- November 30, 2021
- Posted by: Marisa Palmieri Shugrue
- Category: Articles
Imagine you’re a baby boomer who owns a pest control company. You always thought you’d pass down the business to your children, either through a buyout scenario or a family trust, before exiting to enjoy your well-earned retirement. You may have discussed this plan explicitly or casually with your children over the years.
Now imagine the going rate for your business is three times what you expected it would be. And there’s no way your kids could come close to matching the price private equity firms and public companies are willing to pay for your business.
As the number of competitive buyers has increased over the last decade in the pest control industry, so have the valuations.
Buyers today include domestic public pest control companies like Terminix and Rollins; large foreign pest control companies, such as Rentokil and Anticimex; private equity firms; regional pest control companies such as Arrow Exterminators and Massey Services; and others.
In fact, valuations for pest control companies are at an all-time high. It’s a good problem to have, but it creates an M&A conundrum for some family business owners.
“The super high valuations right now make it a lot more difficult to turn away an offer,” says Dan Gordon, managing member of PCO Bookkeepers. “This is going on all over the place.”
Consider the conundrum
Let’s take a look at an example:
Family Pest Biz Inc. is a $3 million pest control company. Mom and Dad are getting ready to retire, and always assumed they would sell to Junior, who has worked in the business all of his adult life. Junior expects to buy out his parents, send them off to Florida and take ownership of the company.
Historically, Junior would get a $1 million Small Business Association loan to serve as a down payment. Mom and Dad would take a $2 million seller note, which the business would pay back over 15 years or so.
Instead, in today’s M&A environment, Mom and Dad have a $10 million offer for Family Pest Biz Inc. If they accept it, they would net approximately $7 million immediately. Junior can’t come close to matching the offer.
What’s a business owner, who is also a parent, supposed to do?
Do you stick with the plan and sell the company to your child, knowing you may be walking away from millions of dollars? Or do you tell your kids that plans (and valuations) have changed, so they won’t be the next generation to own Family Pest Biz Inc. after all?
What are the options?
There is no right answer to this tricky question, but you do have some options.
- If you always planned to pass on the business to your children, and they are interested in taking over, you can certainly still go the traditional route, ignoring the offers of other buyers.
Pros: Your business remains in the family and you still get the retirement you’ve always expected.
Cons: You walk away from a large sum of money, while assuming the risk of selling the business to your children and keeping your net worth tied up in the business.
- If your children would like to stay involved in the business, you could sell to another buyer and negotiate a role for them in the buyer’s business. (In a private equity deal, you also could negotiate an opportunity for them to buy into the company, which increases their incentive to make it successful.)
Pros: You realize the financial benefits of the hot M&A market and have the opportunity to diversify your financial assets. At the same time your children have a chance to stay involved in the company and the industry. It could be a great opportunity for them to earn experience at a larger, more sophisticated company.
Cons: Depending on your children’s expectations, they may not be happy with the plan, the terms or the buyer.
- You could sell to a buyer rather than your children, and compensate your children in other ways, such as with a financial gift.
Pros: You realize the financial benefits of the hot M&A market and you reward your children for their contributions to the company. If they are still interested in being involved in the industry, they could potentially use their gift to start a new company outside the non-compete area. Meanwhile you can diversify your financial assets.
Cons: Depending on your children’s expectations, they may not be happy with the plan.
In any case, successfully exiting a family business takes planning and requires careful consideration of your values, needs and wants.
“Everybody should be thinking about an end game,” Gordon says. “For planning purposes, I like a five-year runway, but it all depends on who you are and what you need.”
Regardless of the route you choose to take, the PCO Bookkeepers and PCO M&A Specialists teams are well versed in the pest control market, have dealt with this parent/child dilemma many times, and are prepared to help you find a creative solution that works for your family business. To learn more about your options, get in touch with us today.