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Going to do a little SMB acquisition deal analysis in public. Based on searcher exchange ... 
Would love other thoughts...
Would love other thoughts...
Searcher: I came across a nice landscaping business, had a good amount of commercial clients. However, $3.9m in revenue and only $400k EBITDA. ~50 employees. Would you expect that low of margins for landscaping? The low margins and high # of employees is a bit unnerving \\\\
Me: oh how I'd love to get my hands on that much revenue at that low margin if I could buy for <3x.... At that scale a well run mostly commercial maintenance operation could probably get to 20-25% EBITDA margins in a few years.
The questions I'd hone in on is why is the net margin currently so low?… Some hypotheses…
-a lot of overhead? how much of the labor expense is frontline workers vs. indirect? if it's management or administration heavy, there's a probably great opportunity to streamline
-has pricing kept up? many late career owners are afraid to raise prices so margins collapse in the later years as they try to hold onto revenue and long time employees. if that's the case, there's likely a lot of mispriced accounts.
-has employee productivity/talent atrophied? later career owners can struggle to recruit, motivate, and retain talent, ending up with a bunch of lower performing people who are loyal and reliable, but not up to standard on productivity or skills
-a lot of construction rev? margins are just not as good in construction. But, again being a disciplined bidder and good operator is easily the difference between a 5-10% margin construction business and a 15-20% one. There's no real magic to it.
-within commercial, do maintenance jobs skew toward giant property managers as clients? they're often tough shoppers. It's gen. harder to get higher margin service with big PMs representing REITS than tenant-managed or boutique local PMs.
-lots of residential or HOA? Expect lower gross margins and higher overhead. There's more customer support staff required and crews are better able to extract higher wages (on pure resi) because they can always leave to compete for the same biz. not so much in commercial.
2 things I've learned to appreciate about landscaping vs. some of the solo trades is the accountability of working in pairs and the observability of quality. When it's hard to observe quality, it can be a real race to the bottom.
In landscaping you can walk any site any time and have a good feel for how good of a job the crew is doing. Commercial customers generally don't even do that, but if management does it, and everyone knows that, the team will give you their best.
