A New Private Equity Platform Strategy in Pest Control

In a swarm of more than 20,000 U.S. pest control businesses, there are only a smattering of super-colonies — major corporate household brands that have been playing the M&A field for decades. With private equity increasingly strategizing ways to enter an attractive recurring-revenue service business with relatively low operating capital requirements, the old way of buying up a big guy to stake a flag in the market has drastically shifted.

“There are fewer businesses of size that are available for purchase,” said David LeResche, president and chief operating officer of PestCo, now one of the 15 largest pest control companies in the country.

LeResche is the former chief operating officer at Vetio Animal Health, an animal health company backed by Thompson Street Capital Partners, the St. Louis, Mo.-based private equity firm that partnered with longtime industry executive Jay Keating (Sears Termite & Pest Control, Orkin) to build a platform in a buy-and-build way that works in fragmented ecosystems like pest control where the majority of operators are owners, and only about 100 U.S. businesses post revenues of more than $7 million. Keating is CEO of PestCo.

“During the last four to five years, the pest control industry has had a magnifying glass on it,” said Barrett Conway, managing director of Cetane Associates, with a Houston, Texas, team that works on the sell-side as an adviser. “It’s an active space because there are so many companies out there.”

This is no surprise to anyone in the industry. But an emerging mergers and acquisitions strategy by private equity firms is changing the tack and opening up high-multiple opportunities for even the smallest family-owned pest control operations with sound financials, a solid customer base and proven systems in place, called platform building.

BUILDING A PLATFORM. Brent Stoehr at Unity Partners in New York City points to the industry’s multiple levers for growth as an attractive lure for private equity, along with its recession-proof nature (have rodents, will pay) and contract-based client base.

“Because of that, the price that private equity is willing to pay to enter the industry is higher than other residential services,” said Stoehr, the firm’s vice president of investments. “But a lot of the big platforms have already been acquired by private equity or strategics, so there are very few available that would be a ‘platform sale.’”

Defining a platform business is subjective and involves variables. But for the most part, it involves a scaled operation with a robust org chart and $2 million to $10 million of earnings before interest, taxes, depreciation and amortization (EBITDA), which is a measure of profitability to net income.

Conway said, in general, the revenue entry point for a platform company is closer to $10 million.

The reality is that large assets are scarce in the pest control industry. The very last company on PCT’s 2023 Top 100 List posted a $7,800,064 revenue.

“That means there are 20,000-plus companies that operate at less than $7 million, so if a platform under my definition starts at around $10 million, it’s a short list of prospects,” said Certus CEO Dave Bradford.

Enter the strategic grow-your-own approach. Private equity companies are mashing together clusters of smaller operations to create platform-sized businesses. Some firms doing this have a mind to eventually sell the newly created platform to a strategic pest control corporate buyer or another venture capital player. Others do not.

Bradford explained the private equity mindset. “Ultimately, the industries they choose to get involved with are in the value creation business,” he said. “Instead of trading stocks, they trade companies. They buy companies they believe will deliver a good return on investment, and there are different ways they can realize the value they create.”

One approach is to keep the value creation train moving and stay in for extended periods of time. Another is to grow and sell to another private equity firm, and a third is to rachet up the value and offer it to a strategic, which would be one of the top several pest control companies on PCT’s Top 100 list. Some even decide to take their minted outcome public.

At Certus, a strong, fully integrated foundation allows the investment firm to typically acquire one pest control company per month, sometimes two, building its own market platforms.

Bradford said Certus closed about 55 transactions in the initial two-and-a-half years in the pest control industry, calling it high volume and citing a target half-million to $5-million revenue threshold. The firm focuses on fully integrating its acquisitions within 90 to 120 days, continuing in a spiderweb-like fashion to expand its reach. Following that initial surge of deals, Certus took 18 months to focus on integration. Then, in September 2023, it continued on its M&A trajectory and by press time, Bradford estimates about 70 total deals closed.

But for Bradford and Certus, it’s not just about dealmaking and growing a reputable presence in a high-return service industry, albeit this certainly makes pest control appealing.

All numbers aside, “This is a people business,” Bradford said, adding that private equity firms that do not understand the service-focused, hardworking ethic of owner-operators in this industry get a bad rap for a reason.

“Really, it’s all about the people, and I had a modest upbringing, growing up in the country in Texas, down home, dealing with real people who are salt of the earth, and that’s the pest control industry,” Bradford said. “It matched my personality along with my professional training and skills, and it’s been a very comfortable industry for us to grow because of the people, who are very genuine.”

DEFINING PLATFORM. People are a draw for many reasons. Aside from work ethic and grounded values, a company’s leadership team offers private equity a bench of talent on which to start building a platform or graduate to various higher-level regional roles in an already established platform.

