Pest Control’s PE Advantage

I admit, I am in love with the pest control industry. In all my years, I have never seen a more attractive space to do business in. You can make a lot of mistakes and still do very well in this industry. But is it so good that you can do really stupid stuff and still succeed?

Merger and acquisition and “build-up” activity in the residential services space has been rampant since the COVID-19 pandemic. Much of this has been spurred by private equity and other financial sponsor-types and has included service categories across the board, including HVAC, lawn care, plumbing, roofing, home remodeling and — of course — pest control. Many business owners have benefited hugely from this capital influx. And a lot of successful outcomes have been generated as a result of this activity. But as the recent New York Times article “How Private Equity’s Vision for a Roofing Conglomerate Went Bust” illustrates, success is not inevitable.

The pest control industry is among the most appealing of the various residential services for many reasons. There are a particular few, however, that have stood out to me as those most responsible for the attention and interest being drawn from investment capital. One of those is that the space has historically demonstrated consistent performance regardless of what’s happening in the broader markets or, for that matter, the world. This is key to any investment thesis as it lessens perceived investment risk and therefore raises the perceived value of the investment. This, combined with pest control being one of the more profitable of the residential services, makes it a superstar investment proposition. To benefit from just these two attributes alone, you don’t need to be a rocket scientist and you don’t even need to have a special “mouse trap” (no pun intended). You simply need to be able to execute a plan and do so with common sense.

Now back to The New York Times piece and the examples gone wrong cited in it. I must say, to date, I have yet to see a private equity-backed platform buildup fail in the pest control industry. And I believe that’s largely a testament to just how wonderful this industry really is. But that’s not to say that I think the pest control industry is immune to failure when it comes to this type of build-and-sell aspiration. And furthermore, I would never suggest that potential sellers of pest control businesses take for granted that a successful outcome will result from such an engagement.

As with any investment and/or partnership, there’s unfortunately a lot that can go wrong. But if I had to drill down to two specific concerns I would be extra cautious of upon entering this type of deal, they would be the people (who ultimately make these businesses what they are) and the actual day-to-day execution of the business. Particularly with a service business, you absolutely must have a relatively high level of employee engagement to successfully scale the business within the type of timeframe these investors seek. To get this high engagement, it must be a core focus of the plan going in and the business carrying forward. There is no need to cut corners in a pest control business by trying to synergistically eliminate people. To the contrary, any attempt to do this will almost certainly spell catastrophe. Employees at every level need to understand organizational vision and be inspired to carry it out.

With respect to execution, because institutional investors see and operate so many businesses, they’re constantly thinking, and sometimes overthinking, about execution. A former NFL coach once responded to a question about his team’s execution by answering, “I’m in favor of it.” Well, I’ve seen some execution practices that I think ought to be executed. If you buy a high-performance business and pay a premium for it, do not fix what is not broke! Add to it and complement it, for sure. But too often you will find really good businesses that take several steps backwards due to change and overthinking that is completely counterproductive. And this puts the business in a vulnerable position.

As a business owner, how can you prevent being a victim of a build-up gone wrong? Do active due diligence before engaging in one of these transactions. Get to know the firm and the people that will own the majority of your business and that the decision-making buck will stop with. Ask them how they add value to the companies they partner with. Talk to several business owners that have already partnered with the firm in the past and really question them about their experience. Find out what actually happened after the transaction closed. The monetary wealth you’ll generate from such a transaction is important and can be life-changing. But you can likely get that from one of a number of different suitors. Being able to look back and feel good about the business you built and what it accomplished after your ownership can be equally fulfilling.

The author is president of LR Tullius, a firm that specializes in providing merger and acquisition and financial/strategic advisory services to pest control companies.