Dan Gordon on $2 Billion in Pest Control Deals and the Headline Numbers That Mislead Sellers

00:00 Dan Leibrandt

Hey everyone and welcome back to Pest Control Legends. I'm your host, Dan Leibrandt, and today I'm with Dan Gordon. Dan is a CPA and the founder of PCO Bookkeepers and M&A Specialists, which has done over $2 billion in M&A transactions and has over 400 accounting clients. He also co-hosts the PMP Industry Insiders podcast and is the author of the new book From CEO to Exit. Today we're going to get into what a pest control company is really worth. The secret to bookkeeping that actually makes you money and how to set your pest control company up for the ultimate payday when you sell. Now without further ado, Dan, welcome to the show.

00:41 Dan Gordon

Hey, thanks for having me. Appreciate it.

00:43 Dan Leibrandt

Of course, Dan. Dan, it was so great hanging out with you at PestWorld. We were doing, I think it was putts and pints where we were mini golfing together and I kept hitting into the sand. So that was that was fun hanging out. We really appreciate you having us there. Dan, I want to jump into your background. You are one of the legends in the industry. You've been in it longer than most people. Tell us how you initially got into first accounting and pest control.

01:14 Dan Gordon

Sure. So I went to Northeastern University in Boston and was an accounting major. That's what I went for, accounting/slash management boat. Double major. And you know, so I once I graduated, back then you had to have three years of experience working under a CPA to become a CPA. And so I went to work for a very large accounting firm to you know, actually one of the predecessors to a company called Deloitte, right? And worked as an auditor, as a tax consultant, and as a transactional guy. We were doing roll-ups back then. And at the same time, one of my friends from high school decided not to go to college and he went to work for a pest control company. Really bright guy, and within six months he realized he could do it himself, and so that's what he did. He started a pest control company. So remember I'm going to school for four years, then I got my three-year internship that I have to do. So it's like seven years. So he's into this business for probably five or six years. And he comes to me and he says, I am the money is it is going out the back door as fast as it's coming in the front door. And could you help? So yeah, I went out to see him and I was floored. He was making a lot more money than I ever was. And he was having a good time, although, you know, he was confused. He was just growing way too quickly. And he asked if I could help. And so I told him I could. And began to help. And not too long after that, we got along really well. He asked me to become his partner and to leave the accounting firm. And I said, well, I've got to finish my internship. My three years and I did. And then I came to work with him and we became partners. And then he had some life issues. He went through a divorce and whatnot, and he decided that why don't I sell you the company? So I said, sure. So I buy the company and here I am. Now I'm a CPA who owns a pest control company and don't know a lot about the operations of killing bugs and whatnot, but I understand numbers, right? And so here I go. I own this company and we start to grow the company and grew it pretty significantly and thought maybe it was time to leave, you know, that was a cool venture and so I started looking around and wanted to sell the company. And one of the guys who wanted to buy it was a friend of mine from New Jersey Pest Management Association, a guy named Ed Bradbury. He owned a company called Viking, which is now an Anticimex company. But he asked me to sell him the company and be his CFO. And I thought that was kind of cool. And so we did that and the vision was that we were going to grow a pif a PCT top 50 company. And we did that within like two years. And so we grew this company and but I decided, you know, I'm an entrepreneur at heart so I went to into accounting. But it was right about that time that all of these computer programs were coming online. So you were doing things in the cloud remotely. And what I realized is most accountants would be the local guy in town. He'd do the restaurants and the bowling alleys and whatnot. But what I realized is kind of like what you did is that a niche and pest control was my niche. I had all of these contacts. I knew people from the state associations, from national, et cetera, et cetera. And so I started you know, PCO bookkeepers. And one of the first clients that I had was actually in Hawaii and I operated from New Jersey. So that showed that this whole cloud accounting thing could work. It was right around the time that PestPac was going to the cloud with their dot net version and of the others followed. You know, QuickBooks had a hostable version before QuickBooks Online. So we were able to do this and that's what we did. Around 2012, one of my clients called me up and he said, Hey listen, I you're not our accountant anymore and I said why what do we do? And he said well I sold the company and I was really taken back because as an accountant I'm supposed to be your trusted advisor and I asked them about it and he said, Well, they made me sign a non a nondisclosure and I couldn't talk to you about it.

05:47 Dan Gordon

And I said, Well, now that it's over, do you mind if I read the contract and the asset purchase agreement? Which I did, and I realized it was a terrible deal. And the reason I realized it was a terrible deal is because when I was at Deloitte, we were doing roll ups of a very similar industry. It was the cable industry. They were all mom and pops, and then there was this big company called Century Communications that w Cox Communications and all of these. But it was very similar, you know. Had a couple of big companies rolling up these mom and pop cable companies. So I worked on those. So what I realized is, my gosh, this is gonna happen to the pest control industry. And so I started to represent companies and since then two thousand thirteen or two thousand fourteen was our first transaction. We've done over a hundred transactions since then for some of the highest dollars in the industry. I mean we've we've made a lot of people a lot of money and it's been a lot of fun. Yeah.

