3 key attributes that drive company valuation

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Despite higher interest rates that have had an impact on valuations in other industries, the pest control space is still yielding premium returns today for well-run pest control companies.

Macro factors that continue to elevate valuations in the pest control space include:

• Competition among strategic and financial sponsors (private equity firms).
• The fragmented nature of the industry.
• Low regulatory barriers to enter the market.
• Increased pest pressure and consumer demand.
• Overall minimal cost of equipment and capital expenditures to operate a pest control business.

Outside of these factors, here are three key attributes of well-run pest control companies that improve valuations and drive value prior to an exit.

1. Sustainability

When selling a pest control business, purchasers want to understand your revenue composition and the sustainability of that revenue well into the future.

Be prepared to provide details such as:

• Which pest management and ancillary services do you offer?
• How much of your business is recurring vs. one-time?
• What is the quality of the revenue? (Do you have well-priced accounts in line with or better than market? Are you instituting routine price increases?)

The makeup of your service line is crucial when purchasers are analyzing your business, and the wrong service model could be costly when sitting across from them at the negotiation table.

For instance, if you perform one-time services, are these primarily add-ons for existing recurring accounts that will continue based on the needs of the customer — bed bugs, exclusion, termites, etc. — or is your business based on one-time customers? If you have a model that is largely dependent upon customers calling each year for service without any set program or frequency, you run the risk of losing this work if your name and brand are being absorbed into the purchaser’s operations.

By contrast, a recurring business model possessing a strong net retention will enable the purchasers to forecast the durability and reliability of your revenue well into the future. Companies with recurring revenue of 80 percent or higher with tenured customers demand the highest multiples and continually trade at premiums because this revenue is sustainable and can be maintained after the sale.

2. Scalability

Size matters when it comes to pest control companies, and the ability to scale on a consistent basis is integral when selling a business.

Once companies reach about$2 million in revenue, they’re usually considered to be a standalone branch for purchasers and require a management team to operate the business. These businesses are more desirable than a one- or-two-person operation because they have an infrastructure in place to scale the business and accelerate growth for the purchasing party.

Once companies are between $5 million and $10 million in revenue, they’re considered a platform by most strategic and financial buyers. This means their brands will continue to be independent in the marketplace and operate as their own separate organization after the sale. These companies are highly desirable because they are not just rare assets in the pest control space; they have a leadership team and a brand that can be leveraged for future growth and potential acquisition opportunities.

For established brands in markets, there is significant brand equity that purchasers find valuable to maintain and accelerate growth rates. Ideally, platform companies generating consistently high single-digit to low double-digit growth rates are trading at the highest multiples.

3. Profitability

While recurring revenue, scale and steady growth rates are the building blocks of a well-run operation, the most important factor that drives valuation is profitability.

There are two ways of looking at profitability:

1. A company’s gross profit is a product of all direct costs — chemicals, technician wages and benefits, vehicles — subtracted by the company’s revenue. Gross profit shows purchasing parties the revenue per technician, the efficiency of chemical usage and the route density. As a percentage of revenue, purchasers like to see gross profit above 55 percent, which means all direct costs should not exceed 45 percent of your total revenue.
2. Companies with a strong gross profit margin generally have a healthy earnings before interest, taxes, depreciation and amortization (EBITDA), which measures the overall profitability of the business. EBITDA is calculated by subtracting all operating costs such as advertising, office and management wages, rent and utilities, insurance, benefits and all other operating expenses from gross profit. As a percentage of revenue, buyers are looking for normalized/adjusted EBITDA margins above 25 percent when removing all one-time and non-discretionary spending, which won’t continue post-transaction.

Following these three key attributes will boost the valuation of your company for that eventual day you decide to sell and ride off into the sunset.

<p>The post 3 key attributes that drive company valuation first appeared on Pest Management Professional.</p>

from Pest Management Professional https://www.mypmp.net/2024/09/12/3-key-attributes-that-drive-company-valuation/
Sacramento CA