it’s another year and another Top 100 issue and, once again, mergers and acquisitions (M&As) made big news.
At least nine large, regional pest management companies were bought by bigger global or national entities. As such, we scratched them from the Top 100 list, just like we deleted nine companies from last year’s ranking and six from the list in 2017.
We thought by now M&A activity would have cooled after years of non-stop action but it hasn’t…not by a long shot. And that got us wondering: What do all these M&As mean for the smaller pest management companies that make up the bulk of the industry? What impact does this activity have on their day-to-day operations, business strategies and outlook?
“It’s hard not to pay attention to it, especially when the dollar amounts are so large,” admitted Garrett Thrasher, owner of Thrasher Termite & Pest Control in San Diego.
Here’s what pest management professionals and industry experts had to say:
1. You’re the target.
While big buyers are aggressively competing for Top 100 businesses, they’re also buying smaller companies to “tuck in” to their operations, whether to increase route density or develop footholds in new markets.
“The big players are acquiring smaller companies at a very dramatic clip. The activity is certainly elevated,” said Paul Giannamore, managing director of The Potomac Group, which closed three transactions on firms doing $1 to $2 million in revenue the week he was interviewed. “We do dozens of these smaller deals,” he said.
Companies with revenue between $500,000 and $3 million were the focus of a buyer who met recently with Stuart Aust, former owner of Bug Doctor (acquired by Anticimex in 2016) and founder of The Aust Group, an M&A consultancy.
PMPs on the East Coast between Boston and the Carolinas have seen the greatest interest from buyers; it is the most competitive market for M&As with the highest company valuations, said Giannamore.
2. You’re getting in the game.
Smaller companies are joining the race to buy, as well. Gregory Pest Solutions (#30) in Greenville, S.C., bought five companies in 2018. Hoffman’s Exterminating (#94), Mantua, N.J., bought eight in the past two years. It was the first time either company purposely used M&As to grow the business.
The parties knew each other through their state pest control associations. Some sellers were nearing retirement and finding it hard to hire and retain employees. “It was the right time for them, coupled with the job just got a whole lot harder over the last couple years,” said Ben Walker, president, Gregory Pest Solutions.
William Hoffman, president, Hoffman Exterminating, said sellers “knew they didn’t have all the things in place to be attractive” to the big acquirers yet still had value and were committed to their customers. “They found us to be that perfect niche where we can take on their customers still as that family run business.”
3. You’re seeing high multiples.
“Multiples have never been where they are now,” said Giannamore.
Seven years ago, a company with revenue of $10 million would sell for $12 to $13 million, he explained. Today, that company can sell for $30-plus million. And where a company with $2 million in revenue might sell for $2.5 million back then, today it’s possible to get $4 million.
The market is going through a cycle: Valuations will “drop in the future, but they’re still compelling,” said Dan Gordon, owner, PCO M&A Specialists. Big buyers also are bidding up prices. “It becomes a competition,” he said.
Carrie Campbell, owner, Hatfield Pest, La Porte, Ind., said big M&As are entertaining to follow, like the huge trade deals in baseball. “When you see multi-, multi-million dollar mergers, when you see that money, you say, ‘Wow. That’s my industry. That’s crazy,’” she said.
4. You’re strategizing better.
More small firms are thinking big when it comes to acquisitions. “Everybody’s getting an education and we all have the big companies to thank,” said Aust.
PMPs said they’re using M&As to help reduce tax liabilities on year-end profit and to help them enter and quickly grow in new markets without the cost and time of starting from scratch.
Compared to growing organically, an acquisition “adds to the bottom line right away” and “when you sell, you’re going to be worth even more money” because the company is now bigger, said Aust.
Thrasher, who completed his first acquisition in 2018, “added about 30 percent to our recurring service business overnight.”
“It’s a way to grow fast,” agreed Kevin Thorn, president, Thorn Pest Solutions, Pleasant Grove, Utah. “Acquisitions can be a great way for us to gain new talent,” he added.
5. You’re catching the mania.
“Learning from the big guys can take a company right down the shitter,” cautioned Giannamore. “It’s very bad business for smaller pest control businesses to look at comparable acquisitions — the multiples being paid by the big strategics — in order to justify prices that they will pay. You could purchase the best pest control company in the world but if you overpay for it, it is a bad investment.”
