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How to Determine the Value Of and Sell Your Cleaning Business

How to Determine the Value Of and Sell Your Cleaning Business

Cleaning Companies are really selling right now – it is a great time to consider listing

Cleaning or Janitorial Services are a highly entrepreneurial industry with over 1 million registered companies in the United States as of October 2020. Due to the industry’s fragmentation, the market is very active with buyers and sellers participating in transactions with revenues from less than $1 million to well-above $5 million, and much, much more!

This is a very entrepreneurial industry. We often hear from business owners, who started operations started with a minimum budget, sometimes doing the cleaning themselves and eventually growing their resources by hiring more employees and extending their services. We often learn how they found a niche by focusing on a particular industry segment; for example, commercial or residential, carpet or window cleaning. Frequently this has allowed them to build a more loyal customer base. By sharing these stories, the seller allows us to better assess growth potential and risks when preparing a business valuation and eventually assisting when it is time to sell.

A business valuation compares your business to other recent an similar transactions

A business valuation requires a detailed analysis of recent financial performance and review of key business metrics as they compare to the overall industry; for example, wages, purchases, rent and marketing as a percentage of sales. For the purposes of determining the “most likely selling price” a market-based valuation requires access to transactions of similar businesses. That is, to compare an “office” cleaning business with others in the same segment, and to those with similar revenues, profits, trends, and number of employees. Grouping all types of cleaning services across a wide range of business sizes is likely to not provide the most accurate value range.

An experienced business broker focused on the cleaning industry will first normalize the most recent financial data to show the “earning power of the business” and apply a factor (or multiple) to determine a business value. This multiple typically ranges from 1x to 3x of Seller’s Discretionary Earnings or SDE. (The International Business Broker Association defines SDE as the operating profit of a business plus the following items: non-recurring income and expenses, depreciation, amortization and interest expense and total compensation for one owner/operator after adjusting the total compensation to market value).

It is important to note that larger and more profitable businesses will command a higher multiple. On the contrary, business that are highly dependent on the owner will sell for a lower multiple. While many factors are considered when buying a business, it is fair to assume that a higher perception of risk will diminish its value, also that the clear potential for growing the business will push the value higher. These risk/growth tradeoffs are the reason why two businesses with similar revenue might have a higher or lower multiple associated to the SDE and therefore a significantly different valuation.  

Particularly for cleaning businesses, we have seen that customer concentration and turnover, as well as having clear payroll documentation and worker’s compensation insurance are key valuation drivers. Overall, the most valuable business asset in a cleaning business is the quality and quantity of its customer list.

Selling a cleaning business is not an event – it’s a process that takes time

Most owners of cleaning businesses will consider selling at some point. Their reasons vary. These might include retirement, family changes, burnout, relocation, another business opportunity or simply a need for cash. Regardless of the reason, it is usually an overwhelming and difficult decision.

We often hear that the owner has been focused in growing and running the business, so selling it just turned into a recent priority. This is very understandable. Running a business while also trying to sell it is a conflicting proposition and why seeking the assistance of a business broker makes the most sense.

Keep it confidential!

An equally important factor in the selling process is ensuring that managing the information shared with potential buyers is treated confidentially. Nowadays, buyers will start their business acquisition searching for a business opportunity online. These listings will include a generic description of the opportunity as well as revenue, profit, and asking price. Confidentiality, or the lack of it, can have significant implications in the preservation of the business value and avoid unnecessary distractions. You might not want to let your competitors, employees, or customers know that you are planning to sell until you have a clear transition process that includes how communication should be handled.

In terms of process, a business broker with experience in this industry is likely to have a larger pool of potential buyers (including first time buyers, experienced entrepreneurs, or even competitors) and can help prepare marketing materials that highlight growth opportunities and how the asking price is supported by the valuation (as well as any financing available). Also, it will assist with qualifying those potential buyers and negotiating offers. It should be no surprise that selling a business might take several months and it is important for the owner to stay focused serving customers.

Minnesota’s Largest Seller of Companies

Our team at Sunbelt Business Advisors has experts in the cleaning industry, and many others. In fact, we sell more businesses than any other brokerage firm, bank, or law office. We would like hearing “your story” and be able to maximize the value of your life’s work when it is time to sell your company.

Manuel Santana is a licensed Business Broker, CMSBB, with Sunbelt Business Advisors.
msantana@sunbeltmidwest.com
612.431.1455