Are Tree Companies Actually Worth Anything?

R

Reedola

Location
Boulder
Howdy,
Would love some insight on my current situation.
My 50/50 business partner and I started a company here in Boulder, CO Jan 1 2017. In the past 1.5 years we've grown quickly, upgraded equipment and have made a name for our selves in the local industry. We are probably the youngest company in town with ages of 27 and 25. This month my partner had some large life changes occur and has to move back his hometown. Both of us are super bummed. Now we are trying to figure out how to split things up. I am planning on buying his portion of our truck, chipper, dump trailer, and equipment at a fair rate taking into consideration deprecation etc.
My real question is that besides our equipment, is our small business worth anything? From talking to friends in the industry and other people with years more life experience, i've gathered that in the end of the day, our "business" is really worth nothing. We don't have any large annual PHC contracts or big city jobs. My partner and I have both worked hard to make this happen and are more than happy with the results, but in the end of the day I don't know that our business is really worth much more than our assets. I want to give him the money for our equipment and some chunk of money to acknowledge his amazing work and brotherhood as a business partner.

Has any one gone through a similar experience? Anyone have some insights on how to handle this situation to where we are both tastefully satisfied or dissatisfied?
Would love your input.
Thanks
 
Sad story but all too common, Business and friends are soon parted. Not always because of a bad thing but a partnership is often times very difficult to maintain. You say you have assets? you have grown quickly? I'm assuming that means your company is making money? You have a network of clients? You have a reputation? You have established a line of credit perhaps? All of these things have value, they take time to accumulate. When companies sell off, they often include client base and a network. The entire package has value, not just the assets. Did you create a legal business name? Do you have insurance policies? Do you contribute to any pension plans or medical plans? What is the business revenue? How much cash in hand? Who has name on title for the equipment? Any liabilities? Do either of you owe anything for debt or damages or unpaid licenses or fees? Will there be a tax issue? Do you plan to liquidate assets?
Hopefully your business is still small enough that many of these things aren't a problem, but you don't want to be stuck paying taxes for your buddy.
 
If you don't want issues and you are comfortable running the show on your own, make him a deal. If one the other hand there may be issues, liquidate the assets and pay off any and all debts including taxes owed, bank fees, licensing, loans, credit cards, damages. Any monies left over split them as you both agree works. Shake hands and stay friends.
 
Interesting scenario. Sorry to hear you have to split on the biz. Stephen has some very good points and considering the age of your company. Your “system” is not usually very valuable in this industry with such short time in. I built quick, 800k my first year. I wanted to sell right away and go back in to full time ministry with my wife but was told that it would be very hard to get any interested buyers with such a short time in biz. I was advised to get a few more years under my belt before I could attract a buyer.
Without distracting you about my situation, I’m trying to say that you probably have the value of the equipment to consider mostly. If you were to run the numbers on your EBITDA or If you are able to calculate what the benefits to owner are, maybe a 1x multiple split because you are partners. So, if you guys profited any money or used any money to pay for benefits to the owners, like health insurance, company vehicles, etc. those are “benefits to owner”(we have a boat club paid for by the business that’s a benifit to owner because the next owner may just want to have that money as profit instead of an expense for example) and should be viewed as “profit” to be added in. For example if you guys profited 100,000 that was given out in pay to yourselves (or just pass through income as profit) and spent $20,000 on misc benefits to owner. You would have a total of $120,000 that you do a 1x multiple on which is still $120,000. Then you would devide that number in two because you are equal partners. Then, you would add in any of his share of the value of the equipment. (Be careful not to pay to much for something that was already depreciated ahead of schedule or you will overpay in taxes in the long run) of course any debts also have to be subtracted from the equipment value. In my opinion your revenue amount is a non point in the equation because of the age of the company and lack of contracts in place for repeat customers.
 
