As you may recall, Rentokil announced on Dec. 14, 2021, a $6.7 billion deal to acquire Terminix. It would make Rentokil the largest pest control company in North America. The transaction is expected to close this year, toward the end of the third quarter, according to Rentokil.
What lessons can pest control company owners learn from this major deal? Rentokil North America President and CEO John Myers recently was a guest on the Pest Management Professional (PMP) Industry Insider podcast I host with Coalmarch CEO Donnie Shelton. You can access the episode online at PMPIndustryInsider.com/post/episode-74.
We wanted to know: If any of our listeners want to exit their company and/or the pest control industry in the next three to five years, what steps can they take to make their company more desirable and maximize its value?
DESIRABLE COMPANY CHARACTERISTICS
Because my mergers and acquisitions division, PCO M&A Specialists, handles so many deals with Myers and his team, I knew he would provide a great snippet of advice we could share with our listeners. But rather than a snippet, he gave us a full-blown view into what the industry’s largest pest management firm looks for in a potential acquisition. The following are five characteristics for which Myers and his team look:
- Increase your percent of recurring revenue. “If you’re at 70 percent or above, that’s a good place to be,” Myers said, referring to the percentage of total revenue from recurring services he likes to see. But he also noted that there is a lot of one-time work out there, and he’s not opposed to some revenue coming from one-time services. It should take a back seat to recurring revenue, however.
- Ensure general pest control represents half of your revenue or more. “We like to see general pest control represent 50-plus percent of revenue,” Myers said, noting that offering some other services may make sense for customer retention purposes. “There are a lot of service offerings out there that are good, but when I see things like gutter cleaning, it’s hard for us to evaluate and value [those services].” Myers considers termite services separate from general pest control, noting 30 percent is a solid percentage of revenue for termite control services. He favors non-fumigation termite control services because fumigation typically is sold as one-time work and must be re-sold every year.
- Show above-average growth. “If the industry is growing at 4.5 percent [revenue growth], I love when I see 5 percent to 6 percent,” Myers said. “It means you’re outperforming the industry, doing something a little bit better — that’s really helpful.”
Have earnings before interest, taxes, depreciation and amortization (EBITDA) of 15 percent or higher. “When I see 15 percent or higher on EBITDA, I’m thinking [this is a] pretty well-run company,” Myers said. He added that sometimes, there is a good reason for EBITDA to be lower, such as a recent investment in an area that doesn’t have a short-term payback, such as sales resources. Note that the industry average for EBITDA, according to the PCO Bookkeepers’ Pest Control Industry Cost Study, is 13.74 percent. (Source: PCOBookeepers.com/profitability.) However, when excess owner compensation and other owner items are added back, that number usually jumps higher than 15 percent.
- Clean up your financials. Myers said he’s always looking for companies that follow good accounting rules, have clean books, and reflect quality earnings.
While we discussed all these items in the context of exiting the pest control industry, I would add that even if you are not looking to exit, maximizing these five characteristics will put your firm in the elite “best-in-class” category when it comes to running a successful business.