Sales & Acquisitions: Selling Your Business

A rule of thumb in the pest control industry is that the fair market value of a business ranges from three to six times earnings before interest, taxes, depreciation and amortization (EBITDA). That may not seem like an enormous difference until you actually run the multiplication. In fact, there may be hundreds of thousands of dollars difference depending on where your business rates on the scale buyers use to determine value.

For example, a recent valuation that I did for a client with annual revenues of about $1.5 million showed a price range of $1.2 to $2.4 million. In this client’s case, I determined the business would be valued at the higher end of the range. Based on my experience, I’m convinced that a well-run business being sold by a well-informed owner could be priced twice as high as a business that doesn’t meet industry criteria — or is being sold by an uninformed owner.

Though most of us would never consider selling our car or home without some form of independent appraisal or analysis to determine market value, many PCOs sell their businesses by merely estimating a price. They estimate based on what they’ve heard about other sales or by figuring out how much they need to retire comfortably. Without valuing your business based on important industry and buyer criteria, you could lose thousands of dollars or spend months — even years — negotiating in vain.

So how do you rate your business to determine if its value is at the high or low end of that range?

VALUING YOUR BUSINESS. Some criteria depends upon an individual buyer’s preferences or current operating procedures. For instance, having a compatible mix of services will boost your business’ value in the mind of one buyer. A large percentage of commercial accounts may appeal to one buyer but not another. Or a buyer who isn’t Sentricon-authorized may pay a premium for your business if you can arrange for them to assume your "authorized operator" status.

Still, most of the difference in value is based on a series of industry standards and buyer criteria. A buyer’s offer is made after a thorough review that determines how your business stacks up. If you’re getting ready to sell your business, knowing how a potential buyer will rate it makes you a much better negotiator. (In some cases, owners may decide that they’re better off keeping the business, boosting their performance and then selling for top dollar a couple of years down the road.)

If your plans to sell are long term, taking the time to figure out how your business rates now may significantly increase its value when you decide to sell. In the meantime, your bottom line profitability may increase dramatically, depending on how well you’re already running your business.

Throughout the past 20 years, I’ve developed a list of criteria that buyers review to determine value. From that list, I’ve created a system that rates individual criteria and then determines a score that indicates how your pest control business rates in the industry. Take this information into account:

• General financial statement profitability, revenue and customer base growth. One key point that is often overlooked, however, is that buyers are looking at growth across all lines of business and in total number of customers. Even if revenue is increasing, buyers are leery if one line of business shows decline or your customer base is static or decreasing.

• Account receivables. Well-run businesses have relatively low levels of receivable over 90 days, so take a careful look at how well you are actually being paid for the services you provide. Also, note that a significant number of pre-paid accounts can lead to an adjustment in the purchase price.

• Payroll costs. An astute buyer will compare your costs to industry averages — by both service type and individual employee. Labor is the single most expensive part of doing business in our industry. If your costs are out of line compared to industry standards, a buyer will want to know why. They will also be determining what they are willing to live with after the deal closes.

• Revenue by route. A careful buyer will look at how much revenue each route produces each month. Production per employee is a key factor in the business’ value. Buyers also carefully review your pricing and ask about contracts with pricing guarantees.

• Employee turnover. Employees are one of your business’ most valuable assets and employee turnover will be closely scrutinized. In fact, some buyers request payroll records from most recent pay periods and several years prior to determine how many employees have been retained. Shrewd buyers also will expect that all employees have enforceable non-complete contracts.

• Customer cancellation rates. If employees are your most valuable assets, customers are a close second. How many customers do you retain yearly? How many unserviced customers do you have? How many customers are on the books but haven’t recently had service? Growth and stability of your customer base is an important aspect of value.

• Company vehicle condition. Another key expense for a potential buyer is maintaining — or replacing — a fleet of worn-out vehicles. (However, payments or lease contracts will normally come out of your side of a final sales figure — most buyers assume your business without liabilities.)

• Litigation, claims or other liabilities. Obviously a concern to a potential buyer, he or she will ask for a detailed list of litigation, both pending and threatened. Even verbal threats — "I’ll take you to court" — should be noted prior to the sale. Full disclosure will be required in the purchase agreement.

• Ongoing costs. A business with minimal ongoing costs (like Yellow Pages or other contracted advertising, computer/office equipment maintenance, consulting, etc.) is a better buy for most new owners who may have established contracts.

• Real estate. Many buyers expect to merge your business into their operations and facilities. They normally do not want to purchase real estate and leases would be very short term. If real estate is purchased or leased, it is a separate transaction from the agreement to buy the business.

• Add-backs. Costs that will be eliminated after the sale, such as owner’s compensation, travel, benefits, vehicles, etc., can be "added back" to the bottom line and may make a significant difference in a final offer. The more, the better — as long as you can clearly document and track them.

The value of your business — and which end of the range of multiples your business will command in today’s market — goes way beyond simple earnings and revenue statements. A well-run business deserves a higher market value and buyers have consistently shown that they are willing to pay a premium for high-quality business. Whether you are ready to sell now or plan to wait until later, knowing how a potential buyer will look at your business will help improve its value so you get the best price possible.

The author built her family’s pest control business through both internal expansion and acquisitions to a $15 million firm before selling it to Waste Management in 1989. In 1991, she established a consulting practice serving the pest control industry. She is also the author of Level the Field!, a step-by-step workbook written specifically for pest control operators who are selling their businesses. She can be reached at 813/831-7180.