This document discusses trends in the pest control industry, including consolidation through acquisitions. The industry has transformed over the past 10-15 years from a fragmented $5.6 billion market to a $14 billion market with solid projected growth. Private equity firms have invested heavily in acquiring pest control companies, drawn by the recurring revenue business model. Marketing has become more sophisticated through digital strategies. Some fast-growing companies use a direct sales model pioneered by other industries. Business owners face choices about whether to sell their own companies as valuations are high or continue growing their businesses organically.

1. Growing Our Business in
Interesting Times:
Buy, Sell, or Hold
Daniel S. Gordon, CPA
PCO Bookkeepers

2. PCO Bookkeepers: The Pest Control
Industry’s Most Trusted Accountants
● 30+ years in the pest control industry
● Previous pest control business owner
● Serving pest control operators for over 15 years
● With over 300 PCO clients spanning 43 states
● Our clients make up well over $600million in annual revenue
● Bookkeeping/Accounting/CFO Services/Tax Prep & Planning

3. PCO M&A Specialists: M&A Brokerage
Services
● Pest control operator market focus
● Pest control business systems analysis
● Tax consulting & minimization strategies
● Accurate business model valuations
● Intimate knowledge of business law focusing on merger &
acquisition transactions
● Due diligence
Daniel S. Gordon,
CPA
John P. Corrigan,
JD, CPA, MBA

4. Are We Really
SHATTERED?

5. A Comparison of the 2002
& 2018 PCT Top 100
(Partial List)
2002 PCT Top 100 2018 PCT Top 100

6. Our Changing
Industry...
● Over the past 10 to 15 years, we have seen our
industry undergo a dramatic transformation,
fueled by rapid growth and recognition by the
“smart money” people on Wall Street that a
recurring revenue model provides an ample
ROI in a low risk and stable industry
● What used to be a $5.6 billion industry in 2002
is now approximately $14.0 billion with solid
growth projected by market analysts for the
decade to come.

7. A lot has happened
in our industry since
Y2K...The 90s-
Once upon a time...
There was an Internet bubble, and kaboom! It burst
and all the smart people had to look for businesses
that made sense, were sustainable, scalable,
profitable and had enterprise value…
So, what did they do?

8. They Invested in
Real Estate
● Low interest rates
● Easy access to money
● CPA letters

9. Once upon
a time...
There was a real estate bubble, and kaboom! It
burst and all the smart people had to look for
businesses that made sense, were sustainable,
scalable, profitable and had enterprise value…
But, before they could flip to the next big thing,
they encountered...

10. Recession, What
Recession?
Am I a psychic?
● Did I make a bold prediction that came true?
● I’d like to think so! But it’s really about this
amazing country we live in!
● While we have many political issues, few can argue
about the economy and the business-friendly
climate we live in
● In addition, the bedbug epidemic started right
when the world was in economic meltdown

11. All the smart people had to look for
businesses that made sense, were
sustainable, scalable, profitable and
had enterprise value.
Enter-
Backto My Story...

12. You’ve got a recipe for industry
growth and consolidation
Cheap
Money
PE firms with
large pools of
money
Service
businesses with
high gross
margins
Service firms that
are highly
scalable

13. Consolidation
Our industry is in a classic consolidation phase. We
are (were) a fragmented industry represented by
mostly mom and pop businesses.
● Fragmented industries make ideal targets for
companies looking to enter and potentially
dominate a market.
● The nature of fragmented industries means they
often provide fewer barriers to entry than more
consolidated industries.
● It’s much more difficult to roll up industries where
tremendous domain authority knowledge is
required as well as business models that are not
simply duplicatable.

14. “Overcoming fragmentation can be a very
significant strategic opportunity. The payoff
to consolidating a fragmented industry can
be high because the costs of entry into it are
by definition low, and there tend to be small
and relatively weak competitors who offer
little threat of retaliation”
- Michael Porter, Harvard Business School

15. Consolidation: How Simple
Marketing Used to Be!
Yellow
Pages
Direct Mail
couponing
Community
Involvement

16. It “Ain’t” so Simple Now!
● Internet
● SEO
● PPC
● Email Marketing
● Reputation/Review Management

17. Enter the Business
Disruptors -
Marketing, the Weapon of the Successful
● The larger and tech savvy players have the
wherewithal to understand and master digital media
and those who do master it are making more money
than ever before
● Those players who don’t embrace the technology or
master it are in harm’s way of the industry members
who use it as a weapon to dominate their markets
● “Kill or be killed” or just sell it to the larger players
who are willing to make the financial investment to
put the digital marketing machine in place.

