- December 7, 2022
- Posted by: Marisa Palmieri Shugrue
- Category: Accounting Advice
Is your pest control company ready to take on a new year? PCO Bookkeepers & M&A Specialists Managing Member Dan Gordon tackled this topic last month in a webinar for Target Specialty Products titled, “Make Your Pest Management Company Rock Solid For 2023.”
Gordon recommended four actions pest management professionals (PMPs) can take to shore up their businesses next year and in the long term. Read on to learn more or the access the webinar recording.
Action 1: Consider raising prices and improving route efficiency to decrease your breakeven point.
Look at your selling price, direct costs, gross margins, fixed costs and net profit to see if your profit is sufficient compared to your history or others in the industry. (Check the Pest Control Industry Cost Study for comparison.) If it’s not, determine if your problem is pricing (which you can fix by raising prices) or if your problem is the cost to perform the service (which you can improve with routing efficiency). It may be both.
“If you listen to the news, there’s a lot of people out there who think we’re going into a recession,” Gordon says. “That will tamp down demand … So how do we keep that gross margin up? We can do it by raising prices up. The other thing we can do is improve our route density, which has the same effect as raising prices.”
Action 2: Ensure your annual cashflow to ownership is 20 percent, which is what best-in-class pest control companies see.
Measure your annual cashflow to ownership as Earnings Before Interest Taxes Depreciation & Amortization (EBITDA) plus add-backs, including owner excess wages, travel and entertainment, certain administrative costs and other owner items.
Gordon recommends PMPs monitor the annual cashflow to ownership indicator because it’s essentially your return on investment. It’s also important to understand your company’s valuation.
“Look at your business as an investment,” Gordon says. “That’s the way buyers look at sellers.”
Action 3: Increase your percentage of recurring revenue as much as possible.
Companies that focus on recurring work rather than one-time jobs have many advantages, including: predictability, scalability, visibility and durability. All of these things add up to a higher company value when it’s time to sell.
Gordon recommends offering recurring pest control services by creating a program where you visit your clients quarterly or triannually and bill them monthly.
“That’s what best-in-class companies are doing,” he says. “(Clients are) paying for a pest-free environment, not ‘I’m going to skip my services and I want a credit.’”
Gordon also points out that it’s easier to raise prices with this method. Clients are more likely to accept an increase to a small monthly charge than they are with larger, less frequent billing.
“Every business should have recurring revenue woven into its core,” he says. “If you’re not thinking along these lines, you’re putting the future of your business in jeopardy.”
Action 4: Focus on revenue growth.
Most small business owners don’t have to be told that it’s important to grow, but they may not realize all the reasons it’s so vital. There are four, Gordon says:
• Profitability;
• Valuation;
• Customers; and
• Employees.
“A growing company is good for customers, it’s good for the community, (and) all kinds of things,” he says. “Employees also like that because it provides upward mobility.”
In summary, Gordon highlights gross margin, annual cashflow to owner, recurring revenue and revenue growth as the key performance indicators pest control firms should pay attention to.
“If you focus on those, you’ll be rock solid in ‘23, ‘24 and far out into the future,” he says.
