Amid significant changes to its industry landscape, a leading distributor of home and garden products – and an employee-owned company – faced the daunting challenge of adapting its strategy and planning for a sustainable future. Many of the company’s senior leaders were approaching retirement age, and no clear successor leadership had been identified. Then, after several years of stagnant sales, the pandemic era brought renewed demand for the company’s products, driving a significant uptick in business, and garnering the attention of a serious prospective buyer. Striving to capitalize on this unexpected boon, but with the questions of succession and ESOP repurchase obligations still looming, the leadership team sought Acuity’s guidance in evaluating their options and understanding the vital complexities of selling an employee-owned company to a strategic buyer.
Background and Challenge
Founded in 1953 and ESOP-owned since 1987, L&L Nursery Supply, Inc. had served as the West Coast’s leading distributor of home and garden products for nearly 70 years. Throughout its history, L&L faced numerous challenges and had successfully navigated changing conditions in the lawn and garden industry, including the rise and decline of independent nurseries and the emergence of mass retailers. It had all been accomplished despite having to compete in a mature industry with rising costs and continuous margin pressure.
L&L’s executive team was capable and experienced, but there was no clearly emerging leadership to take the reins as members of the team approached retirement. Additionally, L&L was faced with choosing the best way to finance the repurchase of stock from ESOP participants as they reached retirement age, given ongoing headwinds in its underlying business.
During the Spring of 2020, management was approached by a regional distributor in another market owned by a private equity group seeking add-on acquisitions. By June 2020, a letter of intent (LOI) had been received. While a sale of the company could potentially address some of the challenges faced by L&L, the onset of the Covid-19 pandemic raised a number of new questions. Business’s transition to a work-from-home environment combined with millennials entering the housing market and purchasing homes away from the city drove interest in gardening, resulting in unprecedented sales growth.
Furthermore, the management team contemplated how they would be able to devote the time necessary to explore and potentially consummate the transaction of an ESOP company, which inherently carries certain nuances and idiosyncrasies, while navigating the aforementioned surge in business activity.
Adding to the complexity of an acquisition was the fact that an L&L executive and Board member had served as the ESOP fiduciary for over 20 years and would be responsible for evaluating whether the proposed transaction economics and structure represented a fair outcome for the ESOP participants.
Having served as a trusted advisor to the L&L ESOP for over 25 years, Acuity Advisors was a natural fit to help the L&L Board and management team address these questions and enhance the outcome for the employee-owners.
In order to best serve L&L, Acuity resigned as the ESOP trustee’s financial advisor and was engaged by the company to serve as its investment banker in December 2020.
First, Acuity reviewed the terms of the initial LOI with the Board and identified certain terms that would pose challenges for a potential transaction, including the asset-sale-based structure and indemnification provisions that, while common in typical M&A transactions, present issues for the sale of an ESOP company. Given the volatile business environment, Acuity then had extensive discussions with management and assisted in preparing a detailed monthly budget and forecast to inform valuation expectations in light of the increased sales activity.
Acuity Advisors then critically examined the various drivers of the performance increase, with a focus on which areas of business would sustain in a post-Covid landscape, and developed a concise summary of key valuation drivers and ESOP-related deal structure considerations that were communicated to the suitor in a letter outlining provisions we would expect from a revised LOI. Acuity Advisors developed the framework of a transaction that would meet the goals of the L&L Board and ESOP and allow the participants to take their retirement into their own hands, thereby alleviating the repurchase obligation pressure on the company. Through skillful negotiation, Acuity Advisors successfully compelled the buyer to agree to terms that worked for both parties
By January 2021, an LOI was executed with significantly enhanced economics that reflected the company’s recent performance along with a stock sale transaction structure that was more feasible for an ESOP company.
Although an LOI had been signed, challenges to successfully closing a transaction remained. Acuity Advisors assisted company management with the vetting and eventual hiring of an independent fiduciary to serve as the ESOP trustee, thereby preserving the ESOP’s independence from the Board and management team and ensuring participants’ interests were being protected. Leveraging both our transaction and ESOP expertise, we successfully worked with both the buyer and the ESOP’s trustee team to build on the structure outlined in the LOI such that the needs of the various stakeholders in the transaction were being met.
Over the next two months, Acuity Advisors coordinated the diligence process, which minimized distractions and let L&L management focus on running the business during the busiest season of the year. By the end of March, the transaction closed, with ESOP participants realizing a significantly better outcome than the initial June offer.
Selling an ESOP company carries a number of complications, ranging from valuation to deal structure, and these challenges were compounded by an unprecedented global pandemic and rapidly changing business conditions. Given the complex landscape and the many possible outcomes in the transaction, ultimately the right result was reached for the employee-owners with the help of Acuity Advisors.