How to Sell A Cleaning Company

Selling A Cleaning Business

A wide range of cleaning businesses are frequently bought and sold in the South Florida market. Residential cleaning companies service individual homeowners whereas commercial cleaning or janitorial companies focus on servicing office buildings and businesses. Many cleaning companies are part of a franchise because of the benefits from the goodwill, trust, and brand name associated with the national franchise.  A cleaning company will sell for a premium valuation when the owner has minimal involvement in the business and when the cleaning crew and customer base are easily transferable to the buyer. Prior to selling, cleaning company owners should prepare an accurate financial statement, streamline operations to maximize profitability, reducing owner-dependency, and hiring a business experienced in valuing cleaning companies while confidentially marketing the business to strategically qualified buyers.

Valuing Cleaning Companies

The median valuation multiple for a cleaning company in Florida is 2-3 x its annual adjusted owner benefit (or true economic profits). This means that a cleaning company with $250K of annual adjusted owner benefit results in a median sales price of $500K-$750K. Obtaining the adjusted owner benefit of a cleaning business requires a careful evaluation of its financial statement (such as a tax return) in order to determine its true economic profits absent expenses not applicable to a buyer. Adjusted owner benefit includes the owner’s salary, personal expenses of the owner that flowed through the financial statement, non-cash expense such as depreciation, and non-transferable debt servicing costs. The historical financials from the past three years must be analyzed along with the future trajectory of profits. Well run and established cleaning companies with strong growth prospects and a transferable customer base and staff may receive a premium valuation of 3-4 x its annual adjusted owner benefit.

Recurring Revenue Impacts Valuation of Cleaning Businesses

  • Recurring revenue is the reliability and predictability of a company’s stream of ongoing revenue.
  • When it comes to cleaning companies, the degree to which its revenue is recurring has a major impact on its business valuation.
  • Similar to landscaping companies and pool routes, cleaning companies have a customer base with regular weekly, bi-weekly, or monthly service.
  • Factors to consider when analyzing the customer base of a cleaning company include the longevity of its customers, payment history of customers, the location of the customers, and the churn rate or lost customers over time
  • Commercial cleaning companies are more likely to have monthly contracts with customers which may renew annually.
  • Residential cleaning companies often have their customers pay automatically via credit card every month based on the services provided.
  • A seamless billing process where the customers are on ‘auto renew’ constitutes a strong degree of recurring revenue.
  • In order for the recurring revenue of a cleaning company to be valued to the highest extent by a buyer, it must be fully transferable.
  • A buyer will closely examine the owner’s role in the business and the extent to which the buyer may be trained by the seller to replace the seller’s role after the closing.
  • If customers are more likely to leave after the closing because they will miss the owner, then that will impair the transferability of the customer base and hence its valuation.
  • A cleaning company with a passive or even absentee owner who does not personally interact with the customers (and whose presence will not be missed after the sale) has a more transferable customer base and will receive a premium valuation.

Staff of Cleaning Company

The reliability, efficiency, and transferability of a cleaning company’s staff is critical to its valuation. A trained, productive, and dedicated staff of cleaners is ultimately what keeps the customer base satisfied (and keeps the churn rate low). An efficient and productive cleaning staff also results in higher net margins. Higher net margins (or percentage of profits divided by revenue) translates into higher profits for the owner from the customer base.  Some larger and more established cleaning companies also have their employees sign non-compete agreements. These agreements prevent the staff from stealing the company’s customers. It may also prevent the staff from working for a competing cleaning company within a specified geographic time period for a specified period of time. Non-compete agreements are fairly uncommon in the cleaning industry but do assure the buyer that the staff will be retained after the sale.

Confidential Sale

The sale of both residential and commercial cleaning companies must be conducted in a confidential manner up until closing. All publicly displayed online advertisements should be in the form of a ‘blind ad’ – meaning it does not reveal the company name, specific location, or owner of the cleaning business. Any prospective buyers must be financially qualified by the business broker and must sign a Non-Disclosure Agreement (NDA) prior to receiving any confidential listing information. An NDA prohibits prospective buyers from communicating with staff, customers, competitors, or directly with the seller. For most owners of cleaning companies, confidentiality is critical since its employees and customers may quit or cancel service if they become anxious about a pending sale. It is the role of the business broker to protect the seller’s confidentiality at all times.

The valuation of a cleaning company is based on its true economic profits or adjusted owner benefit that a buyer may expect to receive after the sale. The valuation range depends on its recurring revenue, transferable customer base and staff, and future growth prospects.  Buyers will only pay a premium valuation for a cleaning company if it is reasonably certain that the profits from the business will be retained after the closing. This may be accomplished by de-emphasizing the seller’s role in the business and by highlighting how a smooth transition process after the closing will keep the customer base and staff of cleaners intact for the buyer.

Give Martin at Five Star Business Brokers of Palm Beach County a call today at 561-827-1181 for a FREE evaluation of your business.