Attend a pest control industry conference and you know the conversation eventually will turn to merger and acquisition activity. Everyone wants to know: Who sold? Who bought? How much did the buyer pay? And perhaps most important, how much did the seller receive?
While the pest management industry has been energized by all this buying and selling, the fact remains that pest control is required in the residential and commercial markets, and the demand will never diminish. During this period of consolidation, the industry — which is dominated by mom-and-pop operations — potentially could be controlled by a few large players, and this scares many industry veterans. Despite the current environment, there is room for smaller and start-up firms to excel.
Hard work pays off
The beauty of our industry is that a pest management professional (PMP) can launch a company and in short order become a force within their market. Why? Compared to many other markets, the pest management industry has low barriers of entry in terms of finances. Anyone willing to work hard can realize the American dream of owning a business and being their own boss. If built properly, a pest management firm can provide significant value for owners when it comes time to leave the business.
At the end of the day, an owner looking to exit has three choices:
- Sell the company to an outsider who wants to acquire a pest control business.
- Sell the company to current management.
- Pass the company on to the next generation or other family members.
With all three scenarios, the ultimate objective is to maximize the value of the firm at the exit date. Unfortunately, many owners realize as they approach their exit dates that their firms are worth far less than they would have been worth had they had operated with the intention of selling from the beginning.
They would have made many decisions regarding recurring revenue, pricing and type of work differently had they planned for the day they were going to
leave their companies.
Suppose you are starting your company from scratch, but with a definite exit date sometime in the future. What would your company look like? Following these six tips will ensure you “create” your company with the end in mind.
1. RECURRING REVENUE makes a company more stable and predictable both operationally and financially. This, in turn, lowers the risk associated with a company’s operations. The types of desirable recurring revenue streams your company should have include:
- Commercial, with services weekly, semi-monthly, monthly and every other month.
- Residential, with services every other month, quarterly and three times a year.
- Termite services that include renewals for baiting and liquid treatments.
2. PRICING is one of the most powerful ways PMPs can improve their performance. How effective is your pricing policy?
- An effective pricing policy will keep you profitable and successful.
- A mediocre pricing policy will keep you frustrated and barely in business, and leave you wondering what needs to be done to succeed.
- An ineffective pricing policy will put you out of business.
3. TYPE OF WORK. The beauty of the pest control industry is that the work is duplicated frequently. This makes the business model highly scalable. Therefore, the best type of service you can offer is cookie cutter in nature. Highly technical, non-scalable, one-time work may provide big revenue dollars one year, but will create a void the following year when you’re trying to grow year-over-year comparable services.
4. COMPANY CULTURE reflects how company management thinks, who it hires, company values, and company conduct. If good culture is instilled from the beginning, employees usually will endure a change in ownership, provided the acquirer wants it that way. To help ensure good culture is established and continues, company policies and procedures should be codified to explain how work gets done and how people are treated.
5. ACCOUNTING AND TAX COMPLIANCE. As your business grows, you need the internal structure and financial controls to support this growth. Accurate bookkeeping means accurate financial statements. It’s not enough to simply produce financial statements; you need to study them, compare them to your company’s previous statements, and compare them to those of other companies in the industry. Use your financial statements to improve your business.
File tax returns in a timely manner, with taxes remitted as required. Work to minimize taxes, but make sure they are filed and paid, as tax liens can lead to the death of your business.
6. EMPLOYEE NON-COMPETE CLAUSES. Asking employees to sign a restrictive covenant or non-compete clause is one way to make it more difficult for an employee to steal your customers. If you are looking to sell your business, one of the first questions a potential buyer will ask is how your non-compete is written because it will help ensure high customer retention after the sale. Your customer list is your most valued asset. The idea is to protect it and not have an ex-employee become your worst nightmare. This is a real risk and one that will most assuredly occur unless you implement appropriate legal safeguards. (Editor’s Note: See p. 90 for a real-life example of what could happen.)
Create your dream company
We can dream of starting over and creating a utopian company we can sell for a profit when the time comes. Because you probably already own, or are involved with, a firm that is up and running, starting over is not an option. Implement these tips over time, so you can turn your company into an entity that maximizes its value for the owner at the time he or she leaves the company.