I recently attended a pest control industry conference, and as with most of these meetings in the recent past, the conversation revolved around the industry merger and acquisition activity. It’s the white elephant that everyone’s talking about. Who sold? Who bought? How much did the buyer pay? And how much did the seller receive?
While the pest management industry has been energized by all this buying and selling, the fact remains that pest control is required in the residential and commercial markets, and the demand will never diminish. During this period of consolidation, the industry — which is dominated by mom-and-pop operations — potentially could be controlled by a few large players, and this scares many industry veterans. Despite the current environment, there is room for smaller and start-up firms to excel.
The Pest Management Industry
The beauty of our industry is that a pest management professional (PMP) can launch a company and in short order become a force within their market. Why? Compared to many other markets, the pest management industry has low barriers to entry in terms of finances. Almost anyone willing to work hard can realize the American dream of owning a business and working for himself. And if built properly with the right pest control business strategy, a pest management firm can provide significant value for ownership upon exit.
At the end of the day, an owner looking to exit has three choices:
- Sell the company to an outsider looking to acquire;
- Sell to current management; or
- Pass the company on to the next generation or other family members.
With all three scenarios, the ultimate objective is to maximize the value of the firm at the exit date. As an accountant working to help PMPs build their companies and safeguard their assets, and as a broker helping PMPs to sell their firms at maximum after-tax value, I see many owners who, as they approach exit date, realize their firm is worth far less than if they had operated with the intention of selling from the beginning. Had the exit been planned from the beginning, many decisions regarding recurring revenue, pricing, and type of work would have been made differently. Suppose you are starting your company from scratch, but with a definite exit date sometime in the future. Follow these tips to “create your company with the end in mind.”
What Does a Pest Control Company Built with the End in Mind look like?
Recurring Revenue: An Overview
Recurring revenue makes a company more stable and predictable both operationally and financially. This, in turn, lowers the risk associated with a company’s operations. The types of desirable recurring revenue stream your pest control company may include are:
- Commercial, with services weekly, semi-monthly, monthly and every other month.
- Residential, with services every other month, quarterly and three times a year.
- Termite services that include renewals for baiting and liquid treatments.
Pricing: How Effective Is Your Pricing Policy?
Pricing is one of the most powerful ways a PMP can improve his/her performance. How effective is your pricing policy?
- An effective pricing policy will keep you profitable and successful.
- A mediocre pricing policy will keep you frustrated and barely in business, wondering what needs to be done to succeed.
- An ineffective pricing policy will put you out of business.
The Type Of Work
The beauty of the pest control industry is that the work is duplicated frequently. This makes the pest control business model highly scalable. Therefore, the best types of services a PMP should include are “cookie cutter services.”
Your pest control business strategy should NOT include the highly technical, non-scalable one-time work that may provide big revenue dollars in the current year. Why? It will create a void the following year when you’re trying to grow year-over-year comparable services.
Having employees sign a restrictive covenant or noncompete is one way to make it more difficult for an employee to steal customers. If you are looking to sell your business, one of the first questions a potential buyer will ask is how your noncompete is written because it will help ensure high customer retention after the sale.
Your customer list is your most valued asset. The idea is to protect it and not have an ex-employee become your worst nightmare. This is a real risk and one that will most assuredly occur unless you implement appropriate legal safeguards.
Company Culture & Management
Company culture reflects how company management thinks, who it hires, company values, and company conduct. If good culture is instilled from the beginning, employees usually will endure a change in ownership, provided the acquirer wants it that way.
To help ensure a good culture is established and continues, company policies and procedures should be codified to explain how work gets done and how employees are treated.
Accounting & Tax Compliance
As your pest control business grows you need the internal structure and financial controls to support this growth. Accurate bookkeeping means accurate financial statements. It’s not enough to simply produce financial statements; you need to study them, compare them to your company’s previous statements, and compare them to those of other companies in the pest control industry. Use your financial statements to improve your business.
File tax returns in a timely manner, with taxes remitted as required. Work to minimize taxes, but make sure they are filed and paid, as tax liens can lead to the death of your pest control business.
The Pest Control Business Strategy: What’s Next?
We can dream of starting over and creating a utopian company we can sell for a profit when the time comes. However, because you probably already own or are involved with a firm that is up and running, starting over is not an option. Therefore, your strategy should involve implementing these tips over time, so you can turn your company into an entity that maximizes its value for the owner at the time of exit.
(This article written by Daniel S. Gordon, was published in PMP Magazine)