While the COVID-19 pandemic paused M&A activity, it has been a short pause that shifted in late 2020, and we expect strong demand for M&A moving forward in 2021 and 2022. For several years, PCO M&A Specialists has been negotiating the highest after-tax values upon exit for our clients by uncovering the true, value-driving key performance indicators (KPIs) when it comes to their exit plans.
But our support is only a small part of you maximizing your success. The earlier you plan for a successful acquisition and start to educate yourself about the moving parts the higher the likelihood of your success.
We understand that most pest control businesses are built from scratch by individuals and families. Typically, an owner starts with entrepreneurial drive, passion a truck and some supplies, add years of hard work and then you reach a point where you are ready to contemplate selling to:
1. A regional or national firm
2. An investor looking for a great company to add to their portfolio
In most cases you will sell to a team, company or investor that has experience (and in some cases deep expertise) buying businesses. However, in most cases the Pest Control Business owner does not have this same expertise and experience. Most PCO owners have spent their time careers growing and managing their business.
And selling a business is unlike anything most Pest Control Business owners have ever bought or sold before. It’s not like selling a home and it’s not like investing in the market. The rest of this short article are a handful of higher-level tips for owners to consider and plan for when in the early stages of thinking about selling their business.
Plan for a Sale in Advance
As you move through this article it will become clear that preparing in advance can be a huge advantage to the seller. There are multiple areas where a little planning and some operational efficiencies will help you go gain the best exit possible for you, your family and your employees. The better prepared you are the better your valuation and results will be.
Do You Have the Right Management Team in Place?
In a typical sale some owners don’t want to stay with the business (they are ready to move onto new challenges). This means the seller will typically need and/or want those folks to “transition out” of the business sometime in the first year after the sale. However, some owners do want to stay on post sale, and we will negotiate that relationship with the most favorable terms as well. Some buyers value having a strong management team in place to continue to steward the company through the transition and in some cases well beyond that transition.
Establish a Strong Relationship with a CFO/CPA
Having a solid financial professional, ideally a CPA with CFO experience in the Pest Control Industry, becomes more important as you are getting ready to sell your business. This makes it much easier for the business owner to have a bullet proof understanding of the business in the following specific areas:
2. Account Receivable
3. Balance Sheet
4. Tax Returns
A business owner with the support of a strong CPA and/or Part Time CFO can increase their valuation once that professional understands the financial story of the business and can explain it clearly and accurately.
Establish Strong Technical Financial Controls
Accounting Software like QuickBooks and Routing Softwares (like Pestpac, Pest Routes and Service Pro to name a few) should be seamlessly integrated. Once integrated they can produce dashboards that will give both buyers and sellers a great deal of insights and data. This integration and level of sophistication also provides you with the added advantage of creating an additional asset that buyers will find attractive. Strong financial technology makes it easier for buyers to merge you into their existing infrastructure and processes. This adds value to your business as an asset.
Benchmark Yourself Against Competitors in the Market
Buyers purchase companies for their investment portfolios for many reasons. But the top reason most companies buy service businesses in this economic environment is to increase the cash flow and profitability of their portfolio. The most important financial ratios into today’s market are:
Gross Profit % – This ratio shows us how efficient a firm is at providing services before paying sales, marketing and fixed costs. In my opinion, Gross Profit is the single most important financial ratio.
Operating Expense % – If operating expenses exceed gross margin you will operate at a loss. If they are truly fixed, the fixed cost percentage will fall as a firm grows. Operating expenses typically decrease with an acquisition, so this is a key area for buyers.
EBITDA – Earnings before interest taxes depreciation and amortization. This is cash flow! Typically important to the buyer to understand how the business will contribute in the first year or two after an acquisition.
Growth – Proper growth increases profitability, employee pride and retention and demonstrates customer loyalty. All adding to the valuation of a pest management business.
To learn more about these and other metrics that are important to buyers (and to business owners trying to grow their business) we invite you to check out and download our Definitive PMP Industry Cost Study. This study was crafted from financial and operational data of 157 different Pest Control Businesses of varying sizes and types on the most important metrics as measured by financial and operating statements.
Educate Yourself About How Pest Control Companies are Valued
With the same precision and hard data used in our pest industry cost study referenced above we’re are now proud to present A Guide to Pest Control Mergers & Acquisitions. This guide also shares our thoughts on the direction of the industry’s consolidation and valuations. We encourage you to download this study for:
1. A more detailed explanation of how businesses are valued in today’s market
2. The tax consequences of a sale
3. The steps in the sales process
Understand Your Customer Mix – Both Service Type and Recurring Revenue vs. Non-Recurring Revenue
Be able to delineate between Commercial, Residential, Termite Control and Other Services so you can articulate who and what your largest customer are.
It’s also important to understand schedule vs. non-scheduled services and skip percentages. This ultimately breaks down to recurring vs. non-recurring revenue.
This makes it easy for the buyer to understand their risk. More importantly it allows you to articulate their reward. It also helps you craft a realistic forecast that can be supported. If you have enough time moving customers to recurring revenue should be done whenever possible. It will lift your valuation.
Maximizing the sale of your business takes time and planning. Little adjustments in the short term can have a significant impact in the long term. We hope you found these early stage tips valuable. In the interim we encourage you to sign up for our M&A newsletter here, and if are interested you can learn more about our acquisition team here.