With the roller-coaster year that was 2020, one of the most common questions I received during the past 10 months was, “Can you help me understand the state of acquisitions in the industry and how it has been affected by COVID-19?”
Regarding COVID-19, there is a lot to unpack. To start, I produced a series of articles with Dr. Faith Oi from the University of Florida. These articles can be found at www.kempanderson.com and are available at no charge. The intent and goal of these articles is simply to help owners and operators in our industry understand what we appear to be up against from both a scientific and business perspective. I encourage you to check them out.
ESSENTIAL INDUSTRY. Can every employee in your company tell every customer why they need pest control services; why pest control is essential; why and how we help homes and businesses stay healthy; and why they need your company and our industry? Conceptually, this is critical since pest management has been deemed an essential industry. What is an essential business? In the 1970s, the Harvard Business Review studied success and failures of companies during recessions from 1970 forward. They determined that consumers in tough times make decisions in four key decision-making consumer buckets:
- “Essentials” are purchases of services or products that are necessary for survival or perceived as central to well-being. This is certainly the area that the pest control industry falls into.
- “Treats” are purchases of services or products that consumers might consider justifiable from time to time even in tough economic times.
- “Postponables” are purchases of goods and services that can be reasonably put off or postponed for an acceptable period of time.
- “Expendables” are purchases of goods and services perceived by consumers to be simply unnecessary or unjustifiable.
The technical definition of “essential services” refers to a class of occupations that have been legislated by our government to have special restrictions in regards to labor actions, such as not being allowed to legally strike. Effectively during this period of COVID-19, this is the category that the pest control industry has fallen into. This is a cause for industry celebration!
Industries defined as essential services differ based on their organization’s specific government designation, but generally include services such as hospitals and other health-care related services, utilities such as electricity and water supply, law enforcement, firefighting and food-related products and services. However, as we are all aware at this time, pest control is included as an essential service and I believe that is because we are in many ways related to health care for the general public.
To survive and thrive in the era of COVID-19 one might include and consider the following:
- Show empathy at every opportunity as leadership with both internal and external customers.
- Stay on top of health-care and economic facts versus opinions. Some great fact-based information sites are Johns Hopkins, USAFACTS.org, McKinsey & Company and BCG. The key is to avoid opinions and stay fact based.
- Focus to the best of your ability on information technology (IT) as it is very possible that a touch-free economy is here to stay.
- Attempt to stay focused on supply chain, inventory management and PPE.
- Be “strategic and nimble” as a business leader. As leaders, we need to be honest, calm and reason based in our decision making. Try to be deliberate with your assessment across your organization regardless of size.
Second, while we may recognize there was a 90-day hiatus by most large buyers in our industry during April, May and June 2020 as everyone was trying to understand the implications of COVID-19, acquisitions were moving very fast at the end of 2020. I also believe 2021 will be an extremely strong year for sellers. With that in mind, let’s take a look at the selling cycle and what I think a potential acquisition team for most sellers should look like.
THE PROCESS. At Kemp Anderson Consulting, we believe the selling process and acquisition team should resemble the above flow chart.
Company owners should prepare to sell before they sell, which includes understanding all financial implications such as profit and loss statements, balance sheets, tax returns; employee and customer retention; pricing; marketing/sales and growth analysis; technology (IT) policies and procedures; accounts receivable; fleet; route density; market demographics; and more. The goal before you go to market should be to understand the strengths of your company, perhaps opportunities for improvement, and expectations for the entire selling process, including your own exit.
At Kemp Anderson Consulting, we believe hiring the right team includes the following:
1. A mergers and acquisition consultant is absolutely critical. This person or team should help you prepare to sell. As such, this person or team should know the pest management industry and your business inside and out in order to add value to you as you begin to prepare to exit while positioning your enterprise in its best light, taking time on the front end prior to going to market. However, it will pay large dividends as this work will help you and your family achieve a premium for your company. Skipping this step and not making this critical hire can literally cost millions of dollars in value as the offers for your company come in.
2. A specialized acquisition attorney is key to the process. Simply put, attorneys who specialize in M&A know what to focus on in an acquisition and will not waste everyone’s time and your money focusing on silly things like font size or formatting or, worse yet, simply making a material error an experienced M&A attorney would not. A specialized acquisition attorney will make the process smoother and efficient for all involved while advocating for you, your family and the company that you built and are selling. A specialized M&A attorney is crucial.
3. CPAs are critical in this process. Some business owners do their accounting themselves or use bookkeepers. If owners or bookkeepers make mistakes in their work, it can be extremely costly as you exit your business. We believe it is critical to have high-caliber CPAs involved in this critical decision prior to selling and certainly post transaction to minimize exposure. Non-pest management industry CPAs and bookkeepers should not drive your acquisition process as service industries like ours are typically not their specialization.
4. Wealth management firms. Wealth management, family trust, and other critical family and life decisions should be considered as well as wealth management firms and estate attorneys (which is typically different from an M&A attorney) as you move to the end of the selling process. Typically, these transactions create more wealth than most people have ever dealt with in their life and as a result, having a professional team including, but not limited to, a wealth manager and estate planning specialist is the key piece to your team.
LAST STEP. Ultimately, when the business is completely prepared to go to market, you go; however, going before you and the business are prepared is a costly mistake that should be avoided. At this point in the process, your team should be in place and ready for the frantic months ahead. This will ideally include multiple buyers and multiple offers as a result of the preparation and work, and the right team will be ready for due diligence, legal work, schedules and exhibits, and onboarding in integration that sellers should plan to support.
Last but not least in the process, you choose your offer (price and terms are critical), you choose your buyer and you execute. Choosing the offer and buyer often comes down to price, terms, and a fit between the buyers and sellers’ cultures, merging what both value and believe in as business principles.
FINAL THOUGHTS. Wow, 2020, what a year! As we all move forward together, this will certainly be remembered as one chaotic year in our national and global history. Aren’t we all thrilled to be in the pest control industry? Aren’t we fortunate to be designated essential? That is certainly a cause for industry celebration! As some of us begin to consider exiting the businesses that have been built in this industry, it is critical to know acquisition activity and valuations remain strong. As Muhammad Ali once said, “The only limitations one has are the ones they place on themselves.” What limitations will you place on your business as you move forward in this unique time? What limitations will you place on your business as you continue to build it and when you sell it?