A PCO’s PERSONAL REFLECTIONS ABOUT A PEST BUSINESS SALE
As a pest control operator, at some point in time while managing the business, you’ll want to consider a pest business sale as your ‘gateway’ to a new lifestyle. When trying to decide if it’s time to sell your pest management business, soul searching blended with logic and awareness of financial aspects will help you assess your situation and make things clearer. However, as part of a pest business sale process, every pest control operator should answer these key questions to help themselves look in the mirror and feel confident about the decision made.
To give a better perspective on the questions below, let’s first use the following example of a pest management business (S-Corp for tax purposes) generating $2.0 million in annual revenues, net income of $400,000 (20% of revenue) and an additional $200,000 (10% of revenue) allocated to the business owner in salary and personal benefits each year. Using a conservative “rule of thumb” valuation of 5X net income (i.e., which equates to 1X gross revenues), the company has an enterprise value of approximately $2.0 million relative to a pest business sale.
Assuming there are vehicle loans, line of credit and accounts payable for $100,000 more than existing accounts receivable and cash on hand, the seller would achieve net sales proceeds of $1.9 million before income taxes and transaction fees (i.e., business broker, lawyer, CPA) that may be 5% of the sale price ($100,000), thereby leaving the seller with $1.8 million before paying income taxes.
Assuming a blended federal and state marginal income tax rate of 30% (i.e., federal capital gain of 23.9% plus state rate of 6%) the seller would incur approximately $540,000 in taxes, thereby leaving the seller with $1.26 million in after-tax proceeds of the pest business sale to invest and/or use to maintain the needs of the seller and his family. Although just an example, the numbers presented above are realistic in terms of what a pest business sale might look like under such circumstances.
Pest Business Sale: Should I sell?
The following questions might help you decide what to do or not do with respect to selling or holding on to your own pest control company:
1. How old are you at present and, given your health, how many more years do you want or need to work in the business to ensure you meet financial responsibilities for yourself and your family?
2. Is your business still in a revenue expansion mode leading to a future pest business sale, a static/steady mode, or possibly declining because of increased competition, loss of key employees and/or local economic problems?
3. How important are you personally to the business relative to a pest business sale in terms of maintaining client relationships vs. internal administrative personnel and software systems that work efficiently whether you were in the office every day or infrequently?
4. Is it your desire to simply stop working full time but continue in some part time role or to fully retire but still draw some measure of compensation from the company?
5. Does your business have employees (or family members) to fill your role if you were unable to work because of disability, death or retirement?
6. Do you have children and/or grandchildren working in the business that you made promises to in that they expect to receive the business as part of your legacy and their inheritance? Do you want the business to remain family owned and operated?
7. Would a pest business sale to the family members at a price far below market value be appropriate, or instead gift it to them for no consideration in return, or be payable over many years from the cash proceeds generated by the business?
8. If your pest business sale involved a larger competitor, would there be any role for the family members in terms of ongoing employment with the buyer? If not, what would your family members do to earn a living?
9. If you sold the business now as in the example above, would the $1.26M after-tax sale proceeds provide you sufficient income replacement for the balance of your life or will you have to seek a new career to supplement your lifestyle while using a portion of the pest business sale proceeds each year?
10. Do you have financial resources available outside of what the business provides you to maintain your lifestyle and financial obligations (e.g., large inheritance from parents/grandparent or a pension or equity vested from an earlier career before becoming a pest control operator)?
11. Are you tired of the business and have ambitions or opportunities to start a new business or hobby after the sale of the business? After a pest business sale, what will you do with your newfound time if you were to retire?
12. Will the recent prices paid for pest control companies continue to rise or potentially reverse course such that delaying a pest business sale to a future date will in fact result in a loss of value as compared to selling today?
Pest Business Sale: Determine the best path
Honest answers to these questions will help you determine the best path, which could be the following based on your view of life and current and future state of affairs in the industry:
A. I am too young to retire and investing in the year over year revenue growth of the business will only result in a higher value at a future pest business sale date. I am going to work harder and more efficiently to achieve such goal.
B. I believe prices for pest control companies will continue to rise and if I can grow revenue 10-15% per year then this will result in a much more attractive pest business sale price to me that will allow me to have a more comfortable retirement.
C. Although I promised I would sell the company to my son, he expects it to be at a price which is 25% of what I could get in the open market. I would be better off if I sold now and gave my son enough money for him to start his own career elsewhere and within or outside of the pest control industry.
D. I have 2 great managers who have worked for me for 25 years and I may just let them buy me out at a bargain price if they agree to pay me a reasonable pension for the balance of my life. I feel I owe it to them and don’t need to get top dollar for a pest business sale as my wife inherited a sizable sum from her parents.
E. I don’t have a succession plan in place for someone to take over for me and I do want to retire. I would be best off finding a buyer that has the available talent to take over now and I can spend some period of time consulting for the buyer after the pest business sale, and then transitioning towards retirement.
F. I don’t want the culture of a large buyer so I will find a local or regional partner to combine forces and still allow me to work but with more labor, technology and capital resources than I could do by myself. I will still be a major equity owner and can control my future.
G. I am disabled and have no succession plan so need to proceed with a pest business sale and cash out to a larger company now so I can take care of me and my family’s financial needs.
H. I am in the middle of a divorce and I need to sell the business now to settle up with my spouse as it is our largest asset other than our home.
I. I have to take care of my two elderly and sick parents and no longer have the time to run a pest control company by myself. I need to cash in and have the time to attend to such needs.
J. A pest business sale to my two children who work in the business was part of my original plan. Both have decided they want different careers so there is no one to pass the business on to after my death or retirement. Better for me to sell now and move on.
Do you have questions about if a pest business sale is the right choices for you? Contact us to discuss!