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Killing You Softly, Part 1 – Your Pricing

While low pricing may make you very competitive in your local market today, it’s going to clobber you when it comes time to sell your business.

Customer pricing is a very important consideration in the acquisition of a pest control company, and very little is said about it until it’s way too late to do anything. Are you a PCO who is focused on growing sales at all cost? Better listen up now, or start saving a bigger chunk of your paycheck for retirement… you’ll need it.

On just about every acquisition that we get involved in, one of the first questions that an acquirer asks when it is looking at the confidential offering memorandum of a pest control company for sale is: “Do you have a copy of the Company’s price list?”

There are a lot of companies out there that haven’t raised prices in years, I know, I am trying to sell one as I write this very article. We are currently advising a pest control company in the New England area that hasn’t raised prices for years. Sure, there’s not an account east of the Mississippi this company can’t get, but its margins are paper thin and every acquirer knows that in order to make any money, it’s going to have to raise prices after the acquisition.

My client says “big deal, let them raise prices, the market will support a price increase”. The problem is, acquirers don’t take this kind of risk, why should they? Pricing risk is generally borne on the seller in one of three ways: 1) a low purchase price, 2) a very large holdback, or 3) no deal at all (the answer is usually #1 and #3). Why would anyone buy a company that is struggling to turn a profit because of under-pricing? Why would anyone buy a company and face losing half of its customers in light of a price increase?

But what about the industry rules of thumb, dollar-for-dollar of recurring revenue? “My margins are low, but I’m doing $2 million in recurring contractual revenue and that’s what the big acquirers are looking to buy.” Great, I bet you could sell your house in 3 hours too… at a 30% discount to market value. Ask yourself, would you pay dollar-for-dollar for a company generating $2 million in sales at a 25% gross margin? (If you answered yes, please give me a call right way, I’ve got some great acquisition opportunities for you).

Pest control operators tell me all the time that their businesses should be worth at least dollar-for-dollar of recurring revenue irrespective of price; so they slash and burn prices, building their revenue base while taking out their competition. While I hear this from pest control company sellers often, I have yet to meet an acquirer who shares the same sentiments. Hmmm

Pricing issues don’t just affect small companies. There is a pest control company on the PCT 100 right now that is doing north of $15 million in sales. When I discuss this company with some of the national acquirers out there, I hear things like, “We’d like to get a stronger foothold in this geography, but there is no way that we could make this deal work with what the Company charges.”

When you look to sell your company, it’s far better to be the highest priced game in town, not the Wal-Mart of pest control. If you are the discount provider, you are taking a huge whack at your company’s value – and in some cases, you may be killing your ability to sell altogether. It happens much more than you would think.

So what do you do? Start now, benchmark your prices against your competitors. What is Rentokil charging? Orkin? Terminix? Your largest competitor? When you raise your prices, do it slowly over time; start with the new customers and then roll it out across the organization. Many of you are servicing friends and family at special rates, you don’t need to get yourself estranged, just make sure that your average price (across all customers) is at least at the market median for your area. The higher you can go while maintaining your customer base not only puts more money in your pocket today, but makes your company much more attractive when it comes time to sell. And remember, the customers that scream the loudest when you raise prices are probably the customers that you are better off not having as customers in the first place.

I leave you with this final thought – while I can’t tell you which pesticides to use, or which enterprise software platform is the best for your business, I can tell you this: ALWAYS CHARGE AS MUCH AS YOU CAN AND STAY FOCUSED ON PROFITABILITY. It’s better to have fewer customers and get more money from each, than to service half the western hemisphere at razor thin margins. Quit sacrificing profit for sales. It’s bad for the industry and it’s bad for your retirement.

Interested in learning more about valuation and mergers & acquisitions in the pest control industry? The Potomac Pest Control Weekly is written the most prominent business appraiser and mergers & acquisitions specialists in the pest control industry and is packed with tutorials, case studies, and interviews with industry insiders. Subscribe to Potomac Company commentary and research on the Pest Control Industry today by completing the form below.

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