The Gross Profit Margin (GPM) Model
Many buyers are willing to pay one year’s worth of gross profit for a book of maintenance or service business. The formula for GPM is basically revenue minus direct costs as follows:
| |
Lawn maint. |
Irr. Service |
| Revenue |
$1,000,000 |
$1,000,000 |
| Materials |
$75,000 |
$150,000 |
| Direct labor |
$350,000 |
$225,000 |
| Direct labor burden |
$105,000 |
$65,000 |
| Subcontractors |
0 |
0 |
| Trucks & equipment |
$130,000 |
$100,000 |
| Rental equipment |
$5,000 |
0 |
Total direct costs |
$665,000 |
$540,000 |
| GPM |
$335,000 33.5% |
$460,000 46% |
Benchmark GPM ranges for green industry maintenance and service work are as follows:
| Lawn maintenance |
35% |
+/- 5% |
Includes Mowing |
| Irrigation service |
50% |
+/- 5% |
|
| Tree work |
35% |
+/- 5% |
|
| Christmas decorations |
35% |
+/- 5% |
|
| Lawn fertilization |
55% |
+/- 5% |
Includes weed and pest control. The |
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EBITDA model is normally used to |
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determine value for lawn fertilization. |
Here’s an easy-to-use benchmark evaluation chart for companies with normal, before tax, profit margins – ones around 10% NPM. I included lawn fertilization (or any chemical application business), which normally sells for approximately $1.25 per revenue dollar.
| Type work |
Blue-sky |
Value per |
$1.00 of revenue |
Lawn maintenance |
$0.35 |
+/- $0.05 |
Includes mowing |
| Irrigation service |
$0.50 |
+/- $0.05 |
|
| Tree work |
$0.35 |
+/- $0.05 |
|
| Christmas decorations |
$0.35 |
+/- $0.05 |
|
| lawn fertilization |
$1.25 |
+/- $0.25 |
To include weed and pest control |