06:42 Dan Leibrandt

Yeah. Yeah. That's incredible. I want to talk more on that, but maybe not that specific deal, but you mentioned that it was a terrible deal. And for someone like me who isn't very financially savvy, I'm more of a marketing person. What makes a deal a terrible deal? Like how do you know or how how can owners know that maybe they're they're getting the bad end of a deal?

07:08 Dan Gordon

So there's several aspects, right? One of the things that we see, you go to the associations and they say, Yeah, this guy sold for two times, three times, whatever. Those are headline numbers, right? But it's really not how a business is valued. Also, there are other things that come out of it. Maybe you have family members, or maybe you want a job afterwards, you're just taking some chips off the table. Or not that I'm a lawyer, but I've looked at enough of these contracts, maybe you need some protection because just because because you sell a company for that headline number, you may that you may make some representations and warranties that may be to the advantage of the buyer and not to the seller. So we're able to look at some of these things, we're able to, you know, non-competes, maybe you're everybody's gonna sign a non-compete, but for what territory and what for for what services can we carve some things out? We've had clients who actually made you know they manufactured bait stations. Well had we let them go and sell their non-compete would have essentially put them out of business in that manufacturing process which has nothing to do with the competing of the buyers so we were able to carve that out. So there's a lot of different things. One of the things that we see is sometimes people come to us and say, Well, why do I need somebody like you to represent me? And so we kind of go through some of these things. What is your objective? You know, maybe you know want to retire and you need a certain amount of money in the bank and or a certain amount of income every year because you're retiring. And so if I say like, okay, maybe that number is $100,000 a year. Right? So that means that I need two million dollars in the bank invested at 5%. Right? Maybe your company so remember that two million dollars would be after tax. So let's say it's you know we sell for three million. Let's say the your company's only worth two million dollars, there's no way but you know, it's a great valuation, but it just might not be enough. So we go through all of the calculations and the gyrations that where we figure out, well, what is it that you need rather than just saying, man, everybody's selling for lots of money, it's a strategy. It's not you know, it's not a one-off transaction. It's a it's a it's a it's a pathway to exit. And I always say to people that exit strategy is just great business. You go in starting.

09:43 Dan Gordon

With the end in mind. Whether you ever want to exit, that's a different story. But if you build the kind of company that's building value that somebody else would want to buy, obviously you have a good company and you're going to make a good living from it.

09:56 Dan Leibrandt

Hmm. Now, some owners that I talk to, maybe I don't know, they're around a million, up to five million, and they're thinking about buying a company as a means to grow and grow faster. But many of the companies that I see growing the fastest, it's either door to door or M&A. Would you think that that is a smart way to grow fast?

10:22 Dan Gordon

If you find the right company, absolutely, but remember you're up against all of these private equity firms, you're up against Rollins and Rentokil, right? And those guys are probably gonna offer more money. Excuse me. And so if you find like, you know, maybe maybe there's somebody in your market who's just he doesn't want to sell to any of them. He competed against them his whole career. So over his dead body he would do that. Or that he's heard all of the bad things that, you know, private equity means. And so he doesn't want to do that. So maybe he wants to work something with you. Maybe he wants to come out over time and share in some of the knowledge that you bring so the growth that you bring. So that might be a good way to do it. But yes, M&A is a good way to grow, but it's not easy because there are a lot of companies out there who are for sale that the big guys passed up passed over. Well there's a reason why they passed over, right?

11:31 Dan Leibrandt

Yeah, makes sense. Now, Dan, you facilitated one of the biggest transactions of all time in the pest control space. And that was the sale of Fox Pest Control. I think I think they sold for three hundred and fifty million. I don't maybe you can't talk specific numbers, but what could the audience learn from that deal? Maybe things that were interesting or that is required at that scale.

12:01 Dan Gordon

So at that scale, you know, we don't need to talk numbers, but what we can talk about was there were a lot of partners, right? A lot of the door-to-door companies are built on bringing in a door-to-door partner who builds a branch and then becomes a partner in the overall system, right? So now you've got, you know, over 20 owners, plus the two founders. And so basically when a Rollins wants to buy a company like that, they're gonna give you a valuation on the whole company. But let's say one of those branches has been around for six or seven years. So they've got a mature client base, their attrition level is low and whatnot. And let's say one of the other branches is only a year old, right? So how do we split up the valuation and make sure it's fair to all the partners and somebody's gonna be upset. I mean it there's just no way around it. So understanding that if you're building a big system with lots of partners, what you've got to understand is how, you know, put that out on paper, create an org chart. It's really neat to be able to have a massive vision, right? We work with a lot of family businesses that are twenty, thirty million dollars and those are big businesses, right? But some of these door companies, you would have never believed that they could grow to a hundred, two hundred, three hundred million, but they can and they do, right? But you don't wanna run too fast that it's disorganized and that that they the you can't bring it back around and reel it in. And for a company that size, you also you want to make sure that you have a really good law firm, you want to make sure that you have somebody like us who understands the implications of a transaction, but also the tax implications. What are you gonna do with that money, right? A lot of the folks want to give money to their church. Well, how do they do that in the most tax efficient way, right? There's you know, being charity.

14:18 Dan Gordon

Great, but if the government will help you, it's even better, right? And so structuring transactions around that is pretty neat too.

