its annual benchmark report, which included 97 companies in the landscape industry. One of the interesting statistics is operating profit measured as a percentage of revenue. (Operating profit equals revenue less direct job expenses, indirect job expenses and overhead expenses, including straight-line depreciation expense.)

Of the benchmark participants, 15 percent had an operating profit margin exceeding 10 percent; the average among this group was 12.9 percent. The average revenue of these companies was $7.8 million; therefore, the average operating profit was $1 million.

Collectively, the remaining 85 percent had an operating profit margin of 4.8 percent. These companies were slightly larger, with average revenue of $8.6 million, but the average operating profit was just $0.4 million. What a performance gap!

More to it than luck

I wondered if perhaps the high-performing companies just got lucky one year. In my research, I found that their performance over two years was also quite strong. The lower-performing companies also had consistent results over two years. That research supported my observations of our clients — profit performance from year to year is largely consistent unless there is a specific plan to create a change.

Said differently, each company is perfectly structured to produce its operating and financial results. Absent a change in the “structure,” the results will not change. If a management team wants to change the financial results, the team must create a plan to change the structure.

The land of opportunity

Let’s talk about private equity. Private equity investors are experts in discovering opportunities, more specifically, opportunities to earn a large return on their investment. It is their job.

Private equity investors see a huge opportunity in the landscape industry.
What’s the opportunity? The gap between the high-performing companies and the low-performing companies.

If they close the performance gap, they will earn a rich reward. Indeed, private equity investors believe that it’s relatively simple to close the performance gap.

Simply put, closing the performance gap involves adopting enterprise-grade technology, management processes, financial talent and practices, employee training and human resources talent and practices. Those enterprise-grade resources are readily available to all landscape companies, large and small.

The industry has always been quick to adopt enterprise-grade vehicles and equipment, but slow to go with enterprise-grade improvements in other areas of the business. Said differently, companies spend freely on vehicles and equipment, but not on technology, finance and human resources. With vehicles and equipment, owners focus on return on investment, not cost. In these other areas, I suspect owners focus on cost, not return on investment. This failure to go enterprise-grade is one of the principal causes of low operating profit margins.

An enterprise-grade resource is more dependable, more productive and capable of growing with the company. Enterprise-grade resources will cost more but
produce a significant return on investment, increasing the operating profit margin.

I see these truths at work every day in our work with clients. Private equity investors also see these truths — which is why their money is flooding into the industry.

My hope for the readers of this column is that you will choose to go enterprise-grade and enjoy greater profits — and a greater sales price if you choose to sell you company.

If you are one of the low-performing companies, what should you do?

Create a plan — a plan to go enterprise-grade.

Greg Herring has served as a CFO of both public and private companies. Herring is the CEO of The Herring Group, an operational and strategic finance consultancy. Using its proprietary Path to 12%, The Herring Group serves landscape business owners challenged by growth by installing financial dashboards and systems that provide more margin for their businesses and their lives. Reach him at greg.herring@herring-group.com.