The opportunity to sell your pest control company can be exciting, but also confusing and overwhelming. Whether forced to sell quickly or planning for the future, selling a business requires a solid plan and professional guidance.
Consultants Dan Gordon and John Corrigan with PCO M&A Specialists laid out considerations for selling and the complex process in a recent PCT M&A Virtual Conference. “So if you decide to go down this road, put on your seatbelts because it can be a roller coaster ride,” Gordon says.
CONSIDERING TO SELL. Retirement, death, disability, divorce, bankruptcy, a new career and attractive price multiples are all reasons an owner may look to sell his or her pest control business.
But the PCO M&A Specialists team urges PMPs consider all the consequences of selling a business before deciding to do so. For example, would the owner miss showing up to work every day? How will he or she keep busy instead? Does selling let down employees? Will the sale proceeds be sufficient to maintain the owner’s lifestyle? What will it be like to work for the buyer after having run the business? What are the risks of keeping the business longer or selling now?
All of these things can lead to seller’s remorse. “So last word on this topic is that selling might be something you’re thinking about, but if you’ve been running the business for a long time, selling can be a life-changing event. You need to be prepared,” Gordon warns.
HIRING HELP. After determining your concrete reason for selling, the next step is understanding that the sales process is difficult and requires a team of experts for a successful transaction. “It’s not going to be the same as how you conduct your business daily running a pest control company,” Corrigan says. “You really need to set realistic goals for what you’re going to get and what you’re going to do.”
He warns not to go at it alone. Employ a team of advisers, including a financial intermediary, a tax expert and an attorney all with specific knowledge of the pest management industry. The team can navigate through insurance, legal and financial concerns to structure a transaction not only for maximum upside but also minimal downside. “You want to make sure that whatever dollars you get you don’t have to give back one year down the road,” he cautions.
FOR WHAT IT’S WORTH. Gordon referred to this as the “big elephant in the room.” Many sellers don’t have a clear sense of what their business is really worth. Many believe valuation is a function of revenues, but it’s not, he says. It’s primarily a function of the business’s annual free cash flow. Because all companies don’t operate the same way, there is no single metric for valuation. It’s all about the quality of the business’s portfolio and maximum recurring revenue, he says.
High-value companies have recurring revenue streams, such as monthly or quarterly routes that can be counted on. Recurring revenue allows for efficient technician routing and therefore higher average revenue per technician. What is good revenue per technician? “We like to see a minimum of $15,000 a month per technician, but we’d like to see a lot more,” Gordon says.
Better routing efficiency keeps gross profit percentage consistent in terms of controlling labor costs. One-shot revenue is valued significantly less than recurring revenue. So each dollar of revenue is treated differently when it comes to buyer evaluation.
Beauty is also in the eye of the beholder. Factors like low employee turnover and low accounts receivable are signs of a well-run company and can appeal to buyers. “You need to be realistic,” Gordon says. “If it’s not enough money to get out then by all means stay in. It’s a teriffic business.”
BEING ACQUIRED. A good broker can properly evaluate a business and determine what kind of acquisition it could be for a potential buyer. There are several types of acquisitions. Buyers looking to enter a new market acquire “platform companies.” “Bolt-on companies” are usually smaller and can be added to a platform company with fewer customers, management and administrative capabilities. Finally, buyers purchase “tuck-in companies” operating in the same location to fill in route gaps.
Preparing a good confidential business memorandum (CBM) for prospective purchasers is important in acquisitions. The CBM contains critical information including the reason for sale, executive summary, financial results, company overview and equipment schedule. “Buyers are busy and don’t have a lot of time,” Corrigan says. “So the better you can summarize the critical aspects that the buyers want to know and understand makes their life easier and gets right to the point of if it’s a good target to focus on acquiring or not.”
A buyer interested in a deal will submit a letter of intent. This is a five- to-eight page summary of key terms including purchase price, down payment, etc. The letter comes to the broker who will then try to improve those terms and minimize taxes.
After both parties agree to the terms in the letter of intent, it’s time for due diligence. Due diligence helps the purchaser understand what they are buying. They will come into the business to assess the percentage of recurring work, the number of trucks, if taxes have been filed, etc. Then the buyer has the opportunity to withdraw from the deal, make a counter offer or move forward with the transaction as is.
Last comes the purchase agreement. This will define which assets will be acquired and which will not, the total purchase price, assumed and excluded liabilities, and disclosure schedules. The purchase agreement contains many miscellaneous considerations as well, such as what’s going to happen with employees and if the buyer is assuming office and warehouse leases.
“It’s interesting that a lot of people just think about, ‘How much money am I getting?’” Gordon says. “There’s a lot more that goes into it. So if you’re considering the sale of your business, understand that there’s a lot of moving parts. Hiring the right team will save you money and get the most after-tax value.”
The author is an Ohio-based freelance writer.