14:27 Dan Leibrandt

Hmm. Across the deals you see, maybe the ones you don't facilitate, what are the most common things that you see go wrong? Is it that maybe that they don't understand the terms?

14:43 Dan Gordon

So if you lately there's a lot of private equity that's out there and they're throwing out these headline numbers, right? So maybe maybe your company is actually worth ten million dollars, but they throw you out and that they say, Well, we're gonna buy seventy percent of your company we're gonna give you $7 million cash and the $3 million we're gonna roll into equity into our system and by the way in five years that $3 million is gonna be worth $15 million five times right and plus your seven million right so now we're at $22 million and so they say geez you're gonna sell this company for $22 million or that's your headline number and that's just pie in the sky. I will tell you that years ago, right around 2016-17, is when Anticimex came over here from Sweden. And they were the first private equity firm that was doing this in a big way. They're they're known as a strategic now, but back then they were giving away, or they were part of their deal was equity. And yeah, you were able to do a four or five bagger, as they say. That in this market today it's pretty mature you're not going to do that. Especially in today's environment, interest rates are rising, there's a lot of competition. But could you double it? Sure, you could. You know, so I think that understanding the deal, having somebody explain it to you who is not a party to it, like so, us, right? So the buyer is gonna tell you what they want to tell you, and you're gonna hear what you want to hear. But if you have somebody like us in the middle as a referee or you know, being able to explain.

16:37 Dan Gordon

I think that that's important.

16:37 Dan Leibrandt

Hmm. Do you see that there is an ideal range to sell, or maybe that there's a certain point that you should grow to unlock a multiple, or is it really just based on your goals?

16:52 Dan Gordon

Well, it's based on your goals, but I like to look at like three levels. The first level or the highest level is called the platform. And that's a much bigger company. It used to be the definition of a platform was more than ten million in revenue. It's actually come down because a lot of those big guys are gone. And so these PE firms who are trying to get in will try to cobble a couple of five million dollar companies together and whatnot. So that's the platform. And a well-run platform company is going to get the highest valuation, right? The next one is called a bolt-on, and that's maybe a little bit smaller, but I am so the platform will go into an area where the buyer doesn't have a business. The bolt-on will go into an area where there is a business, but they'll bolt it on to their existing business. And a well-run bolt-on is probably, you know, will get a decent valuation as well. And then there's what they call the tuck-in. The tuck-in is where you're selling routes, right? You're you're it's just a route to tuck into your routes to make you more efficient. But you know, those get the lowest valuation. But they're, you know, you don't have management talent, you don't have marketing talent, you don't have an accounting office, you know, that kind of thing. And so that's why they get lower multiples. And then, you know, it's really important though to make sure that if you're thinking about an exit. You don't want to think about it that day, or on a bad day, right? You want to have a plan and you want to make sure, okay, what are the factors that you have to focus on to you know to maximize the value of that. And we I have a designation, it's called Certified Exit Planning Advisor, a CEPA, and it's a course that I had to take and I had to take an exam. And one it breaks it down into, they call it the four C's. So they have human capital, those are the people that work for you. You have to good people, good systems that way. You have structural capital, you have the SOPs, you know, your computer systems are in place, your operational systems are in place. You've got the customer capital.

19:15 Dan Gordon

Right. And that's you know your customer base, your your retention, your diversity of customers, making sure that you don't have customer risk, right? So you don't have one customer that's 25% of your business. And then the last one is called social capital, and that's your brand equity. That's how are you viewed in the in the community. And those are the things that you work on. And if you can maximize those, you're gonna maximize that multiple. And by the way, one of the things that we talk about is the multiple. A lot of people at the association meetings talk about multiples of revenue. That's the way a lot of people talk about it, but that's not the way they're valued. They're valued as a multiple. Free cash flow. Some people call that EBITDA, adjusted EBITDA, which is earnings before interest taxes, depreciation, amortization. It's basically cash flow to the owner. So, in other words, if I get fifty thousand dollars a year from the company, and that's a five percent return on a million dollars, right? So that's kind of how you're, you know, you're you're you're playing with the formula, but that's basically how you. It's really, okay, which basket do you fall in for the multiple and are you maximizing the multiple? That's how it's done.

20:35 Dan Leibrandt

Okay. Yeah, that makes sense. And that's why I've heard from other people. I interviewed Paul Giannamore a few months ago. He said the same thing. And everyone says that what is it? That or what is that? Profit is for sanity, re revenue I don't know, so something like that. Did you know that term? Revenues for sanity or yeah, yeah.

21:00 Dan Gordon

No.

21:00 Dan Leibrandt

Re revenues for vanity, profit is for sanity. That you need to be focused on profit or EBITDA.

21:09 Dan Leibrandt

And I want to ask you just to be clear. So let's say a company is maybe doing three million dollars a year. Let's say they're at twenty percent EBITDA. So they're six hundred thousand dollars in EBITDA. What multiple can they expect? What multiple can they get at that range?