18. Direct Selling, A.K.A Door 2 Door
Enter the Business
Disruptors -
Marketing, the Weapon of the Successful
● An extremely powerful way to build a service
firm
● Origins in the 1990s, several marketing firms
headquartered in Utah
● Assembling outsourced sales teams
● Apex Marketing/Eclipse Marketing

19. The Story of Vivint-
Origins of Pest Control

20. Business Disruptors
While these Utah-based companies were
marketing companies that sold their
expertise in selling during the 90s.
● Many of the “young kids” who sold during those
times are now adults in their 30s and 40s and have
started their own pest management firms and are
the fastest growing group on the PCT 100
● Firms used to spend 20 or 30 years building 10
million or more of annualized revenue.
● Many firms are now building 10 million or more of
annualized revenue in just a few short years

21. Investors acquired Vivint
for in excess of $2 billion!
In case you missed the prior slide...

22. Is Todd still
relevant to pest
control?
Absolutely
Success stories are always used to
build sales teams.
A sense of possibility: look at the likes of:
Amway
Nu Skin
Mary Kay
And Others

23. Business
Disruptors
Just as with digital marketing, D2D is
not for the faint of heart.
● It takes the proper skill set, contacts and lots of
capital to build one of these forms to a point of
breakeven or profitability
● What we are seeing now is that many of our
D2D clients are backed by boutique PE firms

24. PCO Bookkeepers
Experience
● Our ideal client is the 1-20 million in
revenue client
● We don’t usually deal with startups for
sub 1 million-dollar companies
However, whenever we get a call from a D2D
startup, we always take them seriously and this
strategy has worked well for us watching several
of these firms grow up in a hurry

25. Insider vs Outsider-
What does consolidation
look like?
● The last significant roll up was led by Waste
Management along with other Outsiders
looking to expand their horizontal integration
strategy
● As these firms realized that pest control was
not consistent with their core offerings, they
divested
● Terminix was the big winner in a couple of
these deals. Both Waste Management and
Sears Pest divisions were purchased by
Terminix.

26. What Does Consolidation
Look Like?
Insiders vs Outsiders -

27. Public Firms
● Orkin
● Terminix (Servicemaster)
● Rentokil
● Ecolab
Firms Owned by PE
● Anticimex
● Environmental Pest Services
Private Firms
● Massey
● Arrow
● Cooks

28. So, What’s a Business
Owner to Do?
If you want to sell, the valuations have never been better.
Do the analysis-
● How old are you?
● What is your financial plan?
● Do you like the business and enjoy showing up for
work every day?
● What will you do after the sale?
○ Retire? Travel? Philanthropy?
○ Take a position with the acquirer? For how long?
○ Start a new career unrelated to the PCO
business?
● What are your lifestyle needs?
● What would you do with sales proceeds?
● What are the risks of keeping your business longer
vs. selling it now?
● Do you have family members who are likely
succession candidates?

29. What if you don’t want to
sell now (or ever)?

30. So fear not! You
may not miss the
gravy train at all!
● While valuation multiples may fall in the
future, remember these valuations are based
on the size of your company and the quality
of your accounts and earnings.
● Therefore, if you double, triple, or quadruple
in size over the next 10 years, even at a lower
multiple, you’ll most likely end up with a lot
more money than selling a smaller company
at a higher multiple today.

