A nursery transition plan must consider the optimal timing to change ownership, management, control — or ultimately, all three
A nursery business is often nurtured, grown, and sold much like the plants raised in the nursery. One big difference is that the succession planning cycle happens over many years — not just one or two growing seasons.
When it comes time to sell, a nursery presents challenges that are unique, as compared to other businesses. When the owners decide it is time to transition out of the business and to engage in succession planning of the company and a smooth exit for the owners, careful planning and preparation are necessary.
Succession planning can be viewed as the art of structuring the transition of several elements of the business: the ownership, the management, and the control. Each of these elements requires careful planning, structuring, and implementation to assure the succession plan is successful.
Timing the exit
Nurseries are a cyclical business. Cash flow, working capital, and profitability ebb and flow during those cycles. The length of those cycles can also vary greatly depending upon the plant stock of the nursery.
Taking those natural cycles into account when timing the implementation of a succession plan will have a significant impact on the success of the plan and also on the terms and conditions upon which the owners are able to transition out of the business. It often takes several years of analysis of the business cycle to determine the best time to implement a plan, so advance thought and preparation are necessary.
The ownership element
Often, the nursery business is a family affair. The owners may want to keep the nursery in the family, which will limit the universe of potential buyers. However, potential buyers may also include key employees or a competing company. Each option comes with its own challenges.
Internal Buyers: If family members or key employees are the preferred buyers, consideration must be given to the fact that few family members or employees will have the financial resources to purchase the company outright.
Often, family or employees will need to acquire their ownership of the company over time. That can be accomplished through a variety of tools, from bonus plans to buy-sell agreements funded with insurance, or deferred compensation plans.
The funding of the transition of the company to family or employees can be a five- to 10-year process. Additionally, not all family members or employees will stay with the company for the duration of the succession plan, requiring some recalibration of the plan over time.
External Buyers:If the company is to be sold to a competing nursery, confidentiality is a key component of the transition. If it becomes known in the industry that the company is for sale, competitors may use that information to attempt to pick off valuable employees and clients.
During the due diligence phase of a transaction, financial information and other proprietary information is often shared with the potential buyer. If this information is not properly protected, it could be used against the company in the event that the transaction is not completed.
Valuing the business
How much is the company worth? Clearly, the in-ground inventory has a value that can be established at market.
But what about the other aspects of the business, including its in-place workforce, equipment, fixtures, and any real property? What about intangibles such as goodwill or a below-market lease?
Equipment and fixtures may be fully depreciated and in need of replacement or like-new condition. An appraiser may be necessary to accurately assess the value of the tangible assets.
Intangibles may comprise a substantial part of the value of the company. These intangibles will include such items as the anticipated future profits of the company, below-market lease rates, the skill level of the in-place workforce, special areas of expertise or products, and market share.
Determining the value of these intangibles often requires an appraiser or consultant with expertise and experience in the nursery business.
The target buyer, whether internal or external, can also impact the value of the company. When transitioning the ownership to family or key employees, these smaller portions of ownership will often be subject to minority interest and lack of control discounts, resulting in an overall smaller payoff to the departing owners.
Sale of the entire company to an external buyer often allows the departing owners to obtain the full enterprise value for the company without discounts for lack of marketability or minority interest. Additionally, a strategic buyer may be willing to pay a premium for the company if the acquired company complements its current business through acquired geographical reach, product mix, or distribution channels.
Tax considerations may also impact the value of the business. If the nursery happens to be located in an opportunity zone created by the 2017 tax reform, the tax advantages to the buyer may increase what the buyer is willing to pay.
Transferring control
Designing and implementing a succession plan does not necessarily mean giving up control of the company. If an internal succession plan is preferred, transitioning family or key employees into ownership and management of the company can occur over time.
While family members or key employees that are likely candidates are identified and trained over time, current ownership can retain control of the company by retaining the key officer positions within the company, even as their ownership interest in the company decreases.
Securing and monetizing the value that a nursery has is much like harvesting a crop and seeing it safely to market. Starting the process well before the need to exit the company is not unlike the planning necessary for the care, planting, and nurturing of a new crop. This will help assure the success of the company, both in terms of the continued longevity and returning value to the departing owners.
Jordan Ramis PC is a law firm based in Portland that specializes in business and real estate law.