21:29 Dan Gordon

So again, which category are you in? Are you best in class company, right? So let's say that, so what did you say? You said a $3 million company putting $600 on the bottom line, right? Let's say that company only has 20% recurring revenue. That company is risky, very risky, right? So you're not gonna get a very high multiple. But let's say that 80% of it is recurred. Let's say that the reason that you're putting the 20% on the bottom line is because all of your KPIs, your key performance indicators are lining up. Because I can show you 20% where my margins aren't that good, but maybe I was a door-to-door company and I just dial back that marketing and stop it for a year. The problem is that your attrition is going to be really high. And so you know, analysts understand how that works, but you're going to, depending on, you know, where the market is, and the market's really we're having a tough time right now. If you look at Rollins valuation, Rollins a year ago was a $65 stock. Today it's $33, $34, right? And they are the de facto, you know, they're they're they're the bellwether, right? You've got interest rates rising. When interest rates rise, asset values fall. But we're hanging in there. We've got some good valuations if you have a good company. Three years ago you could throw anything at the wall and sell it and it would you'd get a good valuation. Today you really have to have a really good company. So I know I'm dancing around it because I don't want to give you a valuation number, because it could change between now and when you publish this podcast.

23:12 Dan Leibrandt

No, that's fair. That's fair. I appreciate your honesty. Well, so maybe if it's not the best time to sell now, I mean, know you can't you're not a wizard, you can't predict the market, but...

23:25 Dan Gordon

I d I didn't say that, but it's gonna be it's gonna be a little more difficult to prove your case than it was a few years ago, right? There's definitely sales going on, we're doing lots of sales, we're as busy as we've been, but it's just the companies are much higher quality. The diligence teams on the buyer side are they're getting a lot sharper as well.

23:50 Dan Leibrandt

Do you see the market on the upswing in the next few years? I d do you have do you see any trends?

23:55 Dan Gordon

Yeah. Markets markets go through cycles, right? It's just like the stock market or the real estate market. When I got into this business when I was a young guy in the nineteen nineties, there was a company, a small garbage company called Waste Management. Waste management decided they were getting into the pest control business and they became within like two or three years, they became the third largest pest control company in the whole country. That was they bought it they brought that multiple up and whatnot. They decided to exit. They actually exited to Terminix and then it kind of came down. And then Rentokil, which is a London-based company, came here and started buying up companies, right? Well, you had Rollins, who's Orkin, and at that point, you know, Terminix was independent and whatnot. Well, they weren't gonna let this foreign company come over and beat them, so they started pushing the multiples up. So now you had Rollins, Rentokil, and Terminix you know, pushing the multiples up, and then you had a company from Sweden called Anticimex that came over and Anticimex came to town and they started pushing up the multiples. And it's kind of interesting because these multiples became pretty high, such that, like my accounting firm, multiple-wise, if there's a pest control, a well-run pest control company that's the same size, that pest control company is worth more than the accounting firm, right? And what's really interesting is when we go to like PestWorld and we have our booth. There'll be a bunch of private equity guys who are not in the industry, and they'll come over and they'll say, you know, this is a really cool industry. It's kind of a cottage industry. It's kind of fragmented. We think we think it's time to roll it up. And you know, my reaction is like, have you seen the multiples? You're about 15 years late, right? It's not this little, you know, place to play and you've really got to know what you're doing because when you're paying those kind of multiples.

25:59 Dan Gordon

These guys have to ha show a return for that, right? So if I'm an M&A director at Rollins or Rentokil or Anticimex and I pay fifteen times or twenty times EBITDA or adjusted EBITDA, I better have a plan to pay it back and become profitable and expand the business. So...

26:22 Dan Leibrandt

Hm. How how does selling to different kinds of companies compare? So how does it compare selling to private equity versus maybe a major company like Anticimex or maybe a smaller player that's just a five million or so?

26:40 Dan Gordon

So if you're playing with like a Rollins, a Rentokil, an Anticimex, even an Arrow or a Massey, most of the money's gonna be in cash, and then they have what they call a representation warranty holdback, which usually is 12 months, and then you'll get the rest of the money then if you know you've done the things that you were supposed to in that period. The a lot of the private equity firms who are getting into the market, they don't have leaders, right? So when Rollins buys your company, they're gonna take it and bring in one of their branch managers or one of their regional managers, and they know how to run a pest control company and that's how that's gonna work. But a lot of these PE firms they just have money, money and financial knowledge. And so they need somebody to run the business. So they may say, you know what, Dan? You have this five million dollar company, we're gonna buy you but we're only gonna buy 70-80 percent, whatever. We're gonna buy a certain percentage, and we're gonna let you roll the rest of it with us. But you're gonna run it, and we're gonna bring you some services or some some skill sets that you may not have. We're experts at marketing, we're really good at accounting. We can buy fleets, you know, much cheaper than can, those kinds of things. So they bring their synergies together, and they allow you to stay on and run this company, and you're now trying to build a hundred million dollar company with somebody else's help and somebody else's money. So it all depends on what you want to do. Now, it's not always the case. Once you get to a certain size, if that that you've built this company, you might be buying small companies and you'll pay cash for them. But most of the PE firms as they get in, they're they're not buying the whole thing because they ha have to buy leadership and managerial talent. So...

28:35 Dan Leibrandt

Hmm, that makes sense. Okay. And you mentioned the four kinds of capital earlier, which I believe you talk about that concept more in your book, which just came out, I think, about a week or two ago. Yes, yes.

28:47 Dan Gordon

Yeah, password. Yeah. So...