31. So, for the many who are not
interested in selling today,
what do we do?

32. Growth/Sustainability
Current
Income
Long-Term
Wealth
As business owners, we understand that to be
successful, we play in two circles

33. Growth/
Sustainability-
How do we maximize that value of
our company?
(The Wealth Circle)
Quality Revenue
(Recurring Revenue)
Profitability

34. Remember, the pest business is a
simple model (not an easy model,
but a simple model).
Remember
Identify a problem
Sell a solution
Set up a recurring service to ensure
the problem is solver over time
Cluster these recurring services on
a route
Rinse, Lather, repeat until you create
lots of routes and you join the exclusive
club called the PCT 100

35. Let’s look at how
we grow -
Several years ago, our industry made some
important changes.
Lessons from the recent past
Residential Services
● Years ago, general pest in the residential market
was done monthly
● As time passed, it has gone to every other
month, quarterly, and three times per year
service.
● Clearly this has been a game changer as our
dollars per hour per stops have increased
significantly

36. Commercial Services:
● While the commercial arena is alive and well, we are seeing
tremendous price sensitivity
● Whereas pest control budgets of large companies used to be a
petty expense compared to other facilities maintenance and
management outlays, companies are now looking at how every
penny is spent
● Many clients report that in order to keep certain commercial
customers they’ve had to adjust treatment schedules and prices
● Higher-end commercial customers are not only demanding
lower prices but they are also demanding computer generated
reports on pest activity requiring PCOs to invest heavily in
handheld technology.
● We see companies doing quite a bit of analysis with respect to
the cost benefit of employing technology. In some cases, it
seems that even when the analysis says that there is no savings
in deploying technology, PCOs are doing it anyway just to keep
pace with their competition
Lessons from the Recent Past

37. Getting What’s Ours:
We’ve also seen many clients address customer skips
and accounts receivable issues by automatically
charging customer credit cards or ACHs at regular
intervals.
While not all customers participate, we see the
benefits of implementing these types of payment
programs through reduced accounts receivable
balances and early warning signals as to clients who
may be having financial issues.
Let’s look at how
we grow -
Lessons from the recent past

38. Making Service Completions Easier:
Let’s look at how
we grow -
Lessons from the recent past
● Years ago, most residential stops were
scheduled and routed into stringent routing
grids.
● More and more we are seeing PCOs providing
service either on an “outside only” plan or
keeping service time flexible to the PCO thereby
making daily routing more efficient.

39. How do we
continue to grow?
What percentage of revenue should we spend
on marketing/sales?
Marketing Math:
Lifetime Value of Customer=
Annual Gross Revenue x Gross Margin x Average Life
of Customer
Marketing/Sales/Operations

40. Marketing/Sales
Example
● Annual Gross Revenue= $500
● Gross Margin= 50%
● Average Life= 5 years
● Lifetime value= $500 x 50% x 5 Answer: $1,250
(ignoring time value of money for the real financial junkies
in class with us today)
What would you pay for this customer?
It’sup to you but, would $125 be unreasonable?
What is the % of revenue?

41. Operations -
RouteEfficiency Formula/MorePowerful Than
PricingResidential Services:
Total Technician Hours Spent at All Stopes During
the Time Period
________________________________________________________
Total Technician Hours Clocked in (Paid Hours)
During the Time Period
...And expressed as a decimal

42. Using the New
Tax Law
The most sweeping tax reform act since the 1986
overhaul put forth by President Reagan has been signed
into law. So, what does it mean for you?
● C-Corporation rate lowered from a maximum of
21%.
● In most cases, the lowering of the corporate rate
won’t help small businesses and is why most
small businesses should not be organized as a C-
Corporation
The solutions is for small businesses to be organized as
a “Pass Through.”

43. Using the New Tax Law-
Passing Through Entities
● Currently “Pass Through” entities (Sole
Proprietorships, Partnerships, LLCs and S- Corps)
taxation is based on individual tax rate brackets.
● Under the new law “Pass Throughs” are still taxed at
the individual level. However, there is a deduction
allowed for 20% of pass thru income.
● The pass-through exclusion is available for PCOs, Lawn
Care operators, Manufacturers, distributors, real
estate firms among others.
● But not available for professional firms such as lawyers
and accountants at certain income levels (Go figure!
Congress made up of mostly lawyers limits the
deduction on professional service firms).