But first, what does platform really mean? You’ll hear several versions of this definition, yet there are commonalities. Stoehr broke it down to a company of $5 million of EBITDA or more with a leadership team in place, quality financial systems, a CRM software platform, an Enterprise Resource Planning (ERP) system and defined processes that he calls “a standard of procedures the company follows.”

“It’s a mature company that is professionalized from the team and process standpoint,” he said.

Then there’s this: “It might be a company that has the team and systems and processes but hasn’t reached the sufficient scale. However, the leader has a vision to grow and a financial partnership will enable them to achieve that,” Stoehr said.

“The super simplified version is, are you winning new customers and training new employees?” Stoehr asked. “Ultimately, the business model is about winning new customers, creating demand for services and capturing sales leads. The supply side is employees effectively serving the customers you win. If you can demonstrate consistent volume growth for customer leads and wins, and consistent growth for new employee hires with quality training and great retention, that’s the entire business.”

Conway said a company that has completed even a small-scale local acquisition shows private equity that its team is capable of facilitating an integration and optimizing synergies. “It shows you can be a platform because you’ve done [M&A] before and can do it again,” he said.

Size isn’t everything but it counts. “The reality is, the bigger you get, the more valuable you are as a multiple of your revenue, assuming you check all the other boxes,” Bradford said, noting that once a business reaches the $10-million mark, “that’s when you think about it being a potential platform vs. a branch.”

In other words, investment groups that already have a platform will entertain much smaller deals as bolt-ons or branches to grow their footprint in an already established market.

While the numbers can vary, Bradford said Certus generally looks for 85% recurring revenue, 50%-plus gross profit margin, EBITDA margins of 20% or more, 10% or more organic growth and a customer retention rate of at least 82%. Technicians should each produce about $200,000 per year.

Now, yet another variable. “With companies like ours and Thomspon Street that aggregate smaller businesses, our largest here was $4.3 million and we are creating an asset that is scarce by putting together a bunch of smaller businesses,” Bradley said.

Larger private equity firms and big strategics aren’t necessarily interested in this approach because they already have a foothold in the industry.

LeResche retraces PestCo’s acquisitions. The first in pest control was about $5 million in revenue after the group was founded in 2021. In that time, he estimated about 20 transactions. “We’re very strategic about finding a platform and building around it,” he said of presence in the Pacific Northwest, Mid-Atlantic, Midwest and Southwest (primarily Texas).

“We have larger-scale businesses in each of our four focus regions, and it’s interesting, because it’s not like we picked one business in each to be the platform. And our initial acquisition in the Mid-Atlantic wouldn’t be considered a true platform in the sense of the word.”

What this ultimately said to pest control owners: lots of opportunity. “I would expect to see private equity start with smaller companies and build platforms from a smaller starting point than they would have historically,” Stoehr said.

EVERYTHING ON THE TABLE. While there are common metrics and benchmarks private equity firms prioritize and evaluate when establishing a platform or bolting on to an existing hub, there are many ways investors specialize and cherry pick acquisitions from the thousands available across the country.

“We like to be the first institutional money into a business,” LeResche said. “We like to deal with the founders, and it helps the process by having a private equity firm like ours that is used to buying businesses from owner-operators.”

Additionally, “We put all our cards on the table: This is who we are and here is what we care about. It’s customer retention, employee retention, growth and profit,” he said.

Importantly, sellers know PestCo, their suitor, is not focused on growing a national brand name. This can be important to legacy businesses with a strong foothold in a region, state or entire territory, LeResche said.

“We look at which is the strongest brand we have in the five markets where we operate, and we are very open with owners upfront about whether this would mean an eventual name change,” LeResche said. “They appreciate that level of transparency.”

The technology piece is also huge. “Data provides answers, which reduces risk for private equity,” Stoehr said. “And if risk goes down, return goes up and the higher your exit value will be.”

Even bigger is the question investors usually answer first: What will happen to my people?

“People are the No. 1 thing we look at,” Stoehr said, citing a need for ambitious leadership with a vision, an organization chart of motivated managers and technicians that stay on board.

“To start a new platform when an owner is leaving is more challenging, but if there is a great general manager in place who is already running day-to-day operations, they can be comfortable having the No. 2 step up,” Stoehr said.

For private equity firms with already established platforms, an owner or key leaders who are exiting or retiring is less of a turn-off than it would be if the investor was looking to enter the industry for the first time without a base. “They can plug into the existing platform,” he said.

Becoming a platform company or merging into an existing platform can spell opportunity for a pest control company’s people, too. LeResche said, “We have 30 examples of people who’ve come from businesses we acquired and taken on significantly larger roles across our national company, and that is really fun for them and us.”

With this full deck of cards to shuffle into a winning hand, business owners even entertaining succession or partnering with private equity to grow should start early. Don’t wait until the year you’re planning to retire. “Get your house in order,” Conway said.

The author is a frequent PCT contributor.