28:50 Dan Leibrandt

So that is CEO to Exit. So tell us, why did you release the book and what is it about? All the top lessons, the nuggets.

28:57 Dan Gordon

Sure. It's interesting. So about fifteen years ago, I wrote a book called From Technician to CEO. And that book, it was a fictional story, but it was you know it was about the lessons learned in building a company. And the fictional story was this. It was this blue-collar guy who had a pest control company, you know, and he's working and running as hard as he can and trying to take care of everything and whatnot. And his son goes off to business school. His son comes back from business school and says, Hey dad, you know, let's let's take a look at what you're doing. And they start to work together. And the dad, you know, he's from the school of hard knocks and experience and he knows how to do this. And the son's got all of these great concepts and they you know they really kind of get together and they start to make the company bigger and better and scalable. And you know, they do it through professional marketing, through professional finance, through understanding, you know, technology and these kinds of things, and so they build the company. And so it was the premise was from Technician to CEO, and that's the dad, right? And so we wrote the book and all the money, all the profits went to charity. We sold over two ten thousand copies of it, which was pretty cool. It's if you read the book and you read the forward, you can tell the charity that I was contributing to was it was near and dear to my heart. And so roll the clock forward and If you've been in pest control and you go to the shows, it's what everybody's talking about. M&A, how much is my company worth? Blah blah blah. You know, it's not, you know, it's a little bit different than it was ten years ago. And so what I decided to do was know the son was just out of college and now it's 10 years later 15 years later and he's a mature guy he's in his 30s and he's working with his dad and so his dad is at an association meeting in one of the bars and one of his buddies says hey you know did you hear what this guy got for his company and that's the story starts where my gosh maybe I should be thinking about selling but there's a back and forth. And the reason that I wrote it this way, and this continues this fictional story, the reason that I wrote it this way was because I've got a lot of clients who are in this situation, right? So the son, you know, he's worked, he believes he's heir apparent when you know he's gonna inherit the business. And the dad is saying, my gosh, look at how much money I, you know, okay, you couldn't afford to buy me, and even if I bankrolled it, I'm taking all the risk and I'll strangle you with all the debt and everything. You won't be able to grow it. So maybe we should sell it. And w and so what we the book goes through is they the characters get introduced to one of these CEPA guys, one of these certified exit planning advisors like what we do. And he basically says, okay, well what's the company worth? And you know we come up with what these value gaps are that they need. And it's not enough to get out. So how do we improve it using these four C's and everything else? Okay. And so we improve the company and then we bring it out to market and then we you know, run the auction or the limited auction to bring in all these potential buyers. And then we have all the buyers and then we have a bunch of choices, strategics offering cash, private equity offering cash and ownership. And I don't want to kill the ending because the ending is pretty interesting it is part of the story, but it goes through the process of selling the business. What happens when you decide you want to sell? How do you present it to buyers? Are there non-disclosures that you have to keep in place? What is a letter of intent and what are the elements of a letter of intent? What goes into that letter of intent? And once a letter of intent is signed, what is due diligence look like? What is the buyer going to do when they look at your business to determine whether you know this is really a transaction that what they wanted to get into. And then what are the legal aspects after? How does it go to the lawyers and how does the contract formulate it? And then how is the deal done? And so that's what this book is about. It's pretty interesting stuff.

33:36 Dan Leibrandt

Yeah, awesome. Yeah, I highly recommend everyone go get it. I was I was just reading your Technician to CEO book and that that's the CEO to Exit book is next on my list. You mentioned due diligence. This is a term I hear get thrown around all the time in the M&A space. And I feel like most owners don't even know what it is. So can you explain due diligence what owners need to know about it?

34:01 Dan Gordon

Sure. So if you go buy a car, you can kick the tires. If you go buy a house, you can walk around in it and see what condition it is. If you sell your company, what is it that you're showing me? Well, maybe I could look at your trucks, right? Maybe I could look at your office, but what is it that you're showing me? You're showing me an intangible. You're showing me a series of profit and loss statements and a brand, but I don't know whether it's good or it's bad. So the buyers will do due diligence, right? And due diligence takes the form of three work streams. The first one is financial. They want to go through your finances. They want to see if your tax returns are filed. They want to see if your what your financials look like. They want to see if they want to see, you know, make sure that your articles of incorporation or your membership formation is in intact. They want to make sure that all payroll is paid properly so that you're not skirting the law and there's no potential liability. That's the financial aspect. The next aspect is the operational aspect. What does your sales process look like? What does your marketing process look like? What does it look like when your technician gets there in the morning? His day look like how much production is he supposed to or is he responsible for how does that fall into the whole thing and then you have legal diligence you know are you involved in any lawsuits do you have any environmental issues you know things like that and so those what those three work streams are extremely important when you sell to a rider Rentokil or Anticimex. A lot of that is done in-house. They have in-house teams. A lot of these PE firms go out and hire accounting firms to do the financial diligence and they'll hire you know law firms to look at the you know the legal diligence and they'll hire environmental firms to do some of the operational or environmental issues, and it's really important. But that diligence, they give you a list of here are all the things I want to see, they look at them. Once you show that you know everything's in order, then that closes up. So you there's three things that can happen coming out of diligence. The first thing is that you told me this company was doing ten million dollars and dropping two million on the bottom line. Well, in fact, it's only doing five million and it's dropping one million. So we're going to retrade it, meaning we're going to nego renegotiate the purchase price. The second thing that could come out is this company is really in bad shape. It's nothing like what you said it was, we're out. Okay. And then the third most likely in outcome, especially if you're a accounting client of ours, because we do all your accounting in books and whatnot, is looks great, let's go, you know, and so then it goes on to the lawyers. But due diligence can be very grueling if you're not used to it. You they're calling your baby ugly, you that's your child and who wants to hear what mom wants to hear that her baby's ugly, you know. And that's what happens. So you need somebody on your team like us or a diligence provider that that they that can help you get through that process.

