knowing-the-value-v4-2929691

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  • 1. How to value a Pest Control Firm , What factors add Value and Which ones don’t www.pcobookkeepers.com Daniel S. Gordon, CPA www.pmpwealthbuilders.com
  • 2. Overview
    • Why Value a Pest Control Business?
    • How is a Pest Control Business Valued?
    • Valuation Methods
    • Using A Hybrid Valuation
    • Maximizing Your Firm’s Value
    • Is this Value Real? Who would buy at this Valuation?
    • Putting it all Together
  • 3.
      • Provide Fair Market Value as of a specific date
      • Annual Business Check up to determine financial strengths and weaknesses internally and as compared to other companies
      • Retirement Planning
      • Disputing conclusions of IRS audits
      • Estate Planning
      • Merger / Acquisition – Selling the company
    Why Value a Pest Control Business?
  • 4. How is a Pest Control Business Valued? Look in the Trade Magazines, …Read the Articles, …Talk to your fellow PCOs A Pest Control firm’s Value is a Multiple of Annual Revenue. This one is easy!! You can sell your company for what everyone else sells theirs for And that multiple is……………….
  • 5. IT DEPENDS!!! How is a Pest Control Business Valued? How is a Pest Control Business Valued?
  • 6. How is a Pest Control Business Valued?
      • Some Companies sell for 25% of Annual Revenues.
    What would the value of your Business be? Some sell for 125% of Annual Revenues.
  • 7. Valuation Methods To determine a fair value , Let’s look at several business valuation methods (this is by no means an exhaustive list of valuation methods):
      • Adjusted Book Value
      • Capitalized Earnings
      • Discounted Cash Flow
      • Multiple of Earnings (P/E)
  • 8. Valuation Methods We need a definition here before we go any further as most of these valuation techniques use the following concept: The time period that money is received (i.e. monthly for the next 10 years) Contd… Definition: Time Value of money: A name given to the notion that the use of money costs money. A dollar today is worth more than a dollar tomorrow because of interest costs. Alternatively a dollar received sometime in the future is worth less than receiving a dollar today. In order to quantify this the following would be helpful: Time period:
  • 9. Required Rate of Return: Future Payments : Present Value : The interest rate you would require to use your money. This needs to be measured against risk free investments such as T bills considering the risk to be taken in the subject investment. The amount of money to be paid over the time period (i.e. $100 per month for 60 months) The value of the money today Valuation Methods
  • 10. Time Period: 120 months Required Rate of Return: 0% Future Payments: $100 per month Valuation Methods Time value of money Example: Contd… Present Value: $12,000 Time Period X Future Payments =
  • 11. Change the Required Rate of Return To : Valuation Methods
  • 12. One of the least controversial valuation methods for a retailer, manufacturer or distributer. It is based on the replacement value of assets and liabilities of the business Pros: Very objective when it comes to vehicle, equipment, and outstanding loans Cons : Since it takes a Balance Sheet approach it leaves a very vague value on our largest asset – our customer contract list Valuation Methods Adjusted Book Value
  • 13. Valuation Methods Assume a Firm has Adjusted Book Value Example :
  • 14. Based on the rate of return in earnings that the investor expects. For no risk investments, an investor would expect eight percent . Small businesses usually are expected to have a rate of return of 25 percent Pros: Quick, easy, good approach to use as a reality check once all due diligence is performed Cons: Very simplistic approach in terms of actually understanding the business. Assumes that earnings can be projected with precision. There is usually a conflict about what the rate of return should be Valuation Methods Capitalized Earnings or Cash flow Approach
  • 15. If your business has an expected earnings of $50,000,its value might be estimated at $200,000 Valuation Methods Capitalized Earnings or Cash flow Approach Example (50,000 / 0.25 = $200,000) Earnings would be adjusted upward for non cash charges such as depreciation and amortization
  • 16. Based on the assumption that a dollar received today is worth more than one received in the future. It discounts the business's projected earnings to adjust for real growth, inflation and risk. This method considers the time value of money Pros: This again is valuing the revenue stream and is a good reality check once Due Diligence is completed. Cons : Also a simplistic approach in terms of understanding the business. And here again there can be a dispute over cost of Capital and earnings and revenue projections. Discounted Cash Flow Valuation Methods
