Are All Landscaping Companies the Same

At first glance, landscaping companies can look remarkably similar. They mow lawns, maintain properties, install plants and may offer services such as installing irrigation systems or low voltage lighting.  But beneath the surface, landscaping companies can be very different businesses.

These differences matter – whether you are managing a landscaping company, positioning for an exit, buying one, or simply trying to select the right company for your property. For this article, we will focus on a few of the components of a landscape company and what can drive value (and attractiveness to buyers).  These components, and their impact, can be captured in determining the value of the business, which is the first step in preparing for a successful exit.

Landscaping Is Not One Business

As indicated above, the term “landscaping company” encompasses a wide range of services, strategies and business models. Understanding those differences can have a significant impact on profitability, risk, growth potential, and business value.  Given these differences, it is important to  consider the various components when trying to maximize profitability or thinking of potentially selling the business and determining its value, before entering into the market.

Commercial vs. Residential – or Both?

In working with the owners of landscaping firms, there seems to be a very strong preference by the owner on whether they target residential or commercial customers.  While some companies may have a slight mix of both, there always seems to be a core focus by ownership on one or the other, and a stated conviction on why it makes sense for them. 

• Residential landscaping companies may have hundreds or even thousands of individual customers.  This minimizes risk as no one customer can negatively impact the business.  However, challenges such as interfacing with a high volume of homeowners, cost of acquisition, churn and price sensitivity exist.
• Commercial customers (HOAs, property management companies, etc.) may have a much smaller number of customers, but individual contracts can be worth tens or hundreds of thousands of dollars annually.  While they have a fewer number of customers to interact with, each has a greater impact on the overall business.

From a market perspective, certain buyers (especially the larger ones) will only focus on acquiring a commercial OR residential landscaping company as that aligns with their overall business strategy.  For a landscaping company owner considering an exit down the road having a plan that aligns with the potential buyers’ needs will help drive value and attractiveness.

Recurring Revenue vs. Project Revenue

One of the biggest drivers of value for a landscape company is what percentage of their revenue is recurring.  Recurring revenue is where a customer signs an annual or multi-year contract for the landscape company to maintain their property.  This can include mowing, weeding, trimming, mulching or other services that are required throughout the year. Typically, the annual bill is spread out over 12 months, providing the landscape company with an income stream during slower winter months and allowing them to keep key employees on staff.  Recurring revenue is considered “sticky” and can be 60% – 75% of the annual revenues.  It is very attractive to buyers as it offers revenue continuity and consistency.

Project, or complimentary, revenue are non-recurring services that a landscape company may provide.  Many can have higher margins than the routine recurring revenues but are “one-time”.  These can include landscape architecture/design, fertilization, hardscaping, irrigation, snow removal, low voltage lighting, leaf removal, gutter cleaning, holiday lighting, and many other services. As with the “commercial vs. residential” debate, there seems to be different strategies on what services to offer, and who the target audience should be.

• In business, it is generally agreed that the cost of selling an additional service to an existing customer costs less than marketing and selling to a new customer.  For many landscape companies, the thinking is that if they are already servicing a property, there is a greater chance that the property owner will buy another service from them, especially if they do a good job for them already.
• For other landscape companies, they use the sale of a complimentary service such as hardscaping, mulching or fertilization as a “feeder” for their core recurring services.  This can be highly effective in competitive markets or when trying to build route density.
• Once the service area for the business has been established, selling additional business to customers located in the same area has a higher impact on gross margins as the employees are already in the area and there is less travel time in between. 
• What about snow removal?  One client we worked with said it best when he said, “we hate snow and we love snow”.  Pre-treating for snow and the subsequent removal results in long hours in unpleasant weather.  It is hard on the employees and the equipment.  However, it can be highly, highly profitable if done properly.  Most landscaping companies that we have worked with “plan” for snow removal, but do not “count” on snow removal to achieve their annual budget.  Buyers often discount snow removal revenues as they cannot be predicted with any certainty for most geographic markets.

Regardless of the strategy employed, having a healthy mix of recurring and complimentary revenue is an effective way to flatten out peaks in the business, drive higher margins and minimize the costs of customer acquisition.  All should be emphasized when doing a valuation of the business prior to entering the market and are recognized by buyers as “value drivers”.

Geography & Labor Management Matter

Two landscaping companies with identical revenues can have very different economics depending on the geography where they operate and how they deploy employees.  Transportation and labor are two of the most highly variable and controllable expenses in a landscaping company.  Knowing how to effectively manage both can be a true differentiator in the operating efficiency and profitability of the business. 

• Using the business headquarters location (where the employees leave from daily) as the epicenter, most landscaping companies focus on a specific coverage area, either in terms of miles or drive time.  On paper, a customer may only be 10 miles from the landscaping company’s location, but it may take over an hour to get there.  Savvy owners balance distance and drive time to get the best outcome.
• Once the service area has been determined, route density becomes important.  Route density affects labor productivity, fuel costs, vehicle utilization, supervisor efficiency, equipment utilization, and revenue per crew hour.  Overall, the business is more efficient and profitable, creating value.  On the other hand, windshield time (driving between jobs) is typically not billable, incurs costs and should be minimized.
• Landscaping is a very labor-intensive industry. Consequently, the quality and availability of the workforce can have a major impact on profitability.  Understanding the crew productivity and work to be done (recurring and complimentary) allows the business owner to plan in terms of number of crews, crew size, equipment utilization.  Proper planning helps ensure greater efficiency and profitability.  A general guideline is that every incremental dollar in net income is worth $4 – $6 in company value and this will be validated during both the valuation process as well as the buyer’s appetite.

Management Makes a Difference

Perhaps one of the most important distinctions between landscaping companies is the degree to which the business depends on its owner.  Some owners “work on their business” while others “work in their business”.  A landscaping company where the owner personally sells every major account, estimates every project, manages crews, handles customer complaints, and maintains key relationships may be great in the short run but can limit the growth and business value over time.  Having a firm with operations management, sales staff, estimators, crew supervisors, administrative support, and established operating procedures allows for greater scaling of the business and is very attractive to a potential buyer as it is a lot less owner dependent.

In Summary

Are all landscaping companies the same?  Clearly, the answer is no.

Are all landscaping companies attractive to all buyers?  Again, the answer is no.

Are landscaping companies equally valuable on a per dollar basis?  Unfortunately, the answer is still no.

Are well run landscaping companies in demand and attractive to buyers?  Yes and yes.

Landscape companies can come in many shapes, sizes, structures and with different operational plans.  As long as the owner is working their plan, and their plan is working, they are creating something of potential for buyers – if it is valued properly and then marketed in the right manner to the right group of buyers.  Having a professional M&A firm assist the business, from the initial business valuation to the final close will help owners maximize the value and ensure the best outcome.