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George Pickhardt's niche has long been eradicating bugs and termites, but in the past two years he's delivered a fresh wrinkle to the business of buying other peoples' businesses.
Pickhardt's approach has reshaped the company, Sarasota-based Arrow Environmental Services. The firm had $6.6 million in sales in 2011, and Pickhardt, the chairman, projects at least $9 million in 2012 sales. It ranked 82nd in Pest Control Technology magazine's top 100 list of the largest pest control business in North America by revenues for 2011.
A chunk of the recent revenue growth comes from buying other pest control and lawn care businesses on the Gulf Coast, from Pasco to Collier counties, and in the greater Orlando area. Arrow has acquired 12 other small firms since 2010 and term sheets are pending on a few more deals. The 113-employee company has also grown organically by signing up customers to at least one of its four main services: pest control, termites, lawn care and irrigation.
“We are trying to do this both ways,” says Arrow President Bill Hurd. “The acquisitions are for a quantum leap. The organic growth is for every day.”
Pickhardt's rainmaker epiphany that launched Arrow's quantum leap is essentially a recession-forced strategy makeover. It started when growth on the Arrow customer list stalled, in lockstep with a regional population growth that came to a halt. Fewer homebuyers and homeowners means fewer potential pest control customers.
So Pickhardt decided the best, and least expensive way to boost Arrow's customer list would be to acquire other pest control firms.
The longtime industry challenge in acquisitions, though, is the rate of customers who leave a new company after a sale. The average industry leakage is 2% a month, or 24% a year — a sizable slice out of an already thin-margin business.
Pickhardt's solution: Alter the payout structure of acquiring another firm. Instead of the traditional way, which is a down payment followed by a holdback clause if the acquired business struggles, Pickhardt went positive. He now writes sale contracts on an incentive basis. Arrow makes a down payment to the seller, and then offers a percentage guarantee on every retained, or new customer. Says Pickhardt: “No one does that in the industry.”
The down payment-incentive usually works on an inverted basis. For example, if Arrow puts 75% down on a business it buys, the incentive payout, which can last a year, could be 25%. A 25% down payment would normally have a 75% incentive guarantee.
The strategy works. Arrow has shaved 0.5% off the average industry monthly loss rate by keeping sellers motivated in the success of the business after the deal closes. That's significant, because when Arrow retains a customer it can offer more services. “We want to leverage them,” says Hurd, “and we can't leverage them if we don't have them.”
Pickhardt is confident Arrow's growth surge, in clients and acquisitions, will continue through the next two years. He hopes to surpass $30 million in sales by 2015. One of his biggest challenges is to guard against the firm growing too fast, or buying more than it can handle. Making a mistake in servicing a house can be costly, Pickhardt says, so he wants to make sure Arrow employees in the field are top-notch competent.
“There is a huge liability in this business,” says Pickhardt. “If you don't have people really well-trained, there is all kind of opportunity for catastrophe.”
Review Archives
Arrow Environmental Services, a Sarasota-based firm with a niche in termites and pest control, has a history that dates back to 1886 in Buffalo, N.Y. The company also takes a unique approach to foster an atmosphere of employees who engage in community service activities. Take a look at a 2008 profile of the company from the Business Review archives.
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