Web Exclusive: How to prepare your business to sell
August 23, 2017
August 23, 2017
Most pest management professionals (PMPs) don’t think about selling their businesses when they treat their first property. If they decide later they want to sell, they may learn the hard way that acquiring companies don’t consider their business to be attractive. The good news is it’s never too late to start implementing industry best practices to help transform your company into an appealing option for buyers.
If you plan to sell your pest management company, focus on the areas listed below to make your business most appealing to a prospective buyer.
- Cash flow: Every aspect of the business is affected by cash flow. The key is to maximize cash flow as a percentage of revenue. The more cash flow generated and the more profitable the company, the higher its valuation.
- Top-line revenue, particularly recurring: A steady increase in sales, revenue and collections is paramount. Most valued is recurring revenue, which is the backbone of this industry and the fastest way to increase the value of your company. Having 70 percent or more of revenue coming from recurring services is a good goal.
- Tenure of employees: Because customers form relationships with the people who service their homes, we believe there’s a direct correlation between a company’s employee engagement and tenure, and its customer retention rate. The longer employees have been with the company, the better.
- Customer retention: Given the importance of recurring revenue, retaining customers becomes inherently important. Industry-wide, the average customer lifespan is five to seven years. Companies that meet or exceed that standard are doing a great job with retention.
- Mix of business: On average, services such as termite and pest control have longer-tenured customers and higher margins compared to lawn and ornamental, bed bug and wildlife services. We have also found that customer retention is better when a customer buys multiple services.
- Average price per stop: Relating back to cash flow, some acquiring companies may be more interested in a smaller company that sells services at $100 per stop rather than a larger company that’s selling $35 per stop. The best practice is to systematically and annually implement price increases to your customers, assuming the market will support it.
- Customer density: “Windshield time” does not generate revenue. PMPs spend more time providing revenue-generating services when customers are geographically dense rather than spending a lot of time driving between customer locations.
- Customer revenue concentration: If a PMP has one customer that accounts for 30 percent of its revenue, that presents risk to the sustainability to future revenue sources if that customer cancels. Higher risk equates to lower valuations.
If you can’t check off all the items above at this time, don’t despair. Identify the biggest areas for improvement and prioritize how you will begin addressing them. Below are some tips for how to get your company to that next level.
Be honest and disciplined when handling finances. It’s critical you have a firm understanding of how your business is operating. In order to arrive at a clean financial statement – which will be required by any company considering a purchase – you’ll need to be brutally honest with yourself. If your company is underperforming in particular categories, why is that?
Co-mingling personal financial transactions with the business can also be problematic. While it may not seem like a big deal, these practices can result in an understatement of your company’s performance, which could lead to a lower valuation. An accountant can help you scour the books to clean them up and give you a true picture of how the business is performing.
Think long term. When making business decisions, consider long-term implications and not just what makes sense right now. For example, there will be certain periods when you should invest in your business to position it for future success, such as opening new branches, adding key positions or leveraging technology. That may mean you accept a tighter profit margin this year in order to earn exponentially greater yields in the long run.
Also, keep in mind that not all growth is created equal. Think long-term when managing customers and offering services. Retaining customers and generating a high percentage of recurring revenue – rather than accepting easier, short-term gains – will help increase the value of the company down the road.
Lastly, consider the business’s legal structure, which, due to tax implications, could significantly impact your profit at the time of sale. We highly recommend you consult with a tax and/or legal expert as soon as possible for guidance, so you can elect the optimal legal structure.
Focus on your team. Retaining employees is one of the best things you can do to retain customers. Your technicians build personal relationships with your customers and earn their trust, and an employee leaving can often result in clients cancelling their service. Invest in your team, not only in terms of financial compensation, but also by providing training, opportunities for advancement and a satisfying work environment.
When it comes to bringing on new employees, it is critical to hire intelligently. It’s important to identify the right people to join your company and those who will want to stay. Performing background checks, drug testing and thoroughly vetting candidates will increase the likelihood of assembling the right team to carry your company forward.
If you’re considering selling your pest management company in the future, get a clear idea of where you need to be and make a solid plan to get you there. Even if you aren’t planning to sell, the tips above can help any PMP build a stronger, more profitable business that will endure well into the future.
Dave Bradford is chief financial officer at Environmental Pest Service. EPS has acquired more than 80 pest management companies since 2010 and has seen businesses at all stages of operational efficiency and profitability. He can be reached at firstname.lastname@example.org or 813-830-9707.