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Are You Building Wealth in the Pest Control Industry?

Posted By admin On June 15, 2010 @ 5:52 pm In Articles, Pest Control | No Comments

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Is Your Business Creating Wealth?
Is your business creating wealth or just providing you a paycheck? As a business owner, you have a duty to view the ownership of your company in the same way that you would view the ownership of any other income-producing asset, such as a stock, bond, or investment property. That is, your business must provide you an appropriate return on invested capital. If it is not providing you with a return, such as annual dividends or capital appreciation, you must determine why, otherwise you are squandering valuable time and resources and not building wealth.

The Evolution of a Pest Control Company
Just like most businesses, pest control companies are founded by individuals trying to put food on the table to feed their families. The early stages of a pest control company’s life cycle are plagued by cutthroat price competition and one-time service bonanzas. By undercutting the competitors, pest control operators are able to get cash in the door and keep the lights on. At the end of the day, however, these pest control companies aren’t really businesses, they are nothing more than a guy or two and a truck grinding out a living by taking on any work that is available at just about any price. This is the way it is, ask any industry veteran who has had the stones to step out and start his own pest control company and you’ll hear this story repeated over and over again. You do what you have to in the initial stages, otherwise you won’t be around that long.

The Fork in the Road
As the company grows the owner comes to a fork in the road, he can go one of three ways. The owner can decide to go one way and build a real business, he can go another way and essentially just keep his job, or finally, he can go a third way and fool himself into thinking that he is building a real company, which unfortunately is the road most-travelled in the pest control industry.

The Real Businessmen
The first group, we’ll call them the “barons,” choose to build real businesses by focusing on building value in their businesses above and beyond their own efforts. They view their businesses as not only a job, but more importantly, an investment and they demand a return on their investment of time and capital. They choose to systemize their businesses, hire and nurture great employees and build solid management teams, to focus on building, measuring and maintaining profitable pricing and margins, and they view their customers as long-term commitments, that if serviced properly, will provide them a stream of cash flow in perpetuity. Upon their eventual retirement, they will sell their businesses at substantial valuations, and all lesser pest control companies will point covetously to those valuation multiples and ignorantly demand them for their own businesses. You’ll find companies big and small run by these types of individuals, but they have their eyes on the prize, and they will not remain small for long. It is the founders and owners of these types of businesses that dominate the regions, they aren’t competing with the 1-man shops, they are competing with the national providers, and in many cases, they are winning.

The Mom ‘n Pops
The second group, we’ll call them Mom ‘n Pop pest control operators, for lack of a better term. These individuals are content with putting an ad in the yellow pages and servicing whoever calls. They are cutthroat on pricing and don’t necessarily care if they sell their customers a long-term contract or a one-time service. They are concerned about getting the job done, getting paid, and moving on to the next one. If you call their office, most likely you will catch them on their cell phone out on a job. They don’t have a website because they don’t need one. They are getting all the business they can handle from their yellow pages advertisements and the referrals from the nice old ladies they service. These operators never put any systems in place, they don’t track and measure their financial performance and they know it. While they’ll never be rich, they don’t have to answer to some branch manager at Terminix, and they can tell their friends and family that they own their own business. This is the end game for them, they realize it, and they accept it.

The Pseudo Business Men

The final group, we’ll call them the pseudo-businessmen, fool themselves into thinking they are building real businesses. You’ll find members of this group throughout the pest control industry in every country. They are lurking at pest control conferences and trade shows. Unfortunately, they make up the bulk of small businesses in just about any industry. They have employees, a fleet a vehicles, and most of their owners are very knowledgeable when it comes to pest control and extermination best practices. Where everything breaks down is that they, for whatever reason, fail to build a valuable business enterprise. They perform well tactically, but they choose not to be strategic thinkers, they never become financial managers who view their businesses as an investment.

Unlike the Mom ‘n Pop operators, however, they do not realize that they are not building value. These are the guys who build their companies up to $1M in sales and end up selling them for $300K because they focus on one-time jobs, have high employee turnover, no management or systems in place. Worse yet, these are the same guys who wait until a life-event drives them to sell their businesses, while all along they have overvalued them substantially in their minds, only to learn the bitter truth when it’s much to late to do anything about it. These are the guys who end up telling the acquirers: “I am not going to give my business away.” And for some of them, they are correct, they couldn’t give their businesses away, because they are worth less than nothing.

Irrespective of how you got into the pest control industry, whether you bought a company or founded your own firm, whether you are a Mom ‘n Pop operator or a “Pseudo Businessman” you need to ask yourself why it is you are doing what your doing. Are you building a real company or are you just being your own boss?