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CanaryBoss said:
....For example if you guys profited 100,000 that was given out in pay to yourselves (or just pass through income as profit) and spent $20,000 on misc benefits to owner. You would have a total of $120,000 that you do a 1x multiple on which is still $120,000. Then you would devide that number in two because you are equal partners. Then, you would add in any of his share of the value of the equipment. (Be careful not to pay to much for something that was already depreciated ahead of schedule or you will overpay in taxes in the long run) of course any debts also have to be subtracted from the equipment value. In my opinion your revenue amount is a non point in the equation because of the age of the company and lack of contracts in place for repeat customers.
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My understanding is that out of that 120K, you should ask "how much would it have cost to hire somebody else to do the job I as the owner did managing and working". If, for example, that is 50K each (or $100K total), then the profit to the owners is only $20K. The value of the business is the profit you'd still make if you were absent and somebody else was running the company. Over heard 3x that profit is a "fair" price for selling an established business. But like others have said: are you established beyond equipment? What is to say I can't start knocking on doors next week and take all of your clients? If you've been around for 20 years, many of those clients would ignore me and stick with you...but I'm not sure you are there?

Option B: he stays on board as an owner and is paid a percentage of profits. So, that means you are paid and an employee AND owner. He is paid as an owner. Does he have enough invested that this model makes sense for you???
 
Your points are valid. There are definitely multiple ways to figure out the value of the company. I’m currently reading a book it’s called “Exit”. It talks about maximizing value of a business for sale. And I’ve also had some recent meetings with some business brokers. That’s really the only experience I’m speaking from. I’ve never sold a tree service before, just studied on potentially selling mine one day. I have not heard A 3x multiple in the tree service industry though. If it can be done I sure hope to do it because I’ll be sitting fat and happy
 
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Stephen Moore said:
Sad story but all too common, Business and friends are soon parted. Not always because of a bad thing but a partnership is often times very difficult to maintain. You say you have assets? you have grown quickly? I'm assuming that means your company is making money? You have a network of clients? You have a reputation? You have established a line of credit perhaps? All of these things have value, they take time to accumulate. When companies sell off, they often include client base and a network. The entire package has value, not just the assets. Did you create a legal business name? Do you have insurance policies? Do you contribute to any pension plans or medical plans? What is the business revenue? How much cash in hand? Who has name on title for the equipment? Any liabilities? Do either of you owe anything for debt or damages or unpaid licenses or fees? Will there be a tax issue? Do you plan to liquidate assets?
Hopefully your business is still small enough that many of these things aren't a problem, but you don't want to be stuck paying taxes for your buddy.
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Stephen,
Yea our company is making money, and our reputation is good. We don't have a line of credit or anything besides a business bank acct. Our goal was to keep over head low and just crush work. We have done an accelerated depreciation on all our heavy equipment and we have around 300 happy customers, some of which are larger property management and real estate firms. Beside that we are mostly referral based. To be honest the Nextdoor app as generated lots of work for us.
Our business revenue for our first year was around 150k, but that all really came from June-Nov 2017. As for 2018 we are on track for around 250K.

We are not worried about tax issues since we will just file at the end of the year and any work i do when we split will be put into a different acct.

Ill put some numbers into the equation y'all provided above and see what comes of it. Im still not convinced our lil scene is worth all that much. I personally wouldn't go out and buy a small 2 person tree company, I would buy equipment and go do bids and then go do the work. No sense in paying someone to go do work.
 
Reedola said:
Stephen,
Yea our company is making money, and our reputation is good. We don't have a line of credit or anything besides a business bank acct. Our goal was to keep over head low and just crush work. We have done an accelerated depreciation on all our heavy equipment and we have around 300 happy customers, some of which are larger property management and real estate firms. Beside that we are mostly referral based. To be honest the Nextdoor app as generated lots of work for us.
Our business revenue for our first year was around 150k, but that all really came from June-Nov 2017. As for 2018 we are on track for around 250K.

We are not worried about tax issues since we will just file at the end of the year and any work i do when we split will be put into a different acct.