37:20 Dan Leibrandt

Ha.

37:35 Dan Leibrandt

Yeah, that makes sense. So when you and your team are looking at a company's numbers, maybe a company that wants to sell, what are some of the red flags that you see in their numbers and financials where you're like, you guys need to get this fixed before you sell?

37:53 Dan Gordon

Well the r recurring to non-recurring percentage, that's gotta be best in class is 80 or 80 or more. One of the things that you might see that a company's growing, but their attrition is really high. So I have a million-dollar company and I want to grow ten percent. That's easy. I grow a hundred thousand dollars. What if my attrition is thirty percent? So I have to now grow the thirty percent I have to replace the three hundred thousand I lose plus that hundred thousand. So attrition is an extremely important piece of it, keeping that to a minimum. So we like to see anywhere twelve to fifteen percent under twenty is good, but if you're running thirty, thirty-five percent, that's high. A lot of door to door companies will do that year one, but if they run their operations properly, they can get that under control. Door to door is an aggressive sale. Right, and you're selling to people who don't have an emergency. You're knocking on their door and saying, Hey, would you like this? Whereas digital marketing is, my gosh, I have a bee's nest and I have a picnic next week, so I gotta get it taken care of. So, you know, that's...

39:10 Dan Leibrandt

Yeah. As I was doing some research on you, Dan, in twenty twenty three, I believe you said that the easy money has been made in digital marketing and it will climb to door to door levels. Do you still agree with that?

39:25 Dan Gordon

Totally, totally, totally. You're you're watching it happen before your eyes. As a matter of fact, if you go and listen to the earnings call for the last two years from Rentokil, they keep saying that the price of digital marketing is it's climbing and it's climbing significantly. Well Rollins, the last two quarters, has finally said that it's climbing, right? I'm not sure why it's climbing, I think AI has something to do with it, right? You don't just buy, you know, carpenter ants near me. Now you know, when I search the internet, I say I have carpenter ants and I'm in this town in this state and I have these kinds of trees on my property, who would be the best company to handle this? That's much different than carpenter ants near me or something. So I think s that's got something to do with it. But if you watch the price, the Google price per lead and then conversion percent of price per sale, it's coming in at way over 50% of first-year revenue. Door-to-door has always been over 50%, right? But a lot of people are scared of it because it's very expensive. However, when you're doing door-to-door, you can build density, you can build routes that have all the same homogeneous services. So you're not doing a hospital and a pizzeria and Mrs. Jones and whatnot. So door-to-door is really, really efficient that way, but it's expensive. But digital is starting to get, you know, very expensive too. So now people like th there were certain people who did door to door and did it well. And then they had these marketing companies because they had too many people and they would lease them out or rent them out to other door-to-door companies. Now traditional companies are hiring those guys because all of a sudden it's not that expensive compared to or it's maybe just a little bit more than digital, but door to door is a much more effective way to build a company.

41:33 Dan Gordon

The problem is the attrition. You've got to be able to get past that attrition.

41:38 Dan Leibrandt

Hmm. Yeah, what I've noticed on the digital side is the same thing. Maybe not quite door-to-door level, but yeah, I think something that's kind of changed the game and made things much more expensive is local service ads. That, you know, there's traditional Google ads and there's Google Business Profile and then the website. But across the board, like of all the local SEO and local search studies, that organic search is down, or as in like Google Business Profile and the website traffic is down. Because Google's been pushing so heavily on local service ads. So all of these searches like pest control near me, it's all local service ads at the top. So many of those instances where maybe someone would have clicked on a Google business profile and that would have been a free lead. Now you're paying for that lead with local service ads. And Google's making a ton of money from that.

42:24 Dan Gordon

Right, right. So and that's what's driving it up, and then you've got more people in the market bidding up those words, those keywords. And so you know, next time we both go into business, we're not in pest control, we're opening Google. So...

42:43 Dan Leibrandt

Yeah, for sure. And I wanted to talk a little bit just about accounting. So for the owners out there, let's say, well, actually, I was gonna frame it this way. When should someone, when should a pest control owner start looking into getting an accountant or hiring a firm like yours?

43:03 Dan Gordon

So it's interesting, right? The proper answer is day one, but the realistic answer is you know, if you don't have any business you have nothing to account for. So I'd put my first money into marketing and then you know, do you know, keep it going. Maybe visit an accountant once in a while to see to keep it in. But once you're in that three to four hundred thousand dollar range, you start looking at a professional accounting firm to handle...

