Thoughts on low-profit margin landscaping deals

July 05, 2022

by a searcher from Harvard University - Harvard Business School in Vancouver, BC, Canada

Hi everyone! I'm a new searcher seeking your wisdom on a few things. I would really appreciate your thoughts on the following two questions.

1. A target that I'm looking at has below-average net profit margin (3% vs 7% average in Canada according to IBISWorld report ). Are there reasons to believe that a new owner like me would be able to improve the profit margins post-acquisition? Or should I avoid this kind of deals completely? What have been your experiences?

2. For those in the landscaping business, how did your business perform during Covid19? Does a revenue decline of 25% vs pre-pandemic sound reasonable?

Reply by a searcher
from Northwestern University in Chicago, IL, USA

There is no 'reason' to avoid due to a lower profit margin. A lower profit margin may be the result of many different things. For example a smaller business that recently added more capex due to increased work could see a lower profit /margin afterwards as compared to beforehand. An important question to ask is do you like the industry and can you see yourself doing for at least 5 years. One thing you could do is talk with others who have acquired and determine if based on their experiences this is an area which has an interest.

Reply by a searcher
from Harvard University in New York, NY, USA

You want to look at EBITDA and/or (better) cash flow after your debt service. 3% might be great if there was a ton of accelerated depreciation - that might mean you get a bunch of near new assets that just pushed down profit margin of the year you are talking about. BUT, it's more likely that this isn't an exciting business - if it's being marketed at a 3% margin, then during diligence you are more likely to find that margin becomes lower rather than higher.

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