  • 17. Assume that our book of Business provides a net profit margin of 15% (including owners items) and is comprised of : Discounted Cash Flow Valuation Methods Example Contd…
  • 18. Question : What is the revenue multiple? About 1.1 times recurring revenue Discounted Cash Flow Example - Contd… Valuation Methods
  • 19. One of the most common methods used for valuing a business. In this methods a multiple of the cash flow of the business is used to calculate its value. This is the way Public companies are usually valued. The ratio is called Price to Earnings. You may hear that reference on CNBC or other business channels. But this is the way Wall Street values stocks. Pros: Since there are several Pest Control companies that are public, we can use them as a benchmark Cons: It is a snapshot not a look into the future. Markets heat up and cool down so price equilibrium can be a moving target Valuation Methods Multiple of Earnings (P/E)
  • 20. Valuation Methods (Yahoo reports 24.94 PE), (Yahoo reports 28.07 P/E – PCO work is a smaller % of the company), (Checkout European Financials – a little different but in line) Anyone want to guess why Private Equity Firms and large services companies have such a thirst for acquisitions in our Industry? Multiple of Earnings (P/E) Anyone know why went private? Rollins
  • 21. Using A Hybrid Valuation Using this hybrid method we will incorporate many of the valuation techniques discussed. Essentially, we will define and value all of our assets, subtract the liabilities and be left with a net value. Step1 Hard Assets Valuation Step2 Determine the Outstanding Value of any Debt attached to the Hard Assets Step3 Determine the Net Value of the Hard Assets Step4 Value the Intangibles – Other than Customer List Step5 Value the Customer List Step6 Add all the Values Together
  • 22.
    • Hard assets usually include Vehicles and Equipment.
    • Pest Control Companies usually don’t include Real Estate in the operating Company
    • What is the adjusted Bluebook Value on all your vehicles
    • What is the fair market value on all you equipment
    Using A Hybrid Valuation
      • Step 1: Hard Asset Valuation
    Example: Your Vehicle fleet fair market value is $ 200,000
  • 23.
      • Step 2: Determine the outstanding value of any debt attached to the Hard Assets
    Debt usually has to be netted against the fair market value of the hard assets. This is because the bank won’t let you sell them without paying it off Using A Hybrid Valuation Example: Debt on the vehicles equals $150,000
  • 24. Subtract the value of the liabilities (debt) from the fair market value of the hard assets to determine the net value of the assets. Using A Hybrid Valuation
      • Step 3: Determine the Net Value of the Hard Assets
    Example: Fleet Value less debt This is similar to calculating the equity in your home $ (200,000-150000) = $ 50,000
  • 25.
      • Step 4: Value the Intangibles - Other than Customer List
    Bargain Lease of Office Space (if present in your company) This would be figured using the amount of rent that would be paid at fair market value v/s what you pay for rent over the period of the lease discounted at a reasonable cost of capital rate Example: At 6% discount = $18,015 At 8% discount = $16,484 At 10% discount = $15,134 You pay $1000 per month rent. Fair Market is $1200 per month. Your lease has 120 months (10 years) left. The value placed on the lease would be $24,000 ($200 x 120 months) with a discount applied to it. Using A Hybrid Valuation Let's use $15,134
  • 26.
      • Step 5: Value the Customer List
    Let’s use the example from before: (this is where most of the value will come from) Using A Hybrid Valuation The value is $2,421,670
  • 27. Using A Hybrid Valuation
      • Step 6: Add all the Values Together
    Step 1: Vehicle fleet fair market value is $200,000 Less: Step 2 Debt on the Vehicle $150,000 -------------- Equals: Step 3 Net Value of the Hard Asset $50,000 -------------- Step 3: Net Value of the Hard Asset $50,000 Add: Step 4 Discount @ 10% $15,134 Add: Step 5 Value of Customer List $2,421,670 --------------- Equals: Step 6 All Values Together $2,486,804 ---------------
  • 28. Maximizing Your Firm’s Value Based On our discussion – the asset that contributes the most Value to our firm is the customer list. This is the machine that needs to be oiled and maintained How do we grow the value of the customer list?
    • Sell Service Contracts
        • Uniform in their Service Obligations
        • Easily Routed (efficiency)
        • Acceptable Dollars per hour (Profitable)
    • Retention
        • Keeping the customers active in your customer list.