“All of these smaller sellers think their companies are worth so much money because they’re hearing about these tremendous valuations. There’s nothing further from the truth,” said Gordon.
Even the big marquee deals can be “value-destroying exercises” if returns aren’t adequate for the risk and capital committed, said Giannamore. As a result, an acquired company may be gutted to cut expenses.
Buyers must determine what that business is worth to them, not what it potentially is worth to a company with hundreds of millions of dollars of cash burning a hole in its pocket, Giannamore said.
6. You’re (maybe) seeing more start-ups.
“I’ve seen more startups here in Southern California over the last couple of years than I’ve seen in many years,” said Brian Olson, president, The Bugman Termite & Pest Control, Anaheim, Calif.
“I know quite a few guys in young companies that have started because they didn’t want to work for the big five,” said Campbell.
Some sellers may dive back in when non-compete agreements expire. “It’s such a great industry. Once it gets in your blood you can’t get out of it,” said Walker. Thrasher has seen sellers open new companies in neighboring counties where their non-competes don’t apply.
The actual number of firms in the U.S., however, declined. Rich Kalik, Specialty Consultants, told PCT there were 19,586 companies in the U.S. in 2018, which is down more than 900 from the high of 20,518 companies in 2015.
7. You’re focusing on fundamentals.
Buyers want companies that fit their culture; they also want to see signed client contracts, a high ratio of recurring to non-recurring revenue, proper insurances, profitable pricing, and systems for hiring/training employees, among other things. “They’re willing to pay really top dollar for structured, well-organized, well-run companies,” said Hoffman, Hoffman Exterminating.
Structured companies also grow faster and make more money for their current owners. “It doesn’t matter if you’re going to sell or not; that’s the way you should run your business,” said Hoffman. Doing so gives you options: “I can sell and get a premium or I can continue to run this thing,” he explained.
“It is a great time to sell. But it’s also a great time to build your company,” said Thorn.
Added Gordon, “If people have the endgame in mind, they’re doing things to help their case.”
8. You’re starting with the end in mind.
Aust is mentoring young owners who already have selling their companies top of mind. Millennials, in particular, “realize they have a very valuable asset. By adding scale to it (through acquisitions) they can prepare to have a lucrative exit plan down the road,” he said.
The active M&A market is causing more PMPs to ask peers, “What’s your end plan?” “People didn’t use to ask that. They used to think, ‘This company is going to be around forever,’” said Eric Eicher, founder, Versacor Managed Pest Solutions, Southlake, Texas.
PMPs said they’re wary of companies built to sell. “Usually if somebody’s starting a business with the intent of flipping it in half a dozen years, they’re not really building a solid foundation,” said Eicher. This can cause problems for the buyers, he said.
9. Your advantage is great service.
“Every day we’re talking with someone who’s unhappy with a large company and looking for a small company,” said Josh Erdman, owner, Erdye’s Pest Control, Green Bay, Wis. “We can respond a lot quicker, we can provide better service, which turns into more customers and a longer life cycle with our customers,” he said.
That’s true on the commercial side as well. When a good company is bought by a not-as-good company, the quality and consistency of service can suffer, said Eicher. Plus, the nationals generally target national chains, not the regional food plant, distribution center or hospital once serviced by regional competitors, he said.
When the leadership team moves on, “those companies kind of peter off and they become a shell of their former selves. It gives us an opportunity to get in the market,” said Justin McCauley, CEO, McCauley Services, Bryant, Ark. He credits the buyout of regional competitors in part to his company’s multi-state expansion.
10. You’re keeping it personal.
“We strive so hard to connect with our customers on a personal level,” said Rob Jackson, owner, Jackson Pest Management, Leo, Ind. Clients enjoy his regular newsletters and knowing who their technicians are, and this connection is hard for big companies to replicate, he said.
“People don’t realize how personal this business is,” agreed Eicher. Whether a home or business, clients don’t want to let anybody in. “They want to know the person; they want to know the company,” he said.
Small businesses have more employee buy-in, as well, said Campbell, Hatfield Pest. “You’re not told to ‘stay in your lane’ as much; you can be a technician and a salesman and a route manager all in one when sometimes you’re not able to do that in a bigger company,” she explained.
