More than cash flow

Features - 2019 State of the Industry // Business Management

Understand the 10 metrics to discover your business’s value.

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October 29, 2019

© Visual Generation | Adobe Stock

There is a mistaken idea that value for a company relies solely on its operating statement to demonstrate positive cash flow. Certainly, that is essential to show the company has value, but how to determine the multiple of that cash flow is where value is developed.

There are factors in valuing a horticultural business which people cite that have little effect on its value. “We have a long history.” A nursery, greenhouse or landscaper that is 100 or more years old is not going to require a value higher than one that has been in business for 10 years. While the history is impressive, it doesn’t add to nor subtract from the ability for that business to produce a reliable and repeatable cash flow.

“We are known for our quality.” I get this argument frequently. “We are worth more because we produce a high-quality product.” It’s great that a business produces a quality product, but does that product find a market that buys and pays for the premium the quality requires? There are several premium product quality nurseries that are no longer in business. It is expected the business produces and sells a quality product or it will not be able to continue in business. Lack of quality will mean fewer customers. Very high quality at a high price can also mean fewer customers.

“Our forecasts predict that we’ll be making huge money soon.” While the ability to see forward to scalability and increase matters, the capacity to produce based on past performance is where the real value is. A great spreadsheet is no substitute for performance.

When placing a value on a horticulture business, these 10 factors (in no particular order) are useful as a metric in developing cash flow.

1. Marketplace position

The question is always, ‘How positioned is this company to get the first call from a potential customer?’ Are they first on the Rolodex or a last-ditch effort? “We tried everyone else, let’s give them a call.” A company on top is worth more.

2. Pricing position

Relative to the competitive landscape, where does the company stand in the marketplace for price? If a company is successful yet considered very high priced, there is potential for someone to begin to strip away customers. If a company is very low priced, this may mean that a long run there can equal losses, since they have nowhere to go. Loyalty is a function of value.

3. Barrier to entry

What is the potential for someone to come in and duplicate the product mix the company offers in the same market and become a significant competitor? How difficult is that? Many nurseries that are no longer in business didn’t recognize soon enough the emergence of new competition until it was too late. Container growers are often most at risk. It’s relatively easy and fast to start and build a container operation.

4. Depth of management (bench)

If the owner and key manager were to suddenly disappear or be disabled (think accident), who would continue the business? Depending on the talent and ability of one or two key people reduces the value of the business. Depth of bench matters in football and in the horticulture business.

5. Accounting records and practices

If a company doesn’t know all its numbers or if its records are spotty, it is going to be hard to demand value when the information is fragmented. A good set of books, inventories and reviews by an account will go a long way in finding a value. A poor set of books will result in a lower value.

6. Economic conditions

The economy at large and the local economy are key drivers of business value. When things are great in the market, values are higher; when the economy is in the doldrums, values reduce. It is also important to consider the future of the economy when developing value.

7. Competitive threats

This is not about new entrants noted above. The question is, ‘How crowded is the market you are trying to reach?’ If you are a grower of decent B&B trees, in some markets, this means you have no unique factor to add for value. The amount and vigor of the competitive landscape can impact the value one can place on a nursery.

8. Location relative to the market served

How close are you to the market you are trying to serve? Many nurseries try to move production to low-cost areas but rob themselves of the power of proximity. People will go where it is convenient even if it costs more. There are ways around this deficit if you have a vigorous delivery system at reasonable costs. A poor, inaccessible location reduces value.

Be certain the top 10 customers on your list do not represent more than 25% of your total business volume.

9. Key customer concentration

A greenhouse or nursery can have huge margins, great cash flow, solid management, good records and a dozen other dynamics that look great — but with only one or two large customers, your business is worth a fraction of its value. I had a client once that had only ONE large customer, a big-box store. They did massive business with this company until someone else got the bid to supplant their position for the year to come. They were out. Millions of dollars in revenue were gone in a second. They tried to claw back some market from old customers, but without success. Be certain the top 10 customers on your list do not represent more than 25% of your total business volume.

10. Future scalable growth potential

In order to secure a good value for your company, there must be upward potential for growth. A potential buyer wants to believe they can build from the platform you have developed. There must be room to grow other than better marketing and higher prices.

These 10 metrics create a matrix of value that helps people find the price you can or should ask for your company.

Gene is a certified personal property appraiser specializing in nursery business appraisals; generedlin@att.net.