This document summarizes a CFO workshop discussing key performance indicators for profitability and wealth creation in pest control businesses. It identifies gross margin, annual cash flow to ownership, recurring to non-recurring revenue ratio, and annual revenue growth as the most important KPIs. It provides examples and explanations of how to calculate and improve each metric, particularly how increasing prices can raise gross margin and decrease the breakeven point. Maintaining a high percentage of recurring revenue is emphasized as providing business predictability and stability. The importance of revenue growth for profitability, valuation, customer satisfaction, and employee retention is also covered.

1. CFO Workshop
Dan Gordon, Managing Partner
PCO Bookkeepers

2. Who We Are
● Accounting & Advisory Firm obsessed with providing
Pest Control Companies with information needed to
prosper in today’s competitive environment.
● An Exit Planning firm that has closed dozens of
transactions for several hundred million dollars
● Our clients make up over $650 million in Annual
Revenue
● Our Clients span 47 States
● We specialize in Pest Control & Lawn Care Business
Accounting

3. What 4 Key Performance Indicators (KPI)
are the most important in determining
Profitability and Wealth Creation?
● Gross Margin
● Annual Cash flow to Ownership
● Recurring to Non-Recurring Revenue
● Annual Revenue Growth

4. Gross Margin
Revenue
Direct
Cost
Gross
Profit (GP)
Gross
Margin
Gross
Profit (GP)
Revenue

5. Gross Margin
● Business is a Manufacturing Process
● In the Service Industry we manufacture
Hours of Service
● Are those Hours of Service Profitable?

6. Unit Gross Margin
Example: Company ABC manufactures and sells
dining chairs at a price of $800 each. Their Direct
costs or Cost of Goods Sold (COGS) expenses include:
● $40 in wood per chair
● $8 in fabric per chair
● $2 per chair for wood stain, screws, and
other small materials
● $200 per chair in hourly labor
● $16 to ship each chair

7. EXAMPLE CONTINUED:
Unit Gross Margin
For each chair:
● The total COGS is $266 per chair
● Gross Profit $534= $800- $266
● Gross Margin = 66.7%

8. Gross Profit in a Pest or
Lawn Business
The difference between the price charged per unit (Hour
of Service) and the variable costs.
● We sell Our Service at $100 per hour
● If rent, utilities and all other fixed costs are $9,000 and we use a $45.00
gross profit per hr (Direct Costs are $55 per hr.) than our breakeven point is
200 hours of service ($9000/ $45) at a $100 per hour selling price.
● After 200 hours of service we will start making a profit of $45 per hour.
You see the gross profit contributes to paying the fixed costs.
● Once the fixed costs are paid, the gross profit contributes to bottom line
profit. This is the reason some accountants call gross profit the
contribution margin.
EXAMPLE:

9. What Happens If We Increase Our Price per hour?
Our Gross Margins expand thereby shrinking our
Break Even Point.
Gross Profit in Pest
Management
Using the example on the last slide:
● At a $100 selling price per hour and a $55 Direct Cost, Gross profit $45
● Let’s raise the selling price per hour to $110, a 10% increase
● Our Gross Margin increases to $55 per hr.
● Our Breakeven is now 163.6 hrs. to break even ($9000 / $55)

10. Action Point
Consider Raising Prices to
Decrease Breakeven Point.
This will Increase Annual Cash
flow to Owner

11. Steps to Increasing Prices
WHAT Prices need to be Increased?
● Anything less than our standard hourly rate
WHEN to Increase Prices?
● Usually the anniversary date of the contract
HOW do you determine HOW MUCH?
● The difference between the standard hourly rate
and what is currently charged
Pricing should be analyzed at least annually to consider a revision.
And, this will Increase Annual Cash flow to Owner

12. Annual Cash flow to
Ownership
Business is an Investment
● Owner Excess Wages
● Travel & Entertainment
● Certain Administrative Costs
● Other Owner Items
How do we Measure it the return?
Earnings Before Interest Taxes Depreciation &
Amortization (EBITDA); plus, add-backs:
● Value of the investment
● Return on that investment

13. Value of the Investment &
Return on the Investment (ROI)
Let’s say you have an investment that yields $50,000 per year.
If you want to earn 5% on your money that investment would be
$1,000,000.
Let’s say you have an investment that yields $50,000 per year.
If you want to earn 10% on your money that investment is only
worth $500,000.

14. Cost of Capital
Why is this Important?
Let’s say I am looking to buy your company and my bank tells me,
I can borrow money at 5%.
The entire $50k that your company yields would pay the interest at a $1
million purchase price, but what about some return to me for my risk of
putting the deal together and operating the company?
Let’s say I am willing to accept 5% for my efforts plus 5% for the bank
(10% Required Cost of Capital).
This would make the company worth $500K or 10X free cash flow at a
10% bottom line margin or a 1x revenue multiple

15. What Does It Mean?
Market Interest Rates affect Firm Value
● It’s why the stock Market is high
● It’s why Real Estate values are high
● It’s why the price of other Alternative assets are high
What happens if Interest Rates Rise?
Valuations fall

16. Action Point
Best in Class Pest Management
companies drop 20% to ownership
or better

17. Recurring to Non-Recurring
Revenue
Predictability - Businesses operating on a subscription-based model rarely miss their
monthly forecasts because their financial forecast models are much more accurate.
Instead of starting from zero, a company begins with a base to grow upon at the
beginning of each period.
Company owners and potential buyers are rarely surprised by major fluctuations in
business results, and the predictability of monthly subscription comes with a range
of downstream benefits.
● Easy Budgeting
● A path to Growth
● Higher valuation of Business

18. Recurring to Non-Recurring
Revenue
Scalability - Since they produce predictable cash flow to invest in business
growth, recurring revenue model businesses are easier to scale.
With the deep data insights provided by a subscription model, companies can
understand their cash flow and effectively invest in business growth with
minimal risk.
When a service has reached standardized quality and subscription values, you
can be sure that you will minimize churn and maximize recurring revenue
from existing, satisfied customers.

