Andrew Usher, Director of Catand Advisory, offers tips on how to determine the value of a customer list that you may be thinking of acquiring.
Acquiring new customers is a critical challenge for businesses of all sizes, particularly so in the pest control industry. Purchasing a customer list from another pest manager may seem like an efficient shortcut to growth, but not all lists are created equal!
What makes a good customer database?
A good customer list is more than just a compilation of names and contact details; it should be a detailed resource that can significantly impact your business growth ambitions and provide a return on investment. To make an informed decision, it is essential to understand the qualities that set a valuable customer list apart and the risks associated with buying the wrong one.
In determining the value of a customer list acquired from another pest manager – for example, when buying a sole operator business – it goes without saying that the data should be complete. The list should include each customer’s full name, address, contact details, last service date, and types of services conducted at the property. A good customer list contains accurate and, importantly, recent data. Ideally the information should be in a format that can be imported into your CRM. The next question is what kind of customers these are – are they commercial or residential? Are termite management systems involved? These are important considerations, which we’ll look at below.
Commercial vs residential
One would expect that a client portfolio consisting of commercial contracted work would be more valuable than a customer list of a residential portfolio. In principle this is correct, however you would need to consider the following factors: whether there are change of control clauses in these contracts; the length of time remaining on these contracts; whether you are able to do any due diligence in terms of the quality of work done on the contracts to determine whether they will be renewed; the length of time that the client has worked with the current pest manager; the willingness of the client to work with you in introducing your business to the client; and your ability to take on and transition the client to your business and retain them.
The level of confidence you have in retaining (or growing) the revenue from these clients ultimately determines the value you place on the client list. I would expect that high confidence on full retention and/or growth could signify a value in the region of dollar to dollar on this portfolio (or higher).
A customer list of mainly residential clients presents more risk in terms of retention as there is no contractual obligation for these clients to remain with a new business. I would assume that with a residential client they would not necessarily use pest control services every year – it could be on an bi-annual basis or even longer period. Determining the value of this list means considering several factors: the length of time that the customer has been a client of the pest manager; your ability to analyse the data to assess whether they have been with the pest manager for a length of time (the longer the better, reflecting their loyalty to the business); the prices being charged for the work being done; whether you intend to rebrand the business immediately or continue with the existing brand; your ability to work with the incumbent pest manager in transitioning the clients to your business e.g. maybe they will work in your office for a period of time to talk with the clients and explain the change.
Given there would be less loyalty for a residential client to remain with a new pest manager, and certainly no contractual obligation, I would suggest that a customer list of residential clients would be less valuable than that of a contractual nature.
Calculating the dollar value
Determining what that value is would be dependent on not only the key points mentioned above but also: the size of the list (the larger the list, the more opportunities to transition clients); the pest manager’s reputation; their reliance on marketing or online activity to drive these clients to the business; and whether they offer anything unique in their approach to their own client retention, which can be transitioned to your business. Given that it is unlikely you will transition 100% of the clients, you would need to factor this into your valuation. Estimate your expected customer transition over a period of time, then base your valuation on the expected revenue you will likely get in year one and/or year one and two.
Ongoing termite management
Termite management is another factor to consider. In-ground termite systems that require regular inspections are typically valuable in terms of client retention provided they are maintained appropriately. These clients should be easily retained based on their contractual obligations, on the principle that they have been serviced correctly – which should be verifiable during due diligence. Assuming the current pest manager’s pricing is consistent or better than your pricing, you are then able to quite easily determine the value of revenue that should transition to your business.
Termite management clients are also potential opportunities for upselling general pest treatments. Similar to contracted commercial work, and being able to prove the clients’ loyalty to the business, I would expect that the value of such lists could reach as high as dollar for dollar. However, please bear in mind that you may also be taking over a service liability for the period remaining on the contract plus associated warranties and these would need to be factored into the final value.
Final thoughts
In summary, there is no clear multiple or determining factor in valuing a customer list when buying a business from another pest manager. Calculating a value comes down to the full potential income of the data versus the likely success rate of conversion to your business/ brand. While there are risks associated with buying customer lists, with due diligence and best practices, you can unlock valuable opportunities for growth and customer acquisition.
Andrew Usher, Director, Catand Advisory