43:36 Dan Leibrandt

And what happens if you're at like a million plus and you don't have an accountant?

43:43 Dan Gordon

Things things go off the rails pretty quick. You need to have an accountant. There's plenty of reasons, not just for running your business, but also complying with taxes, right? If you don't comply with taxes, you know, we've we've represented people in tax audits that owed a lot of money, owed a lot of penalties, and some the government was trying to put in jail. So you gotta make sure that you're that you're you're doing things properly. You gotta make sure that your payroll you're peop paying your people you may think it's a fair wage, but it may not be complying with the law, and if it's not, then you can get yourself into trouble.

44:31 Dan Leibrandt

Hm. Specifically around salary or just like all all kinds of laws?

44:35 Dan Gordon

Salary, there's something called the Fair Labor Standards Act, which tells you how to pay people you know, hourly over time. There's an exception called 7A or 7I, which is a outside sales exemption. It works in some states. Whether you're an executive, whether you're you're a manager, there's different ways to pay people that are required under this Fair Labor Standards Act.

45:04 Dan Leibrandt

Okay. And I also wanted to ask so you guys have over four hundred bookkeeping clients. Across all of these clients, what would you say are some of the biggest lessons you've learned? Like is there an anything that maybe you understand from all this data that you have across these clients?

45:29 Dan Gordon

So yeah, pest control, the pest control profit and loss is what governs your success, it governs your value and everything else. And it's a puzzle and it's a formula. And that formula, you know, your gross margin needs to be a certain percentage, your labor needs to be a certain percentage, your chemical and auto need to be a certain percentage. And that formula is what will allow you to profit in that 20, 25% range, but it'll also make you attractive to others. One of the things that we've done is we've curated all of that data. We've created a cost study with hundreds of clients. You can go on our website. Website and download it. It's we did it in conjunction with NPMA. You can go on their website and download it as well. But basically what we did is we took, I don't know, 150, 175 companies, put them together, all of their P&Ls, and then divided by 170 or by the number of companies, and we have the model company. And the model company, their labor percentage is supposed to be X, they're they're spending so much on fuel, they're spending so much on auto insurance and whatnot. So it's really important to make sure that you know we're in a very simple business, don't overcomplicate it. And people do, because you know, with technology and everything, it's cool. It's you know, it's pest control's boring, but making a lot of money is boring. Sorry.

47:04 Dan Leibrandt

Yeah. Yeah. Okay, so that's that study we'll put in the in the description and also...

47:13 Dan Gordon

Yeah, there's another one that we also do. We do something called the Pest Index. We do that with the investment bank William Blair. We give them sanitized data every month and they come out and say what the industry's doing. And what they'll do is they'll put that against you know the plot a graph against like Rollins and how they're doing. And you would be surprised how highly correlated it is, right? So we can tell how the industry's doing. And the investment bank William Blair provides this to big investors, pension funds who invest in Rollins and Rentokil and whatnot. It's good stuff. If you want a copy of that, just watch PMP and PCT magazine. They published it. We do a press release every month for the prior month and you can get that information there.

48:09 Dan Leibrandt

Awesome. Sweet. Also full transparency for people that don't know, PCO Bookkeepers is actually a sponsor of Pest Control Millionaires, our coaching program. So we're so excited to have you guys as a sponsor. Of course, we really believe in you guys. And I just as at at the party, which I don't think you were able to make at at our house, I was talking about you guys and saying really you are the industry standard. I don't think anyone even comes close to the level of service you guys do and also the reputation you have. I don't I can't even really name any other bookkeepers or accountants in the space. It's like you guys are the ones. So for people out there that are interested in getting accounting, I would and maybe also looking to sell or looking to buy, highly recommend contacting Dan's team. I think you can just go to pcobookkeepers.com and that link will also be in the description if you guys.

49:07 Dan Leibrandt

Want to visit that. And I believe there there's also some fun stuff coming with the Pest Control Millionaires program. I think maybe you and Jonas are working on a course together.

49:15 Dan Gordon

Yeah, we're pretty excited about it. It's gonna be pretty neat. I appreciate the kudos. You know, but it's gonna be pretty neat. But yeah, we're we're gonna be working with them. Visit our website. I couldn't be more proud of the team that we have. We have over 30 people, all accountants, a couple of marketing people, but we've assembled an amazing team of CPAs and rollers. Agents to greet accountants who know the pest control and lawn care space inside and out and we're looking forward to working with you guys what you guys are doing is pretty cool as well.

49:52 Dan Leibrandt

Yeah, definitely. One quick question there, actually, that was meaning to ask.

49:55 Dan Gordon

Come to me.

49:56 Dan Leibrandt

Regarding accounting and M&A, how do pest control and lawn care stack up against each other? Cause like in our of course, we're mostly pest, but maybe twenty percent or so of the people in our program are lawn and we're gonna continue to expand into lawn. So I'm curious to hear the differences.