Risk & Value Drivers - Creating Real Wealth
To build real value in your business and create wealth for yourself, you must understand the risk and value drivers of a pest control company and relentlessly monitor and measure your success in increasing value and mitigating risk. The following are four critical metrics (in no particular order) that owners should constantly monitor:

Revenue Growth Rate

As I write this article, the pest control industry, just like every other industry, save for bankruptcy attorneys and government bureaucrats, has been hard hit by the global recession. Revenues are down across the board, but that is not what’s important here. Your business should be growing its sales as least as fast as the industry as a whole. Examine your customer retention rates, your sales organization and your marketing efforts. If you are not growing as fast (or ideally faster) as the industry average, you’ve got a sales problem and it needs to be addressed. Now.

Customers and Accounts

One of the biggest killers of value in the pest control industry is focusing on one-time work. Though it’s hard to avoid a lot of one-time work in the first year or two of the company’s existence, not focusing on contractually recurring pest control business is where pest control owners begin to falter. 

Long-term, contractually recurring pest control service is a major builder of value in a pest control company. In fact, recurring revenue is the very nature of the pest control business and what makes it so appealing to outside investors and pest control operators alike. If you aren’t selling your customers on long-term work, you are not only wasting your advertising and marketing dollars, you are increasing the risk profile of your business and killing value.

 Sure, you might make a lot more money on doing a $1,600 termite job on the day your guys go out to service the account. But the pest control operator who services the house next door on a $400 per year service contract and works hard to retain that customer for 10 years, has brought in $4,000 in revenue while you’ve only brought in $1,600. If both companies spent the same amount on sales and marketing to land these two customers, your competitor is smoking you in return on sales and marketing dollars. Additionally, he now has a customer to sell and the best you have is a termite renewal, which in my opinion doesn’t get you a whole lot nowadays.

Management & Employees

Are you building a talented and capable management team? Most small pest control operators assume that when they sell their company, they are just selling service contracts. This may be true for some of them; however, real value is realized when the owner systematically replaces himself in the company’s organization chart. As your company grows, you’ll want to build a loyal and capable management team that will manage the day-to-day operations while you spend your time dealing with longer-term strategic issues. Furthermore, if you have high employee turnover, you are most likely sabotaging your customer retention rates. Hire high quality people, pay them well, treat them right and give them appropriate incentives and opportunity for advancement. 

Pricing and Profit Margins
If you aren’t pricing for profitability you are your own worst enemy and a menace to the industry as a whole. To build a real business you need to think like a real financial manager. If you can’t get solid pricing on your services you are doing something wrong. We all know that the pest control industry is very competitive, but you should never make price a point of competition. Compete on service, compete on speed, compete on appearance, compete on everything and anything, but never on price.

Maybe your service is rubbish? Perhaps your technicians look like they live in a cardboard box? If so, fix what’s wrong and take pride in being the best, don’t compete on price and everyone in the industry will be better off. Ignore this advice and when it comes time to sell your business, I’d love to be the one to say: “I told you so.”

Seeking Answers
Many pest control companies rely on their accountants to provide strategic financial advice. This can be problematic for a lot of reasons and I have seen it take many a pest control operator down the wrong path. Most accountants are neither financial managers, nor are they valuation experts, they are reporting professionals. Their job is to take the financial information that you provide them and compile a tax return with that data. If you ask him if your gross margin is in line with the pest control industry, the extreme majority of accountants will not be able to answer that question without a serious investment of time to understand the pest control industry.

My suggestion for small to mid-size pest control companies that don’t have the resources to hire their own financial expertise would be to seek the advice of a part-time CFO with expertise in the pest control industry, or begin building a relationship with an [2] investment bank and strategy consulting firm that covers the pest control industry to help them understand valuation and guide them on the path of real wealth creation. This is an integral part of financial management and the first steps in establishing an exit plan.

Successful, and consequently wealthy pest control operators manage their businesses as investments. They understand what creates value in a pest control company and constantly monitor and manage those factors that most affect it. Many of you are at the fork in the road right now, what will you choose? Will you be content being the Mom ‘n Pop, will you not rest until you are a baron, or captain of industry, or will you fool yourself into thinking that you are creating value and real wealth and remain the pseudo businessman?

The first steps on the path to wealth in this industry are:

• Identify your personal and financial goals

• Retain qualified valuation advisors to guide you through the process

• Seek the advice of competent managerial accounting advice

Understand and quantify:

✓ Your company’s return

✓ Your company’s risk profile

✓ Your company’s valuation

✓ Your company’s return on investment

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URLs in this post:
[1] Webinars on Value Creation and Valuation in the Pest Control Industry: http://www.potomacpestcontrol.com/webinars/
[2] investment bank and strategy consulting firm that covers the pest control industry: http://www.potomacpestcontrol.com/

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