    • Gross Margins – If we value our customer list off of cash flows, the higher the gross margins the higher the cash flow
        • Reduce Call backs – high level of call backs reduces our gross margins
  • 29. Is this Value Real? Who would buy at this Valuation? The purest analysis comes from the public filings of Rollins (Orkin) since the highest percentage of their revenue comes from pest control: Data provided by, except where noted Maximizing Your Firm’s Value
  • 30. EBITDA When Looking at the Net profit of an Orkin vs. your company we need to make adjustments for all the interest and Amortization that they take for all the past acquisitions and other charges not present in your company. So when we look at Orkin’s net profit of 7.21% we know that at our firm’s we can do much better. That’s why its probably a better comparison to look at Orkin’s EBITDA then their net. EBITDA at Orkin is at 15.7% which is in line with most of the Clients we work with after adding back owner items Maximizing Your Firm’s Value Is this Value Real? Who would buy at this Valuation?
  • 31. So rather than using a straight Price to Earnings analysis lets equalize the comparison by comparing: Our Firm’s P/E = Orkin’s Price EBIDTA So now the P/E that we spoke of before goes from 25 to about 11.8 Maximizing Your Firm’s Value Is this Value Real? Who would buy at this Valuation?
  • 32. So we know that at a 15.7% Profit margin (EBITDA) Rollins the market has priced Rollins at 1.83 times revenue. Is it realistic to think that you can sell your firm for 1.83 time revenue? Maximizing Your Firm’s Value Is this Value Real? Who would buy at this Valuation?
  • 33. Probably Not. A very Compelling reason for the large players to aggressively pursue the smaller players is the spread and value that is unlocked as a portfolio of pest control companies are assembled . IMO …… The reason for all the M&A activity in our industry relates to the spread between the purchase valuation and that of what the market will value a portfolio of pest control companies Is this Value Real? Who would buy at this Valuation? Maximizing Your Firm’s Value
  • 34. Has anyone heard of a firm called Clayton, Dubilier & Rice? Maximizing Your Firm’s Value Is this Value Real? Who would buy at this Valuation?
  • 35. You may have: They bought a little company called !! Why would a Private company want to purchase a public company and take it private? Because of the spread!!!! ServiceMaster was not being valued by the market the way the way the best in breed in our industry was valued. In short, they were having growth and profitability problems and the market penalized them for these issues Maximizing Your Firm’s Value Is this Value Real? Who would buy at this Valuation?
  • 36. From the CD&R Website: We invest in market-leading companies that are typically underperforming . Often, but not exclusively, our portfolio businesses are distribution- or services-related. Rather than pursuing specific industry segments, we concentrate on companies with broad “spread of risk” characteristics, such as large customer and supplier bases and diverse revenue streams. In all cases, we only invest where significant value can be created through operating performance improvements. Maximizing Your Firm’s Value Is this Value Real? Who would buy at this Valuation?
  • 37. So in order to create “significant value that can be created through operating performance improvements,” They are taking measures to improve performance operationally as well as making an aggressive push to purchase well run PCOs. In order for other players in the industry who seek to make acquisitions, the price of these firms are being driven up. That’s the way an auction works! Maximizing Your Firm’s Value Is this Value Real? Who would buy at this Valuation?
  • 38. What is the Point? The point is that well run profitable Pest Control Companies are fetching higher prices than ever before Maximizing Your Firm’s Value Is this Value Real? Who would buy at this Valuation?
  • 39. How Long will this last? No one knows but history repeats itself…… Anyone remember Waste Management’s entry into the market? After bidding up and purchasing several PCOs, they realized that running a PCO firm was a little different than running Trash routes and ultimately got out. Maximizing Your Firm’s Value Is this Value Real? Who would buy at this Valuation?
  • 40. Putting it all Together So let’s Summarize…..
  • 41. Putting it all Together Why Value a Pest Control Company?
    • Provide Fair Market Value as of a specific date
    • Annual Business Check up to determine financial strengths and weaknesses internally and as compared to other companies
    • Retirement Planning
    • Disputing conclusions of IRS audits
    • Estate Planning
    • Merger / Acquisition – Selling the company
  • 42. In a nutshell how do we value a Pest Control Company? As a Multiple of Profitable, Recurring Revenue Recurring Revenue Multiple Based on Profitability Business Value Putting it all Together
  • 43. In order to use any of the valuation techniques discussed, we need to have Putting it all Together
    • Organized Records,
    • Streamlined Operations and
    • Accurate Accounting Information
  • 44. PMP WEALTHBUILDERS.COM Best Business Plan for PCO’s Who want to grow their business PCOBOOKKEEPERS.COM ACCOUNTANTS For Growing Pest Control Firms P.O. Box 810 Newton, NJ 07860 Phone: (877) 682-8118 Fax: 866-273-0101 Email: info@pcobookkeepers.com Join us now to grow your business