50:12 Dan Gordon

Yeah. So it's interesting because lawn care companies, the P&L, th those KPIs that I told you about, they're just about the same. In lawn care, the material percentage is a little higher, the labor percentage is lower, so the gross margin's the same, and then you know, your bottom lines are the same. Different businesses, right? So the trucks are a little more complicated in lawn care, you got big, big tanker trucks that are running around and whatnot. To fix, but they're very, very close in terms of the makeup. What's interesting, the M&A game, you know, I told you that Anticimex and Rentokil came to town a long, you know, maybe 15 years ago or so or more. And lawn care never had that, so the valuations were kind of lower, much lower, until about three years ago when private equity found lawn care. So lawn care. Valuations have doubled and tripled in the past couple of years. And we're doing right now as much lawn care M&A work as we are pest M&A work. And I don't see that changing for a while because Wall Street has finally found lawn care. You know, they knew about pest control but they found lawn care. So yeah...

51:31 Dan Leibrandt

Really, pest control before lawn care. Even though lawn care is a bigger industry, I think there's ten times as many companies.

51:36 Dan Gordon

Well, so think about this, right? Not because I've thought about it quite a bit. But how how is it? Well, so you've got a bunch of small pest control guys, right? And they're all independent and they're all clawing and fighting and whatnot. And you got the evil empire, which are these three big companies or have four big comp you win before Terminix was taken over, right? That's the evil empire. And they're trying to buy everybody. In lawn care, you only had one evil empire, and that was TruGreen. And TruGreen was not aggressive in their buying. Right. So they were not and in fact TruGreen's having a lot of issues. They're owned by a PE firm, but they're not the people driving the market. And now these PE firms, the same ones who were buying pest control companies, are now buying lawn care companies and they've driven up the value. It's just supply and demand. But I've always thought I always wonder why not lawn care? Lawn care is a terrific business, you know, and now it's come to fruition.

52:33 Dan Leibrandt

Interesting. So I guess that's good news for the lawn care owners out there that they can get a higher multiple. Awesome.

52:39 Dan Gordon

Absolutely. Absolutely. So yeah.

52:39 Dan Leibrandt

Well, cool, Dan. This has been such a great show with you. I really appreciate your time. The last question I have for you, which I ask all my guests, is what is your message for the audience? What do you want to tell them? Like the pest control owners, maybe the lawn care owners out there. What do you want to tell them? What do you think they need to know?

52:54 Dan Gordon

You are part of one of the best industries in business. When I was an accountant working for a big accounting firm, and I told some of the partners and folks that I was leaving to do pest control, they couldn't believe it. They thought I was out of my mind. Well, it turns out that some of the wealthiest people that I know are in pest control. And that the business all of a sudden the last several all of these Harvard Wharton and fancy MBA guys are now trying to get into our industry. You are part of something very special. It's also a fraternity where you're not gonna help your next door neighbor who's who's in business with you because you're competition, but if you go to NPMA or your state association, everybody helps one another. It's a big fraternity and you're part of a an incredible industry and there aren't a lot of industries like it.

53:47 Dan Leibrandt

Agreed. Yeah. I'm super grateful to be part of this industry. It's there's so much potential and I can I can only see it growing. So really excited for the future.

53:55 Dan Gordon

It's awesome.

53:56 Dan Leibrandt

Yeah. Dan, thanks again so much for coming on. Where can people find you and connect with you and your company?

54:02 Dan Gordon

Pcobookkeepers.com. You can listen to our podcast. It's the PMP Industry Insiders. I do it with a fellow named Donnie Shelton. Donnie owns a big pest control company in North Carolina. We've been friends forever. It's a lot of fun working on that. We've been doing it probably about five years now. And we've got a lot of listeners and we'd love to have more and I think that the more the merrier with the podcasts. It's a new way of getting information. It and it's you know the way of the future and it's just awesome. So yeah, so PMP Industry Insider and pcobookkeepers.com.

54:47 Dan Leibrandt

Awesome. So everyone go make sure to check out Dan's podcast and their website if you're interested in bookkeeping services. Those links will be in the description. And are you on social media at all? Like LinkedIn, Facebook?

54:59 Dan Gordon

Yeah. One thing I would tell you, th this is kinda interesting. So it I forgot to mention this. We're doing a an event. It's a big conference and it's gonna be in Raleigh and it's gonna be in December and Jonas is gonna be one of the speakers there. He's gonna talk on we're gonna have the speakers include Gil Grattan from Virginia Green, that's a big hundred million dollar lawn care company. It's gonna be Tim Pollard, the C O O or President COO of Arrow Exterminators out of Atlanta. We're gonna have Jonas, we're gonna have Donnie, who's my partner, and myself. We're gonna have a CEO roundtable with Chase Goodeill and John Mark Bolton from ClearDefense. It's gonna be amazing. And if you are interested in it, just go to our the podcast website, PMP Industry Insider. It'll be an dot com. It'll be in Raleigh and it's in I don't have the dates right on me, but it's in December and it's gonna be an amazing experience. Yeah.

56:06 Dan Leibrandt

Awesome. So yeah, everyone check out that as well. And also, of course, check out Dan's new book, which is CEO to Exit. So you can get that on Amazon or you can find that on their website. So yeah, go check out all of Dan's stuff. Obviously, he's a legend in the industry. He knows what he's talking about. And yeah, Dan, this has been awesome. I really appreciate you spending some time with me here.

56:27 Dan Gordon

You back.

56:28 Dan Leibrandt

Course.

56:29 Dan Gordon

Thanks so much.