Small Business Acquisition Case Study – Landscaping Company

Summary: This article presents a case study of an acquisition of a small landscaping company. The landscaping company was selling for $700,000 and was acquired using a conventional structure. In this study, we cover the following:

  1. The business: SpringSprout Landscaping
  2. The buyer: Jolene Jones
  3. Choosing a financing strategy
  4. Proposed deal structure
  5. Transaction challenges
  6. Final structure
  7. Outcome

Note: All names have been changed to protect the participants' privacy.

1. The business: SpringSprout Landscaping

SpringSprout Landscaping was started by Sonia Anderson in the early '90s. SpringSprout Landscaping offers landscaping services to residential customers, Home Owner Associations (HOAs), and office parks.

The company started small and initially had only one part-time employee. It had basic equipment. Sonia and her employee used Sonia's truck to drive to and from jobs. Throughout the years, Sonia slowly grew the company. It eventually had a steady portfolio of clients that used her services regularly. This created an attractive source of recurring revenues.

After nearly three decades in the business, Sonia was ready to retire. Sonia has two adult children, but neither was interested in taking over the business. Consequently, she decided to put the business for sale. There was one catch.

Sonia was attached to her employees, clients, and community. She wanted to find a buyer that would treat them right. She was adamant about selling only to the right buyer. However, this would not be the only complication for this transaction.

2. The buyer: Jolene Jones

Jolene Jones had reached the point where she wanted to take an early retirement from her current position as an office manager. Jolene wanted to pursue a new opportunity, become her own boss, and change industries.

Her husband is a mid-level manager at a local company, draws a decent salary, and wants to keep his employment. They decided that Jolene would buy a small business while he kept his job. This arrangement was to their advantage because her husband's salary was sufficient to cover all household expenses.

After some inquiries, Jolene found SpringSprout Landscaping, a local business, was for sale. Jolene and her husband performed some basic due diligence and decided to make an offer by submitting a Letter of Intent (LOI).

3. Choosing a financing strategy

Jolene and her husband have built a sizable nest egg and have enough money to buy the business without financing. They even considered making an all-cash offer for the company.

This situation is very unusual since most small business buyers don't have a lot of money. Few could make an all-cash offer. Instead, most buyers try to acquire a company using as little of their own money as possible.

Buyers usually try to structure the acquisition as a leveraged buyout (LBO) and try to finance as much as possible. Usually, the buyer limits their equity injection contribution to 10%.

Leveraged buyouts have some advantages, which is why some buyers use them. The leverage (financing) has the potential to increase your returns. However, they also have disadvantages. Leverage has the potential to magnify losses if things don't go as planned.

After careful consideration, Jolene decided against a small business leveraged buyout. She has always been uneasy about taking a large loan. Instead, she decided on a conventional business acquisition with a large equity injection.

4. Initial deal structure

After reviewing the business and considering her options, Jolene decided to buy the company. She submitted a LOI offering to buy SpringSprout Landscaping using a combination of seller financing, equity, and a loan.

a) Seller Financing

Jolene proposed a transaction with 10% seller financing. She wanted to have seller financing because it would ensure that part of Sonia's payment depended on the success of the business. The seller financing was structured as a term loan payable over a few years.

b) Equity injection

The proposed transaction would have an equity injection of 40%. The source of funds for the equity injection was their savings.

c) Financing

The remaining 50% of the transaction would be financed using a business acquisition loan. Jolene and her husband decided to use a loan backed by the Small Business Administration (SBA 7a). SBA-backed loans have simpler requirements than commercial bank loans. Additionally, they offer very competitive rates.

5. Transaction challenges

Most business acquisitions will run into challenges at one point or another. It is unusual for a transaction to go smoothly, though it does happen. This transaction ran into three potential roadblocks.

a) Accounting issues

Jolene's accountant discovered some issues with SpringSprout Landscaping's financial reports. This is not uncommon in small business acquisitions. Few small businesses have perfect accounting. However, finding accounting issues is a potential red flag.

Having accurate financial and accounting reports for the target business is essential. They enable you to evaluate the business, determine the Seller's Discretionary Earnings (SDE), and determine a reasonable purchase price.

Fortunately, the accounting issues were not very serious. However, it took Sonia and her accountant a few weeks to fix their records.

b) Sonia's opposition to seller financing

Sonia was opposed to providing seller financing. She thought Jolene would be a great person to buy her business. However, Sonia did not want to have any money tied to the sale. This is a common objection from sellers.

c) Jolene's lack of experience

Jolene had experience doing office management and secretarial work. However, she did not have experience in landscaping or business management. Sonia was happy to stay for a month to train Jolene but wanted to retire after that. This became a significant transaction roadblock since the lender was uncomfortable with this arrangement.

Sonia and Jolene got along very well and wanted the transaction to go through. Sonia was convinced Jolene was the right buyer and came up with a creative solution. She would hire Jolene to work in the business for three months. That would give Jolene experience getting to know the business. She also agreed to stay another three months to mentor her through the transition.

6. Final structure

Jolene and Sonia got to know each other as colleagues for three months. Jolene saw that the business was well-operated and profitable. It also had great staff and loyal clients that had been with the company for years.

Jolene and her husband reconsidered their initial offer and dropped the requirement for seller financing. Instead, they proposed the following structure:

  • Equity injection: 40% - $280,000
  • SBA-backed funding: 60% - $420,000

Most transactions include additional financing to cover equipment upgrades and working capital during the initial months. This acquisition was an exception. Jolene and her husband had enough funds from savings and felt comfortable financing future operations if needed.

7. Outcome

The transaction took longer than Sonia and Jolene had expected. However, transaction delays are not unusual and are somewhat expected.

The main delays were the issues with the inaccurate financial reports and the three-month training period that Jolene went through before buying the company. In total, this delayed the transaction by about four months.

After completing due diligence, the transaction was funded, and Jolene took over the business. Jolene's three months of training at the SpringSporut ensured a smooth transition to new ownership.

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Editor's note:

This information should not be considered legal or financial advice. Given the complexity of business acquisitions, this document is not guaranteed to be 100% accurate or cover every potential option. However, we make every effort to provide you with the best information. If you have comments, suggestions, or improvements, contact us via LinkedIn.

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