The Same, Only Different

Cover Story - COVER STORY

Rand Hollon provides insight into creating maximum value while reducing risk during acquisitions of pest control companies with revenues less than $2 million.

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December 18, 2017
Laura Straub
© DNY59 | iStock.com

The purchase or sale of a pest control company can certainly cause stress to the buyer and seller prior to the closing of the deal, particularly in the areas of reducing operational and financial risk and acquiring maximum value, respectively. Most pest control company acquisitions “end with everybody living happily ever after,” said Rand Hollon, a licensed business broker for Preferred Business Brokers. But, “sometimes it isn’t that good,” continues Hollon, who spoke at PCT’s recent M&A Virtual Conference. The not-so-good acquisitions tend to involve small companies for the simple fact that there are more of them.

From both sides of the transaction, maximizing value of the acquisition while minimizing the risk associated with a new owner of the pest control company is the ultimate goal of a successful deal. Crucial to the initial steps towards acquisition is for a small business owner to take short-term and long-term steps towards making his or her business attractive to buyers. Sellers need to take a look at their large accounts, or customers representing more than 10 percent of annual revenue, to leverage for additional business growth. Seen as risky to a buyer, a big account, if lost especially after the sale, would be a large hit to revenue expectations.

Hollon says offering unconventional services, such as an annual complementary sidewalk and driveway pressure cleaning, can deplete the value of the business when such unusual services are not “generally recognized customer service package offerings” of the core pest control business. Sellers also need to be mindful of route density by choosing to service customers within a reasonable geographic area. “Windshield time is not a high-value commodity,” he explains.

Imperative to making a business attractive to buyers is for a small pest control business owner to have accurate production data. He or she must understand and be able to produce numbers to explain exactly how revenue is created and driving the business. Hollon reiterates that regardless of the size of the business, “being able to specifically communicate how your revenue is created will help prospective buyers make clear assumptions.” Accurate and timely financial information in the form of a balance sheet, P&L statements and tax returns (preferably those that are professionally prepared), is essential to the needs of a buyer planning for a successful acquisition.

The overall message for a small pest control company owner is that he or she should always “look at your business as an asset because at some point in the future, you are going to be ready to sell. And don’t you want to look your best?” asks Hollon.

THE INTANGIBLES. In analyzing small company acquisitions, Hollon evaluates what is purchased beyond tangible items such as trucks or equipment. The intangible items — goodwill, company culture and commitment culture — are often a larger part of the purchasing equation. The buyer is obtaining the customers’ goodwill to continue paying for pest control services, as well as the seller and seller’s employees to transfer that goodwill to the buyer. To have a successful integration, the buyer must learn and appreciate the newly acquired company’s culture, the very culture that created the goodwill of the customer. Otherwise, integration will be difficult, as “integration is where acquisition failure lives,” says Hollon.

“Integration is more than just transferring data,” Hollon adds. Smaller companies tend to have a “commitment culture.” Customer relationships last for years and are often generational in nature, including adult children and other relatives. Employees are also long-tenured. Employees choose to work and remain at smaller pest companies because office politics are almost non-existent when compared to larger pest businesses. As a result, employees are typically more committed to the organization. An advantage to the buyer is to recognize and appreciate this commitment culture.

“A great acquisition really brings a wonderful, transformative value to your business,” explains Hollon. Having a good level of integration competency will set a buyer on the path to a successful acquisition with long-term benefits. Acquisition success is then created with the capture and creation of value. The buyer experiences “value capture” during a company purchase that also has a successful contract structure with good valuation and financing. “Value creation” represents the ability to deliver future services successfully while developing customer goodwill, capitalizing on employee knowledge, and building future company leaders.

Value Creation + Value Capture = Acquisition Success
Without great integration, value capture might not happen.
Without great integration, value creation will not happen.

Successful acquirers buy frequently and constantly, regardless of the state of the market. Hollon says that in the successful acquirer’s view, “integration is where maximum acquisition value lives.” And, how a buyer creates a successful integration and value creation, he identifies in six important steps:

  1. Learn the business by digging deep into the financials while fully understanding the operations.
  2. Create an integration team and identify which person will be responsible for what tasks, while being mindful of the effect on the employees to ensure that everyone is committed.
  3. Identify the integration strategy to create “a compelling vision for everybody that will be involved.”
  4. Establish priorities. Identify and plan for the communication and handling of issues that will undoubtedly arise.
  5. Create supporting alliances and determine who has the influence in the acquired business. Hollon explains that “influence doesn’t always follow the organizational chart.” Determine the people who the employees “informally look to for direction.”
  6. Be gradual and deliberate while focusing on the integration.

The bottom line: Good integration management is imperative to the acquisition process and can help ensure a successful purchase for the long term. Planning for a successful integration leads to the deal’s closure.

A successful deal — for both sides of the smaller pest control company acquisition equation — relies on accurate predictions and assumptions. Every decision made during the planning phase is an attempt to forecast the future, said Hollon. Buyers must analyze and forecast how the acquired employees will fit into the organization, the length of time before an investment return is realized, or whether they’ll see a return at all.

“It’s critically important for all parties to know that at the end of the day…good decisions rely on making these right assumptions,” Hollon said. The most helpful factor in making these right assumptions is for the buyer and seller to see each other’s points of view. “Know that there’s more to a deal than getting to a closing table.”

Learn more about Preferred Business Brokers at www.preferredbusinessbrokers.com.

The author is a Cleveland-area freelancer.