Prepare for a great financial year

|  January 18, 2019
PHOTO: ISTOCK.COM/MALERAPASO

PHOTO: ISTOCK.COM/MALERAPASO

The pest management industry is in great shape and poised for another record year. Optimism abounds, even though the weather didn’t cooperate in many parts of the country in 2018. The new tax laws gave an already-strong economy a shot in the arm, which is leading consumer optimism to higher heights. The unemployment picture illustrates a full employment scenario, making it difficult to find good people to do all the work this heated economy is demanding. In fact, this seems to be one of the pest management industry’s biggest challenges. In 2018, mergers and acquisitions (M&A) activity had another record year.

As the owner of an industry accounting and consulting firm, my employees and I work with pest management professionals (PMPs) from all over the country. Our client base represents more than $500 million in annual pest control revenue, making our data an extremely accurate barometer of the health and opinions of industry participants. We compile and present this information to our PMP clients to help them manage their firms for growth and profit.

The big picture

Financial data from our PMP clients nationwide offer insight into what to expect in 2019. In general, most of our PMP clients are growing organically at a healthy pace. Those who are in the M&A game are growing faster. General pests, wood-destroying insects and other ancillary services are growing quite nicely. Revenue from bed bug work is flat compared with prior years. While this is disappointing, the root cause doesn’t seem to be less bed bug pressure, but rather more competitive pricing.

Unfortunately, this is a reality of a maturing market. If you remember, this is exactly how the termite baiting market evolved. At the beginning, prices were high — and as time passed and more players entered the market, prices normalized.

However, do not fret: Mosquitoes appear to be the new bed bugs, and the volume of mosquito work has increased exponentially over the past several years. PMPs are competing not only against one another, but against lawn care firms and specialty firms that only provide mosquito control.

Knowing thy customer

For many years, PMPs used traditional marketing channels. Because of the recurring nature of the business, it was easier to build a book of business and maintain it simply by providing great service.

But the world has become much more sophisticated, and business has become more competitive than ever. The use of digital media, while not a new phenomenon, has been combined with high-level data analytics to provide predictive marketing. It’s no longer enough to sign up Mrs. Jones; rather, once a customer contact is made, you predict her next steps. What other services can you offer Mrs. Jones, and how can you be in front of her when that service is required?

Facebook and Instagram are being used to target and remarket customers as they conduct their searches. Tools such as Hotjar and Google Analytics are being used to collect the data. And services such as Podium and SoTellUs are being used to collect reviews.

Retaining customers

As for customer retention, the savviest firms are using drip campaigns (which entail sending a marketing message to a prospective customer over a longer period of time) to maintain contact while giving discounts away at distinct times during a customer’s life cycle — when the data says they are likely to leave. (See “Summer sales see success,” at the end.)

Customer skips and accounts-receivable issues are addressed by automatically charging customer credit cards or Automated Clearing Houses (ACHs) at regular intervals. The benefits of implementing these types of payment programs include reduced accounts-receivable balances and early-warning signals of customers who may be having financial issues. There’s a trend toward making service completions easier. Years ago, most residential stops were scheduled and routed into stringent routing grids. More and more PMPs are providing service as an “outside-only” plan or are keeping service time flexible for themselves, which makes daily routing more efficient and easier to complete.

Industry consolidation

M&A activity and company valuations are all everyone is talking about at pest industry meetings, and yet the topic remains the “elephant in the room.” It’s not just our industry; in 2018, M&A had one of the busiest years ever. With interest rates still historically low, lots of money parked with private equity, and companies looking for an acceptable return on invested dollars, the smart money is still on looking for businesses that make sense and are sustainable, scalable, profitable and have enterprise value. This describes the pest management industry to a T. This worries some people, however. They wonder whether this means the end is near for regional players in the pest control industry.

The answer is no. Rather, the industry is in the midst of a classic consolidation period: Companies that get gobbled up will be replaced by companies run by millennials who embrace technology in their marketing, sales, routing and accounting efforts. To succeed in business today, you’ll need to be smarter than ever.

A smart group of young people is rising in the industry. So fear not: The pest control industry is, and will be, alive and well. However, the names of many of the players may change.

There has never been a better time for PMPs looking to sell their companies. We are seeing a new trend in our M&A consulting business: Until recently, the most desirable companies were platform companies ($10 million in annual revenue or more). Now that many of them are gone, those who have purchased them are looking to shore up those territories with “bolt-ons” (companies that do more than $1 million, but less than $5 million in annual revenue). These bolt-ons are being used to make route density tighter and more efficient. To be a desirable bolt-on, you need to be highly profitable, with a high percentage of recurring revenue.

The buying game is not for the faint of heart, as the quality companies are commanding high premiums, and payback periods can be long. To be successful, you need to have an integration strategy that keeps attrition to a minimum. It’s all about company culture, strong office processes and field execution. If you have those items in check, you will be successful as a purchaser in the M&A game.

Good time for PMPs

We are living in prosperous times. Businesspeople are smarter than ever — using technology, money and hard work to succeed — so competition has never been greater. We are part of a very highly regarded industry, and there has never been a better time to be a participant.

Summer sales see success

The summer sales model (students who spend their summer vacations going door-to-door seeking new customers) is a powerful marketing technique that has proliferated in recent years. Marketing-savvy entrepreneurs are building multi-branched, multi-million dollar firms in very short order. While it used to take many years to build a pest management firm doing $10 million or more in annual revenues, these doorknockers have compressed that timetable into just a few short years. These companies are the fastest-growing segment of the industry, and several of them have already grown to be among the largest pest control firms in the U.S. While it takes a lot of capital up front to grow, those who are succeeding are doing it by bringing in outside capital through friends, family, and boutique private equity firms.

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