How to Value and Sell a Pest Control Business (Guide)
Sellers Business Valuation Seller Articles Seller FAQ Valuation
Ready to find out what your pest control business is worth and sell it to the highest bidder?
You're in the right place.
With big players like Orkin, Terminix, Rentokil, Arrow, and Massey buying pest control businesses left and right, and businesses selling for the highest prices on record, it's good to learn what it takes to sell a pest control business.
This post contains useful information on how to price your pest control business and increase its value before you sell.
How to Value Your Pest Control Business
- 3x to 4x SDE + inventory
- 4x to 6x EBITDA
So what exactly is SDE and what is EBITDA? And what are the differences between the two?
Sellers Discretionary Earnings ("SDE"): SDE represents the total financial benefit an owner receives from their business. Expenses such as officer’s salary, benefits, depreciation, and other situational items such as rent or utilities are added back into your net profit before taxes.
The goal is to quantify the total financial benefit your company provides. You can learn how to calculate your SDE here.
Earnings Before Interest, Taxes, Depreciation, and Amortization ("EBITDA"): EBITDA is like SDE, but it’s usually used to value larger businesses (over $2 or $3 million in revenue).
One of the major differences between SDE and EBITDA is that EBITDA does not add back the officer’s salary. Instead, EBITDA assumes the buyer is not going to be an owner-operator, meaning a market-rate salary is needed to replace the owner and must be added back to operating expenses.
Businesses priced using EBITDA also pull a higher multiple than businesses using an EBITDA multiple.
How NOT to Value a Pest Control Business
- 80-90% of sales + Inventory
- 100% of revenue
We hear lots of business owners saying they were told their business is worth some percentage of their revenue.
We’re here to set the record straight.
By this method of valuation, a company doing $2,000,000 in revenue that's losing $200,000 per year is still worth roughly $1,800,000.
Simply put, what good is revenue if you’re losing money? Would you pay $1,800,000 to lose $200,000 per year?
Ultimately, the only reliable way to calculate your company’s value is with a multiple of earnings.
Buyers, investors, and lenders will give you some credit for revenue and the number of accounts you have, but it's what you put in your pocket after all expenses that really counts.
How to Determine Your Multiple
Business value is often determined based on SDE or EBITDA multiplied 2 to 7 times, but the multiple you pull will be determined by many factors.
The most important factor is size. If your business is doing over $2 or $3 million in revenue, your valuation will almost certainly be based on an EBITDA multiple. When using EBITDA, you're going to see a higher multiple (4x to 6x for example).
Businesses doing $1 million to $2 million may be priced using EBITDA, but often see a multiple based on Seller's Discretionary Earnings. An SDE multiple for this size business is usually 3x to 4x.
If your business is under $1 million in revenue, your business will be valued using SDE and will most likely see a SDE multiple in the 2x to 3x range.
However, it's important to understand size is not the only factor that will affect your multiple. Below we describe a number of factors that influence your company's multiple.
What Enhances The Value of a Pest Control Company?
When you get right down to it, it's all about risk. Risk to potential buyers. If you can reduce the perceived risk of your business, you will be able to make buyers more comfortable with the idea of purchasing your business.
1. Service Contracts
Recurring revenue is the name of the game. Predictable and consistent service or maintenance contracts are extremely valuable in any service business – especially if your long-term contracts cover your break-even point and make you a profit. Get more service contracts and your company will be more valuable.
There are two ways geographic location can be important. The most obvious is that different locations have different levels of competition and market size. If you’re in a large market with little competition, that’s good news for you. The other location benefit is acquirer specific. If Orkin or Rentokil is looking to expand in your area, then geographic location can be a huge bonus.
As you know, the pest control industry is highly competitive. Therefore, your reputation has a major effect on the value of your company. Make sure you’re asking customers to review your service on Google, publish some testimonials on your website, and ask clients to refer you if they’re satisfied with your service.
4. Residential + Commercial Clientele
Residential clients have long been the core of a pest control’s business, but recent increases in bedbugs in restaurants, hotels, offices, and even movie theaters around the country have caused regulators to tighten restrictions. Some local governments are requiring businesses to have monthly or quarterly inspections (like a health inspection) performed by professional exterminators. If you can secure these clients, then you'll reduce your dependence on the cyclical housing market.
5. Eco-Friendly Pest Control
Sounds ironic, but today’s consumers are demanding the use of eco-friendly insecticides. Kill them softly, right? Joking aside, this seems to be the direction the industry is moving. If you’re already using eco-friendly insecticides, make sure to highlight that fact in your marketing and sales.
The service industry is rife with software, technology, and gadgets to improve your services, market your products, and protect your equipment. If you can integrate these changes into your business successfully, it will look better in the eyes of a buyer.
What Hurts The Value of a Pest Control Company?
1. Owner Too Involved
As with any company, the more involved the owner of the business, the less valuable. Let’s face it, if you’re the only thing keeping the wheels turning in your organization, it’s going to be hard for a buyer to step in. Think about backing yourself out of daily operations, if you want to increase the value of your business.
2. Old Facilities and Equipment
Although pest control is not an equipment-heavy industry, most companies need branded vehicles, uniforms, office space, computers, spraying equipment, and more. We’re not suggesting that everything needs to be perfect and new, but damaged and outdated equipment may affect your value.
