Buying a Pest Control Business

Introduction

• Potomac averages 50-60 transactions per year globally.
• Focus is on sell-side advisory, but often asked about buy-side of M&A.
• Key discussion: how to value and buy a pest control business.

Strategy for Acquisition

• Reasons for Buying
  • Add-on acquisition to increase density in current market.
  • Entering a new market.
• Common Problems
  • Misunderstanding value compared to big players like Rollins or Terminix.
  • Importance of conservative valuation.

Opportunistic vs. Formal M&A Program

• Opportunistic Acquisitions
  • Opportunity arises due to unforeseen events (e.g., someone retiring).
• Formal Acquisition Program
  • Intentional growth strategy involving sourcing and executing deals.

Valuation Considerations

• Initial Steps
  • Sit down with seller to understand business compatibility.
  • Assess services, service frequency, and employee fit.
• Valuation Metrics
  • Avoid focusing solely on transaction multiples.
  • Consider fair market value and investment value.
• Fair Market vs. Investment Value
  • Fair market value: worth to current shareholders.
  • Investment value: worth to the acquirer.

Financial Assessment

• Normalize P&L
  • Consider actual owner compensation.
  • Use historical financials with focus on trailing 12 months.
• Depreciation and Cash Flow
  • Depreciation as proxy for maintenance capex.
  • Focus on pre-tax earnings.

Projecting and Analyzing Returns

• Internal Rate of Return (IRR)
  • Calculate IRR over a five-year period.
  • Determine personal hurdle rate for returns.
• Synergy Considerations
  • Hard synergies: cost savings from combining operations.
  • Soft synergies: cross-sell opportunities and capability acquisitions.

Offer and Negotiation

• Control the Process
  • Anchor offers low, do not ask the seller's price first.
• Deal Structure
  • Typical deals involve 80-100% cash at closing.
  • Include contingencies based on future performance.

Due Diligence

• Diligence Steps
  • Tax returns, internal financial statements, lien searches.
  • Interviews with key employees and stakeholders.
• Legal Considerations
  • Ensure legal advice from a competent, modern attorney.

Market Considerations

• Current Market Outlook
  • 2022 not ideal for buying due to economic factors.
  • Expect better opportunities in 6-12 months.

Conclusion

• Be patient and focus on strategic fit and valuation.
• Subscribe to resources like Potomac TV and the Boardroom Buzz for further insights.

Note: This is a comprehensive guide on buying a pest control business, with strategies for evaluation, financial consideration, and dealing with the market dynamics.