June 4, 2019

Systems to promote succession

By Mark Bradley
 

“There are a few times
  in life where you get
  to make choices that
  can have a multi-
  generational impact.
  [Selling your business]
  is one of those times.”

— Kim Jordan, New Belgium Brewing

It has been said nobody works harder, for less return, than a landscape contractor. Maybe a stretch, but it is close enough that you are probably taking a moment to think about it. Succession planning is critical to owning a landscape business. You may have a passion for the outdoors, but one day you will have a passion to do other things — outside your business. The hope is, by then, your business has created a situation for you where you can be comfortable.

But for most businesses, that hope is just that. A mere hope. There is no real emphasis or planning for ‘the end.’ Just a vague desire that one day, the business will be able to pay you back for your risk, efforts, late nights, anxiety, and all the other joys of owning and operating a business.

Don’t leave your future to fate. Here are three important ways you can start succession planning in your business.

Embrace transparency
Next to an engaged family member, selling your business to key employee(s) may be your best option for business succession. Transitioning to employees has some important advantages:
  • They are more likely to maintain the existing culture and values you set.
  • You don’t need to hard-sell them your company.
  • Smoother transition for both current owner and new owners, as everyone already knows the business, the customers and the ‘way things get done.’
But engaging your employees when you are ready to sell your business is likely a few years too late. Not only does the employee know the company’s dysfunctions (all too well), but they also may see the situation as a threat to their employment and look elsewhere for greater security.

There are two great reasons to increase financial transparency in your business if you are thinking about succession in the next 10 years. First, it is likely to improve profits and performance — which builds value in your business. And second, while employees understand a company’s dysfunctions, it’s rare that they understand the financials: equity, value, profit … all the benefits of running a business.

There are some fantastic books (Great Game of Business is one) and methods to start engaging your staff around the numbers that drive your business. You don’t have to completely open the books, but you can (and should) start sharing more information than you do today. Good employees will rally round the numbers and use those numbers to help drive more efficient and better behaviours. Think of it like a scoreboard. Good athletes want to play for a score. Beer-league athletes are just looking for the occasional moment of glory. With employees, it is no different.

Implement systems and processes
Whether you are selling your business to a third party or to your staff, systems and processes are the backbone of a good business. They demonstrate a recipe for repeatable success, the likelihood of continued success, and they drive up the value of your business.

Far too many contractors without a plan, make the fatal mistake of assuming their business is going to be worth a lot because there are some healthy profits on the books in the final years. But the reality is, most of the company’s equity is tied up in (old) equipment and the knowledge and know-how of the current owner — who is looking to leave! Today’s buyers are more savvy than that — and they have better options to choose from, too. If the value of your business is the value of your equipment at auction, plus a couple years’ profit as a goodbye present, you are doing your business (and your retirement) a great disservice.

Valuable businesses that get picked up by successful buyers with deep pockets often share these traits:
  • Best-in-class equipment for maximum productivity and reduced dependence on labour.
  • Software systems that drive procedures and efficiency in the office.
  • Well trained, engaged staff who could run the business if you could not.
  • The prospect of recurring income, such as maintenance and snow contracts and client lists.
  • Organized shops, trailers, and procedures.
Think about the type of businesses that sell themselves all the time — franchises. What are they selling? They sell systems, procedures, training, and the promise of repeatable success.
Even if you are never going to franchise, think about your business as if you were, in order to get the most value when it is time to sell.

Know your numbers
Mastering the numbers of your business will pay back more for your time than just about any other activity you can perform in your business. Sure, you might be worth $100 per hour because you can run a job so well … but a little investment in your financials will pay you back many, many times over in the future.

Understanding your numbers will help ensure you price every job for profit. This sounds obvious, but in my meetings with hundreds of contractors, most of them assume they are pricing correctly, but really don’t have any actual numbers to back it up.

Not understanding your numbers and how to price work has a really devastating effect on the profits and success of most companies. At LMN, we have had the privilege of teaching thousands of contractors about their numbers, and here’s a shockingly consistent fact:
After learning to price from a budget and re-pricing some old jobs, the average contractor finds he is pricing 30 per cent of his work at break-even or less!
This is especially true in property maintenance, but it is usually about the same in design/build. Owners are losing significant profits now, and future business value, because of guesstimating.

Consider the following true story:
I was working with a young hardscape contractor in the U.S., building his budget and ensuring his equipment and overhead was being recovered properly. To date, he had been pricing his hardscape work by square-foot pricing (as a benchmark), combined with a little intuition — adjusting prices up or down based on perceived difficulty.

He had bid a project the night before for $19,500. Using the numbers from his budget to properly recover his costs, overhead and a 10 per cent profit, his post-budget price was $27,800. In fact
his direct job costs (no overhead or profit) was $18,600 — leaving him with a paltry $900 to cover all overhead, profit, risk, warranty, etc.

He was naturally skeptical of the higher price. So we revisited his estimate, line by line, double-checking his labour, material quantities and unit costs. When we were both certain there were no glaring mistakes, we returned to the price and declared the numbers tell us this is a $27,800 job, and that is what you need to trust. He did — and, much to his surprise and delight, he even left the meeting with a deposit.

Now look at the impact this adjustment will have on his business:
Revenue gained per single job with correct pricing: $8,300
Assume this kind of mistake happens on three jobs a year: $24,900
And this company has three crews: $74,700
And the company is in business (no growth) for 25 years: $1,867,000

I can’t overstate how important knowing your numbers is to your succession plan. That $1.8 million is going to make an enormous difference on when (and how) this gentleman will retire. It is also going to make a very significant difference in the valuation of the business — increasing the business’s worth and likelihood of sale, given its much stronger profit history. Not to mention, mastery of your numbers will assist you in all kinds of financial negotiations: selling your business, securing funding and loan capital, growing, merging … anything the future holds.

You can fix this with some simple steps. If you can’t tick off all these steps below, start now!
Understand your profit and loss statement. Make sure you know where all your revenues and expenses are being recorded.
Understand your balance sheet. And understand how it differs from a Profit & Loss statement
Identify key performance metrics. Some simple ratios help you know when your business is on track, and when it needs gentle correction.

Run your business from a budget. A budget is a plan for profit — and make sure you have a pricing system that serves your plan.

Mark Bradley is the CEO of LMN Software, and former CEO of TBG Environmental, both based in Ontario.