3. Lowest Prices in Your Market
No strategic buyer wants to purchase a company that has a thinning profit margin. While this may help to attract customers, it’s better to convince customers that you’re worth the extra money. This shows the strength of the company and of your brand.
4. Outdated Marketing
In the digital age, your marketing efforts are more important than ever. As we mentioned before, competition in the pest control industry is cut-throat. To stay in the game, you need to focus on your marketing efforts. Update your website. Start asking your customers to leave you Google reviews. Hire your nephew to wave a sign on the corner! Just make your company look presentable in the digital world. It will have a big effect on your business.
5. Low Number of Service Contracts
If you’re a pest control business with a low number of recurring service contracts, that’s a big problem. Service contracts are the main value-enhancing attribute of a pest control business. Go out to your repeat customers and start securing service contracts.
Who Will Buy My Pest Control Business?
There are three main types of buyers:
- Strategic acquirers ("strategics")
- Private equity groups
The type of buyer you choose will largely depend on the size of your business and your goals for selling.
Be sure to talk to your broker about what’s important to you in the sale. If everything went perfectly in your sale, what would that look like?
If you don’t have a pest control business broker to lean on, here are a few things to think about with the different types of buyers:
Typically, the larger and more profitable your business, the harder it will be to sell to an individual. If the profit of your company is over $1 million, the number of individuals who would be able to purchase the business will be small.
This is because the best financing source for most individuals is the Small Business Administration. The SBA will financing the purchase of a $5+ million-dollar business is difficult – especially since SBA will loan up to $5,000,000 on businesses, and that loan amount would require lots of collateral (which pest control businesses don’t often have).
If the sale price of your business is in the $350,000 – $5 million range, finding an individual buyer to purchase through the SBA is a great option.
An SBA deal allows you to walk away with cash at closing, while the buyer can purchase for as little as 15% down. This protects you as the seller. It also gives buyers a proven financing source with a reasonable interest rate and longer (10 year) amortization period.
SBA loans can also be used to acquire real estate, so if you own your warehouse and are interested in selling it along with your business, its hard to beat SBA financing.
Strategic buyers include some of the big names in the pest control industry: Orkin, Terminix, Rentokil, Arrow, and Massey for example.
For some time now these giants have been consolidating smaller companies, and they’ll often compete over the same business if it’s valuable or located in a market where they'd like to expand.
A benefit of selling to a strategic buyer is they’re experienced in purchasing pest control companies and the process should be fairly straightforward. However, this also means they are extremely savvy buyers. We strongly recommend having a business broker or M&A adviser who specializes in pest control in your camp when dealing with a strategic buyer.
Private Equity Group
Private equity groups ("PEGs") are an unlikely buyer for a pest control business, but deals do happen. To understand why, it's important to understand the purpose of private equity and how it operates.
The main purpose of a private equity group is to provide a return on investment to their investors. They purchase companies, then set out to quickly improve operations and increase the number of accounts. Most private equity groups acquire several pest control businesses, then operate them as a group for anywhere from 4 to 7 years before selling. They typically sell to a larger private equity group, or a strategic buyer.
In most cases, private equity take a majority stake in a business. You would retain a minority stake, typically in the 20% to 30% range. This is known as a majority recapitalization, or "majority re-cap". In a majority recap, you will most likely be asked to stay on with the company.
So to summarize, if you’re interested in getting paid for some of your business today, but not ready to completely walk away, private equity may be a good option.
You’ll retain some equity, have money in your pocket, and a partner by your side to help operate and grow the business. Then, after the holding period, you'll have an opportunity to sell again. This is called taking a “second bite of the apple.”
One thing to note, a few private equity groups have recently been accepting minority stakes in companies, meaning you would be able to retain a majority stake. Even though you would be the majority shareholder, the private equity group would require control.
Again, private equity buyers are some of the most sophisticated buyers on the planet. It doesn't mean they're bad people, but I strongly recommend having a business broker or M&A adviser who specializes in pest control in your camp well before you begin discussions.
How Long Will My Business Take To Sell?
Wondering how long it will take to sell your pest control business? 51% of business owners think it will take five months. However, research suggests it takes six to eight months on average.
The time it takes will be dependent on a number of factors.
One of the most important is size. Chances the larger your business, the longer it will take. You'll have a smaller pool of sophisticated buyers that will request a longer due diligence period.
Another key factor in the length of time it will take to to sell your business will be the shape of your books and records. If you're well organized and your financials are detailed and in very good order, it will expedite the due diligence period. It will also help make the buyer and their lender or investors more comfortable throughout the process.
How Much do Business Brokers Charge?
Curious how much business brokers charge? Like many things when it comes to selling a business - there's no simple answer. Nearly every business and every situation is unique. Ultimately the answer boils down to the size of your business and the type of broker you will work with to sell it.
For "main street" businesses (those doing less than $1 million in revenue), the price will most likely be 10% of the sale price.
For lower middle market companies ($1 - $25 million in revenue), your broker will likely use the Double Lehman pricing model.
For middle-market companies, ($25+ million in revenue), you will probably be charged a simple percentage between 1% -5%.
Speak with an Experienced Broker
If you still have questions about selling your pest control business, we encourage you to speak with one of our specializing brokers. They've worked with many owners of pest control companies to help prepare and execute a successful sale. Give us a call today. We don't bite!