Ill put some numbers into the equation y'all provided above and see what comes of it. Im still not convinced our lil scene is worth all that much. I personally wouldn't go out and buy a small 2 person tree company, I would buy equipment and go do bids and then go do the work. No sense in paying someone to go do work.
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If you look at a 2 person company, it typically has assets and the reputation is with the workers and less about the company, in the case of Davey Tree for instance. However, your company can do 250k per year? Less expenses and other related business costs. That’s pretty solid earning potential. You gonna make that working at Walmart? Someone could buy your show and your phone and your client list and hire a couple more guys, maybe a certified utility arborist and make it grow beyond what you have made. I have a friend / client that builds shell companies. These are companies that technically don’t even exist yet, they are set up to be publicly traded as soon as the perspective business buys into it. Technically you could have pile of startup money to invest in a tree company that doesn’t actually exist yet but has a business plan and cash float, they buy the shell and are instantly being traded as a penny stock on the open market. That is a business that doesn’t even have a reputation yet or any equipment and really no employees even. Yet it is being traded publicly. The potential for large cash infusions are huge, but in most scenarios they are already mostly solvent but are hoping for a leg up- looking for investors!
 
So does your company have value? Mine does. Most of that is in my reputation and skill. Some in my assets, and a lot in client base. I don’t even advertise anymore and I’m beating them of with a club. I don’t look for jobs, they find me. Is that value? I should think so.
 
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Yes but the point I’m trying to make is things are transferable. A friend of mine was a plumbing contractor, two man show. He had built up a client base and good rep. He took the guy that bought the company under his wing for 6 months and told all his regular clients his plan to retire and pass the torch. It can work and does work.
 
Levi.CO said:
It is an interesting debate. We have been steady in work for 4 years without buying someone else's client list, brand, etc. In this day and age Google adwords is really all you need to make the phone ring and the rest is up to you to secure jobs, do the the work, get the cheque, etc. Y'all know this though!

We had the thought of finding someone who is ready to "go out on their own" and pass the biz off to them for cost of equipment plus a little extra, but I don't think we could can ask for much, considering how easy it is to get started.
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That’s fairly true, but a turnkey operation is pretty sweet! If you worked for me from spring to mid summer, we could pass the torch and you can put advertising in the garbage. Never pay another cent and have more work than you can do.
 
Ultimately skill can be taught, but talent can’t. Some of the larger companies in the area here have “ exercised their insurance policies “ on occasion. They can afford that I suppose? I think the larger the the staff count the greater the chance for dummies?
 
I in no way shape or form would be ready to sell my business but have thought about taking on an investor or two (Close friends/family). I would think my thoughts are just the opposite of the OP (he is loosing an investor/partner). Having spent 10 years part time building a reputation, client base and a following, I would hope that would be worth something more than just the depreciating assets I have gathered. And the growth seen in the 2.5 years since we went full time has been phenomenal should have some value. I've watched a ton of the Shark Tank, Blue Collar investor type shows and know you should only pay for today! What's it worth Today? That's the point of investing, grow your money! If you pay for future or projected growth you are behind from day one.
 
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Very tricky to work out.My brother and I started out business January of this year, we had both worked worked for another local tree service/utility contractor and had a falling out.
We purchased a shitty old 13” chipper and small 4x4 chipper truck for a total of $16k.
Had a freak storm in January that got us quite a bit of work due to our reputation as climbers from working at the previous place.
We then went for a utility clearing contract in March as absolute no body’s in a sea of really fish, they decided to give us a shot as specialist climber crew. Now August and we have 2 ewps, 3 trucks and chippers, excavator, slasher, crane truck, 8 employees.

What’s the business worth??? To someone else probably bugger all, although we have a big dollar contract, it ultimately is a contract between them and me.
Sure someone could buy it and run the employees we have, but it is our work ethic, policies, quality and relationships with our crew that get the work done to such a high standard in a safe manner
 
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