Private equity (PE) firms’ investments in landscape companies continue to accelerate. Ten years ago, most owners never imagined a financial buyer would be interested in their business. Today, many are receiving unsolicited calls, emails and offers regularly.
Because demand for well‑run landscape companies is high, valuations are close to double what they were a decade ago. That reality is a big change, and it may not last forever.
Some owners wonder whether the time is right to sell and whether selling to a PE firm or a landscape company owned by one will help achieve their goals. Other owners have no intention of selling but wonder how they will compete against PE-owned landscape companies.
To provide context to educate both owners who want to sell and those who want to win when competing against PE-owned landscape companies, we’ve prepared a white paper — “The Green Exit: What Landscape Businesses Need to Know About Private Equity” — that you can download here, or using the QR code down below.
In this white paper, I summarize the incentives that drive PE thinking and behavior and provide a comprehensive explanation of each.
The incentive that drives everything
Charlie Munger once said, “Show me the incentives, and I will show you the outcome.” That quote is key to understanding PE thinking and behavior.
PE firms earn money in two ways: management fees, which are a small percentage of the equity invested; and carried interest, which are 20 percent of the profits when they sell a company.
The carried interest dwarfs the management fees. In one example I share in the white paper, a PE firm earned $880,000 in management fees but $5.9 million in carried interest. That difference explains almost everything about how PE firms behave. Because the carried interest is tied to the eventual sale of the company, PE firms are highly motivated to:
- Grow revenue quickly
- Increase EBITDA margin
- Reduce costs
- Use debt to increase returns
- Sell the company as soon as it makes financial sense
Another important fact: Every $100,000 in cost reduction can increase enterprise value by $900,000 — and increase the PE firm’s carried interest by $180,000. That math creates urgency, focus and pressure. It is not inherently good or bad. It is simply the reality of how PE works. Understanding these incentives will help both owners considering a sale and owners who compete with PE-backed landscape companies.
PE brings money … and change
Many owners imagine that selling to PE means receiving a large check and continuing to run the business as they always have. That outcome is rarely the case. A PE firm brings money, but it also brings expectations, reporting requirements and a new pace of decision-making. It brings a board of directors. It brings debt. It brings a plan.
Said simply, it brings change.
Some owners find this change energizing. They enjoy the challenge of building a larger company with more resources. Others find it exhausting. They feel the pressure of the focus on speed, growth targets and cost‑reduction initiatives. Neither reaction is wrong. But both are predictable.
The hard part is over
You have done the hard work — starting the company, employing people, building the customer base. The question is whether you are getting the reward and whether a sale to PE will help you achieve the life and business outcomes you want.
But even if they have no intention of selling, owners cannot ignore what is happening in the industry. Private equity is changing the competitive landscape. PE-owned companies typically move faster, invest more aggressively and operate with a higher level of financial discipline than many owner‑operated firms.
Their drive to grow, cut costs and expand market share creates pressure on every company operating in those markets. Owners who understand how PE firms think and behave will make better decisions about sales, pricing, recruiting, investment and long‑term strategy, even if they never plan to sell.
“The Green Exit” defines unfamiliar terms and explores the incentives, structures, risks and opportunities that shape PE transactions. It also contains a list of five questions that every owner should answer when considering a sale. For those owners competing against PE-owned companies, it reveals a significant opportunity. I encourage you to read it.
