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The Gross Profit Margin (GPM) Model

Jim Huston | June 21, 2012

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
        EBITDA model is normally used to
        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