Private Ayes

It’s no secret the pest management industry has experienced a robust mergers and acquisitions landscape over the last decade.

But the buyers might not all be who you think they are. Yes, the public pest control companies that make up the PCT Top 100’s top three (Rollins/Orkin, Terminix and Rentokil) are active in the game. But so are larger industry players backed by private equity (PE) firms. These include Swedish pest management firm Anticimex (owned by EQT and other investors) and Certus (Imperial Capital Group), in addition to many other smaller companies. PE firms have become increasingly attracted to the pest market over the last decade and a half, as the industry has proven to be stable and economically resilient.

In fact, it’s not just in the United States that we see this trend. Our company, PCO M&A Specialists, just completed a PE deal in Europe that created one of the largest pest management firms in Spain.

In doing research for this article, I reached out to four PE industry professionals for their takes on the state of PE in the pest management industry. I’ve either closed transactions with these firms, or I’m currently working with them.

PE’s INTEREST IN PEST CONTROL. Josh Finifter, a principal on the investment team for Access Holdings, said macroeconomic drivers and consumer trends, such as homeowners having more discretionary income and moving from a do-it-yourself mentality to a do-it-for-me approach, combined with the industry’s recurring revenue model, are hard to ignore. Plus, the pest market is large, still highly fragmented and not likely to be taken over by Amazon or Walmart. Access Holdings has been researching the pest management industry for more than a year and is looking to enter it with an acquisition.

Ryan Bradbury, chairman and CEO of Rockit Pest, agreed, saying, “Pest control as an industry has gone from being seen somewhat as a black-eye industry — I say that as someone who grew up in it — to being viewed as a virtually recession-proof, high-margin, subscription-based business that’s very attractive to investors for potential long-term growth. It’s a great space to be in.”

Rockit Pest was launched by investment firm Halle Capital Management in April 2021 to acquire and operate regional pest control companies. We closed Rockit’s first transaction, the acquisition of Spencer Pest Control, early last year. Bradbury is also the former CEO of Viking Termite & Pest Control, which Anticimex acquired in 2017, so he has been on both sides of the coin. (Incidentally, I sold my pest control company to Viking in the mid-1990s.)

When it comes to pest management, the PE industry is just getting started, said Jeff Aiello, managing director of Thompson Street Capital Partners (TSCP) in St. Louis. TSCP entered the pest industry in November 2021 with PestCo Holdings, an acquisition company. In its first six months, the firm closed three deals totaling approximately $40 million in annual revenue, which will assure it a spot on next year’s PCT Top 100.  

“If I were to use the baseball innings analogy, I would say batting practice is over, and we are halfway past the national anthem,” Aiello said. “With the vast number of targets out there and the very small number of PE firms in the space, I expect many more entrants in the coming years.”

PRIVATE EQUITY BASICS. If you are an owner, you’ve probably noticed a slew of emails and/or letters from industry outsiders looking to purchase your company and/or partner with you to grow it. But who are these outsiders, and should you consider their offers?

Most of them are PE firms that establish investment funds earmarked for the pest management industry. PE investment funds are an alternative asset class (to traditional stocks, bonds and cash equivalents) that are formed to provide private financing that directly invests in companies or engages in buyout strategies to maximize their return on investment.

Most PE firms that are in, or looking to get into, the pest management business are doing so to execute a buy-and-build or rollup strategy. A rollup is the process of acquiring and merging many smaller companies together to form a larger company that allows the latter to take advantage of scale by cutting duplicative expenses as well as expanding revenue. Typically, a PE firm will enter a market by buying a large regional company, known as a platform acquisition, and then expand its footprint by doing multiple smaller deals, known as tuck-ins.

Platform companies typically retain their brands due to the goodwill and reputation associated with them. The brands of the tuck-in targets are often retired. Their value is typically in their technicians, customer list and vehicles.

Larger companies who may have the same financial and operational key performance indicators as smaller ones will almost always garner a higher valuation than the smaller firms. Understanding this concept allows the PE buyer of small firms to essentially make two plus two equal five. In other words, if several small firms are consolidated into one larger player, the larger firm taken together will have a higher valuation than the smaller individual firms. This equation is a powerful investment thesis the PE firms count on. Executing a rollup usually takes several years, so when a PE firm commits to an industry, it’s typically for five years or more. There are exceptions, such as when there are offers sellers can’t resist, which is what we’re seeing with the routing software companies that are being gobbled up by PE firms.

