- July 15, 2019
- Posted by: Marisa Palmieri Shugrue
- Category: Accounting Advice
The market for well-run pest management firms remains hot. The economy is healthy. The companies doing acquisitions are performing well. And there are more companies acquiring with Anticimex, Rentokil and large regional companies joining Terminix and Orkin as pest industry buyers over the last decade or so. It’s a seller’s market, and PCOs who are considering selling their businesses can improve their companies’ values by understanding what’s on buyers’ minds. The elements that affect value fall into two buckets: quantitative and qualitative, according to Matthew Whiting, vice president, corporate development, for Rollins, based in Atlanta, Ga. “Quantitative is easier to get your hands around,” he says, referring to the numbers-driven portion of the valuation process. The qualitative part of the equation is more difficult to evaluate, but it’s equally important, he says. It includes employee aspects, company history, local brand recognition and more. “You’re trying to get at ‘What’s the quality of the organization?’”
Vital quantitative elements include the percent of a company’s
overall revenue that’s recurring, the average pricing of the services
provided and the average tenure of customer relationships. “On all of
those, the higher the better,” Whiting says, noting that his team drills
down further on recurring revenue. “For example, is general pest
control delivered on a monthly basis, every two months or quarterly? We
want to look at what’s included in the scope of services. Is it the same
pests we cover or do they add rodent coverage in their basic service?
Maybe they’ve bundled general household pests with mosquito control?”
Of course, profitability plays a huge role. “A company that is more profitable than the next one that’s identical ought to be worth more,” Whiting adds.
Caroline Howell, senior director of M&A for ServiceMaster, the parent company of Terminix International, agrees that profitability, customer retention, and recurring revenue are major factors affecting valuation. “A company with high recurring revenue and high retention points to growth and a valuable customer base,” she says, noting that route density is a key factor, too, because it’s often an indicator for profitability potential. Alexander Nigh, Rentokil Initial’s director of mergers and acquisitions, North America, says his company also places a high value on firms with well-priced services, high recurring revenue, and profitability. “When it comes to profits, we place a premium on companies that are doing well,” he says, adding that sellers often have earnings before interest, tax, depreciation, and amortization (EBITDA) levels between 12 percent and 25 percent. The closer to 25 percent, the better.
Rentokil also looks at the amount of business it considers “core pest services,” and places a higher value on those over ancillary offerings like lawn care, holiday lighting or gutter cleaning.
Additionally, company size plays a role in the valuation, Nigh says. Larger companies go for premium pricing. He explains: “You can do a $1 million deal or a $10 million deal, but your bang for your buck is more for $10 million. Although it maybe 10 times the revenue, it’s not 10 times the work to do the deal.”
Not to mention, smaller companies are often more owner dependent, so they carry more risk. Larger companies typically have an established leadership team, which is attractive to buyers, and offer scalability and continuity.
The quality of a company’s people, years in business and owner
involvement are a few things that make up the qualitative side of a
ServiceMaster is focusing on talent when it comes to acquisitions, Howell says. “We’re going through a company transformation at Terminix where the full talent pipeline is really important for us at a technical level and at an operational leadership level,” she says. “We’re looking at industry experience, accomplishments and asking ourselves, ‘What we can learn from them and what we can apply to our national platform to realize beneficial synergies? And who are the best partners to help carry out our mission to create cleaner, healthier, safer environments for our customers wherever they are – at home, at work or at play?’” Whiting says average employee turnover and wages are important ways Rollins evaluates a workforce.
“If a company is paying a basic low wage then it probably points to relatively untrained, low skill level employees, and those aren’t the kind of people we want,” he says. “We want people who are able to earn a very attractive wage because they’ve got good skill sets and because they’re responsible and show up on time. You can’t provide great pest control without great employees.”
Additionally, Rollins considers whether there are folks at the seller’s firm who are looking for greater opportunities but don’t have them and will see the benefits of joining a larger company.
Rentokil also weighs whether a seller will be a good “culture fit.” It evaluates this topic by looking at the tenure of team members, the strength of the management team and the wages of frontline employees. “We like companies who reward their people,” Nigh says. Another qualitative factor, Whiting says, is the owner’s plan for the future. “Are we buying a business where the owner is going to be our partner or does the owner just want to get the check at closing and head off to the beach?” he says. “I see greater value in having an ownership team who wants to help me be successful after closing.”
What can you do to maximize your pest company value?
The six tips PCO Bookkeepers/PCO M&A Specialists offered in the January 2017 Pest Management Professional cover story still hold true for PCOs looking to maximize the value of their companies before selling:
- Sell recurring, profitable services.
- Solidify your customer retention by providing great service.
- Focus on gross margins.
- Work on your company culture.
- Have all employees sign a non-compete agreement.
- Be the leading brand in your local markets.
Additionally, buyers say great record-keeping can only help value. “We view it as a metric of operational health,” Howell says, noting the use of a routing system and customer data collection are key. “If you have good data, you’re probably doing a better job serving customers in your day-to-day operations, and it significantly helps the due diligence process.” Nigh recommends establishing an “always ready to sell” mentality. “Your business should always be in good shape – not just at the very end,” he says. “It’s not about preparing it for sale, it’s about running a good business that’s sustainable. Sellers always need to be focused on the bottom line.”
Finally, you know your business best. What do you believe makes it most valuable? Buyers like Whiting want to know. “What is it they see that has allowed them to be successful over their careers in pest control? The answer can tell you some things you might not have thought about as the buyer,” he says.