19. Recurring to Non-Recurring
Revenue
Expense Management - With such predictability regarding
their revenue, companies are able to manage their expenses
more accurately.
The challenge of lumpy revenue models is that you can’t
know how well you did until the quarter or the year is over.
With recurring revenue, it is easier to increase or reduce
expenses to match revenues.

20. Recurring to Non-Recurring
Revenue
Visibility- Unexpected changes in business won’t completely
blindside you if you know where you start each month and
where you can expect to end up.
Thanks to your recurring revenue model, you can make
business decisions a year in advance. If unexpected changes
occur, there will be plenty of warning and time to adjust.

21. Recurring to Non-Recurring
Revenue
Durability- With monthly recurring revenues,
you never start a month with zero.
Thanks to accurate forecasting and in-depth
insights, you can use the collected
information to reduce risk when making
important decisions regarding taking on new
business or reducing churn rates

22. Action Point
Every business should have recurring
revenue woven into its core.
If you’re not thinking along these lines,
you’re putting the future of your
business in jeopardy

23. Recurring Revenue-
A Very Powerful Example

24. Just How Powerful is
Recurring Revenue?
Example 1 & 2 line up Perfectly!
Right?
They Sure do when all is Good.

25. Just How Powerful is Recurring
Revenue?
What happens when we get a major jolt to the
economy?
● A Slow Down
● A Financial System Meltdown
● A Major Geopolitical event
● Here’s one that was on no one’s radar 8
months ago, the impossible, a pandemic.
One-time job revenue will dry up
as well as some Recurring Revenue.

26. Just How Powerful is Recurring
Revenue?
ASSUMPTIONS:
● Pandemic happens, government shuts down the economy,
thank goodness our industries deemed essential!
● Citizens get scared not making any purchasing decisions until there
is some clarity in the economy.
a. Sounds far-fetched. right?
b. So does 2 airplanes taking down the twin towers in NY and another
damaging the Pentagon
But: Stuff happens!
As a Result: Assume: 80% of One-time work dries
up Assume: we get
10% skips on recurring

27. Just How Powerful is Recurring
Revenue?

28. Just How Powerful is Recurring
Revenue?
● Example 3 – Monthly loss of $5,000 – hurts but not the
end of the world
● Example 4 – Monthly Loss of $31,250 - that kind of loss
could put us out of business!
Example 4 is a real client of ours!

29. Four Reasons Why Revenue
Growth is Important
● Profitability
● Valuation
● Customers
● Employees

30. Profitability
The more you grow revenue the more likely you are to
grow profits.
If you achieve higher levels of revenue and manage
costs so they rise at a lower rate, then you maximize
profits.
By driving revenues higher you improve the profitability
of your business.
Revenue growth becomes the engine for investing,
acquiring (e.g. talent, new capabilities, additional
products, other companies), expanding, and attaining
even more growth and profit in your business.

31. Valuation
The valuation of your company becomes a currency to
enable strategic decision making in your business.
The valuation that others assign to your business
determines your ability and flexibility to make important
transactional decisions about your business. If you want to:
● Secure investment funding
● Sell your business
● Secure a bank loan

32. Valuation
The rate of revenue growth is also important. The
trajectory of your revenue growth reflects the future
strength of your business.
An accelerating rate of revenue growth is viewed as a
positive indicator for improving trends and therefore,
value of your business.
Revenue growth and in particular, significant rates of
growth are important elements in establishing a
valuation for your business.

33. Customers
In an increasingly customer-centric business climate, investing in and
strengthening your customer engagement capabilities must be a priority for
your business.
● Growing revenues in your business is a testament to your effectiveness
in delivering value to customers.
a. Revenue growth is a key metric of your success in satisfying
customers.
b. They buy because they expect to receive value from what you
provide.
c. When they continue to buy, they are affirming that you are
delivering to them a solution that they need.

34. Employees
Growing your revenue is important to workforce success. When your company is
growing, employee satisfaction is also likely to grow.
● Employees expect to benefit from a business that is growing. Improved wages,
career path opportunities, management performance bonuses
● Growing revenues drives more profits that enable investment in your
workforce.
● Knowing that their company is succeeding, demonstrated by growth in
revenue, is evidence to your employees that their work is impactful. They are
contributing to its success.
● Attaining growth in revenues in your business enables you to keep the best
workers, drives their motivation to excel at their work, and creates an
atmosphere of success that everyone wants to be part of and contribute to.

35. Other Resources
The 4 Most Important KPIs
● Gross Margin
● Annual Cashflow to Ownership
● Recurring to Non-Recurring Revenue
● Annual Revenue Growth

36. PCO M&A Specialists
& William Blair Growth Index
September Results. The total U.S. pest control index increased 6.4% year-over-year
in September 2020. On a sequential basis, the index decreased 1.4% from August
2020,which is slightly stronger than normal seasonal trends. This index includes
recurring and nonrecurring revenue for residential pest, commercial pest, and
termite.
● The Residential Pest Index increased 10.6% year-over-year
● The Commercial Pest Index increased 2.6% year-over-year
● The Wood Destroying (Termite) Index increased 8.8% year-over-year
To read the entire report(s) go to: www.sellmypcobusiness.com

37. Other Resources
And while there are many out their that entertain us with their war stories, its Data
Driven analytics that will get you maximum value for your company.
Remember Data Driven Analytics

38. www.pcobookkeepers.com
www.sellmypcobusiness.com