WHO IS YOUR BEST Buyer? When the large industry players, also known as strategic buyers, acquire smaller firms, they typically do so by buying 100 percent ownership in the targets they purchase. In some cases, they offer a management position to the seller, and many times they offer an incentive on the short-term performance of the firm they just bought.

PE firms, on the other hand, often offer more flexibility and potential upside profit for sellers. Many PE deals first establish the total value of the target firm; then the PE firm will either purchase a large percentage of the target or purchase all the assets of the target and allow the seller to purchase shares in the new entity. This approach is known as rolling equity.

For example, in a $10 million deal, the seller may sell 80 percent of his stake for $8 million and keep 20 percent ($2 million) worth of shares in the company going forward.

“The benefit is you’re staying in and becoming shareholders in the overall business as part of the transaction,” said Gene Shkolnik, partner with Imperial Capital. “You are taking some chips off the table, but you’re also reinvesting with a partner.”

In practice, if a deal is smaller, the PE firm may just purchase 100 percent with no equity roll. If you’re contemplating a transaction in this regard, check with your tax adviser. There can be significant tax consequences.

FIRMS ALLOWING OWNERS TO ROLL EQUITY. This usually happens when an investment firm wants the owner to remain with the company in a leadership position. While PE firms do a tremendous amount of research and due diligence prior to entering an industry, they are not industry operators or managers.

The PE firm is more interested in partnering with pest management experts who can grow the company while it provides funds for expansion, marketing and human resources as well as other support and expertise.

“For the most part, private equity really wants to find a strong operator to oversee the project,” Bradbury said. “They are humble enough to know they don’t know the pest industry, and their role is to provide guidance and strength.”

Why would owners want to roll equity? The ownership percentage they retain becomes much more valuable as the firm grows. When the PE firm exits, the owners get to sell the equity they retained, usually at a much higher value. This “getting a second bite at the apple” can be extremely lucrative.

“More energetic sellers looking to roll some equity into the new deal with the PE firm is usually viewed as a positive and could also help valuation,” Aiello said, “as opposed to an owner looking to retire and hand over the keys.”

Likewise, selling to a PE firm also can be an opportunity to offer equity in terms of options or profit interest to family members or key employees who may be staying with the company. Another way to think about selling to a private equity firm is as a growth opportunity, not an exit opportunity.

“Say a partner or a prospective partner has personal debt on the business,” Finifter said. “They funded everything out of their pocket, and they have done really well, but they want to expand it into new geography, offer a new service line or, quite frankly, just take some personally guaranteed debt off the books. Those are all critical inflection points where a prospective operator isn’t looking to just sell out to a [strategic buyer], but they’re really looking for a partner to help them get to the next level.”

ENDGAME FOR PE FIRMS IN PEST CONTROL. The objective is to grow the firm, make it extremely profitable, then sell it to another investor (private equity or strategic) or take it public.

We have not seen a PE-to-public offering yet in the pest control industry, although Anticimex reportedly considered an initial public offering last year. Ultimately, EQT opted to retain ownership instead of exiting the investment.

We have seen sales of rollups to strategic players in our industry. For instance, Rentokil acquired Environmental Pest Service (EPS), owned by Concentric Equity Partners, in January 2021.

If you are considering testing the private equity alternative to selling your company, it offers several advantages for owners who would like to stay in the game and see their companies grow, while taking some chips off the table.

The strategy of rolling up many companies into one allows economies of scale in purchasing, marketing and other areas. It allows potential cross-selling of services from a variety of portfolio companies held by the PE firm, and it provides opportunity to increase a seller’s value over time.

With that opportunity comes competition. PE money only increases the need for all companies in an industry to invest in technology, innovate and keep up with the times.

“It’s a great time to be in the pest control space,” Shkolnik said, “but I think competition will intensify because capital fuels sophistication, professionalization, competition on marketing for customers and competition on service for customers.”

Daniel S. Gordon is a CPA and managing member of PCO Bookkeepers and PCO M&A Specialists. Learn more at www.sellmypcobusiness.com.