44. Bonus depreciation:
The new law extends and modifies
bonus depreciation, allowing businesses
to immediately deduct 100% of the cost
of eligible property in the year it is place
in services. The new law also removes
the rule that made bonus depreciation
available only for new property and
therefore used equipment now qualifies.
Sec. 179 expensing:
The new law has increased the maximum
amount a taxpayer may expense under Sec.
179 to $1 million & increased the phaseout
threshold to $2.5 million. The new law has
also expanded the definition of Sec. 179
property to include any of the following
improvements to nonresidential real
property: roofs, heating, ventilation, and air
conditioning property, fire protection and
alarm systems; and security systems.
Estate Tax:
Under old laws, estates become taxable
at the $5.6 million level ($11.2 million
for husband and wife). The new law
doubles those amounts. This could be a
very large tax savings to those family
businesses who are passing ownership
to the next generation or selling their
business and passing the proceeds on.

45. Using the New Tax Law-
What Every Pest Control Operator Must Know

46. Using Accelerated
Depreciation to Fund
Your Growth
Question: Is purchasing equipment and taking
an accelerated deduction at the end of a
profitable year a good idea versus depreciating
that purchase over 5 to 7 years?
Absolutely! When you have a profit at year end,
purchasing assets is an excellent way to have the
government fund a significant part of your growth
(thru reduced taxes).
Don’t let anyone tell you otherwise.

47. Using Accelerated
Depreciation to
Fund Your Growth
Effectively purchasing assets in a
profitable year increases short term
profits as well as the value of your Pest
Management firm.
Example
Assume we have profit of $100,000 and our
effective federal and state tax rate is 35%
Assume we can purchase a piece of
equipment for $100,000.
Solution 1:
Do not purchase equipment. Pay $35,000 in
taxes and leave the after-tax profit of
$65,000 in the company for future
investment or distribute it to ownership.

48. Solution 2:
Purchase the equipment financing 100% of it
using a capital lease and take the full
$100,000 deduction using the 179 deductions
or Bonus Depreciation.
Using Accelerated
Depreciation to
Fund Your Growth
In this manner not only does the business
have the $65,000 for future investment or
owner distribution but they have an
additional $35,000 to put to work in their
business because of reducing federal taxes
down to zero.
Now that we have an additional $35,000 to
invest in our business let’s put it toward
marketing and make the following
assumptions…

49. Example -
The cost per new pest lead is $50 and we have a
closing rate of 50% making our cost per sale
$100.00.
Our average Quarterly Service contract is $500
(annual).
We can spend our tax savings of $35,000 on
marketing using assumptions in (1) and (2) above.
Using Accelerated
Depreciation to
Fund Your Growth
In this manner we will increase our annual
number of Quarterly contracts by 350 ($35,000
/ $100 cost per sale) adding $175,000 of annual
recurring revenue to the long-term value of our
business which if valued at 1.75 (assumed price)
the ROI is 875%.
$175,000 x 1.75 = $306,250
306,250 / $35,000 investment = 8.75

50. Using Accelerated
Depreciation to Fund
Your Growth
In addition to increasing the value of our company,
we’ve also added additional annual net income
from these newly acquired customers for as long as
we have them on our books.
Use the money that would have otherwise been
given to the government by way of taxes to fund
these increases as well as purchase the assets
needed to service our newly found increase in
business.
By purchasing assets
in a year of
profitability we can:
Increase Revenue
Increase Net Income
Increase the value of
our company

51. Using the New Tax
Law-
What Every Pest Control OperatorMust Know
Currently the highest federal tax rate is 37%. Add to that the top
state rate (in most states) which can be 10% or more and the top
combined rate exceeds 45%.
Any serious discussion about company finances must consider
the tax effect of various decisions.
The government will either be your partner in profits or not, you
need to be savvy enough to understand how to fund your
business with tax deductions and credits.
The savvy business owner will use sound tax strategy to help fund
business growth and shield income from taxes. YOU NEEDA
GREATACCOUNTANT TO WORKTHE STRATEGY!
The help that the government gives us using accelerated write-
offs is crucial for efficiently growing your business

52. Lessons Learned
from LIVING IN
THESE
INTERESTING
TIMES
Our industry is going through a
transformation led by consolidation. Don’t be
scared, embrace it! Understand that this
consolidation gives you choices
It may be time to exit or it may be time to
Stick around and grow
When growing, embrace the lessons of the
past as well as the best marketing and
operational strategies that will result rapid
and sustained growth
For Business owners looking to grow there
has never been a friendlier tax environment.
Use the tax laws to help finance the growth
Live the Dream!

53. Questions?