Jordan Ramis pc. Attorneys at law
Succession Planning for a Nursery
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This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

BY THOMAS B. ERIKSEN

This article originally appeared in the August edition of the Oregon Association of Nurseries's Digger Magazine

A nursery business is often nurtured, grown, and sold, much like the plants raised in the nursery.  One big difference is that this cycle happens over many years, and not just one or two growing seasons. When it comes time to sell, a nursery presents unique challenges.  When the owners decide it is time transition out of the business and to engage in succession planning to assure the continued success and growth of the company and a smooth exit, careful planning and preparation are as necessary as when planting this year’s crop.  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 in order to assure the succession plan is successful.

Timing the Exit

Nurseries are a very 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 much advance thought and preparation is advisable.

Ownership

Often, the nursery business is a family affair.  The owners may want to keep the nursery in the family, which will of necessity limit the universe of potential buyers.  However, other potential buyers may 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 target 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 ten-year process.  Additionally, not all family 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 will 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 not properly protected, this information can also be used against the company if the transaction is not completed.

Valuation 

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 equipment, fixtures, and any real property?  What about intangibles such as goodwill or below-market lease rates?   Equipment and fixtures may be fully depreciated and in need of replacement or in 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 (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.

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 will help assure the success of the company, both in terms of the continued longevity and returning value to the departing owners.