“Although we’re killing bugs, we’re really in the people business. That’s where I think family owned businesses have an edge,” said Olson, The Bugman.
11. You’re getting a voice in the industry.
Industry leaders traditionally have come from big regional companies, but M&As have changed this. “We’re losing engaged members,” said National Pest Management Association CEO Dominique Stumpf.
That’s why NPMA launched the Executive Leadership Program three years ago. The goal: develop PMPs from smaller companies for leadership roles in the association.
NPMA also is creating stronger relationships with state associations. The second annual State Association Leadership Retreat will be held in July. “We want to move with the state associations. If they’re strong and they’re viable and they’re developing leaders then it’s just a natural progression for us too,” said Stumpf.
M&As have forced associations to actively cultivate new leaders instead of letting them develop on their own. “It’s been a good thing,” said McCauley, McCauley Services.
The Professional Pest Management Alliance, which promotes the industry to consumers, likewise is exploring ways to bring in new investors and ensure its long-term sustainability.
12. You’re gaining respect.
When big companies get bought, smaller companies move up — and onto — the Top 100 list. This year, 14 “new” companies made the list compared to 12 last year.
“It brings a lot of credibility and a lot of validation” to staff and customers and it is “looked over and over and over by people looking to purchase companies,” he said.
One of the new companies on this year’s PCT Top 100 is Hoffman’s Exterminating (#94), which became the second largest, independent pest management company in New Jersey after Viking Pest Control, Cooper Pest Solutions and Advanced Pest Management were acquired in 2017 and 2018.
The revenue gap between companies, however, continues to grow. This year, the top 10 on the list represent almost 65 percent of the industry’s nearly $9 billion in 2018 revenue.
13. Your distributors are feeling the squeeze.
Distributors can lose business when companies are acquired. The new owner may have a relationship with a different distributor or own its own distribution operation.
To make up for the loss, distributors may raise prices on existing customers, lower prices to get new customers, and cut sales and operational expenses, none of which are sustainable long term, said Chris Donaghy, general manager, JP Pest Services, Milford, N.H., and former president of Residex.
“I believe the choices many distributors will face are to either become smaller and more niche-oriented, or attempt to diversify the line offering and expand territory reach,” he said.
Pest control startups may fill the void left by acquisitions but they take years to spend at the levels of lost customers. It also can be more costly for distributors to serve smaller companies, which are “very brick and mortar dependent” and require more support services, said Donaghy.
Should distributors merge, small pest control companies will feel it the most. “Consolidation generally means fewer choices, fewer locations, and fewer support personnel,” said Donaghy.
14. Your family comes first (but it’s good to have options).
“You’ve got strong companies out there that are set up to go on from generation to generation but when these companies are selling at the multiples they’re selling at these days, it’s hard to say no,” said Walker, Gregory Pest Solutions.
Selling may be more lucrative than what an owner and heirs can earn by working at that business over the next 20 years. Should owners sell to their kids at a discount, leaving money on the table; burden heirs with the high debt required to buy them out; or take the cash and possibly start again?
Erdman, Erdye’s Pest Control, said he’s got 30 years to figure it out. “I’d be happy to be bought out myself here at some point” but in the meantime “we’re in a really good position as a company, as a team; we have a really good reputation,” he said.
“When valuations revert back to their historical mean, we’ll see more businesses being passed on to the next generation,” said Giannamore.
15. You’re expecting M&As to continue.
Because the Federal Reserve has reversed course on monetary tightening, valuations will remain elevated, as will M&A activity, said Giannamore, who expected at least six Top 100 companies to sell in 2019. And the market could get more competitive for some smaller companies since there are fewer big companies left to acquire, he said.
Adding fuel to the market: Private equity firms (in addition to EQT, which owns Anticimex). Private equity is bidding on more than $200 million in deals in 2019, said Giannamore.
“Twenty years ago, this was not a sexy industry. Now, for people with smart money, they’re all over it,” said Gordon, PCO M&A Specialists.
PMPs like McCauley welcomed the M&A activity. “We view it as a good thing just because it opens up opportunities for companies our size to grow into something more and be something special,” he said.
The author is a frequent contributor to PCT.