Selling Your Commercial Cleaning Business -- How to Prepare
There comes a time when every owner of a commercial cleaning business thinks about selling their company. Whether you're nearing retirement, losing passion for your business, or hoping for an influx of cash, selling may be the best option.
For us, it happened twice. We sold our first commercial cleaning company in Boise when we relocated back to the Midwest for family reasons. We soon started a second cleaning business and built it up quickly so we could sell when the time was right.
Of course, selling a business isn't as easy as putting a listing on a web site like BizBuySell. In fact, it's a complicated process that should begin long before you're ready to hang up the “for sale” sign.
When to Prepare for Selling Your Janitorial Business
Everyone who owns a business will, at some point, need to leave their business. You may plan to pass your business along to a child, sell out to a competitor, or close the doors for good when you retire, but nothing in life is guaranteed. That's why every business owner should start thinking (and preparing) for an eventual sale.
Ideally, you'd prepare for a sale from Day 1, even if the inevitable end of your business is many decades away. Starting early provides a strong foundation for selling. Even if you've been in business for many years, however, now is the start running your business like you will sell it tomorrow.
Advance preparation is key because a quick sale won't yield the best price. The better prepared you are, the more money you can command in a sale.
While you may not intend to sell your business for decades (or ever), you must consider what would happen if you unexpectedly had a life-threatening illness. If life throws you a curveball, wouldn't you like to be as prepared as possible?
To get top dollar for your business, you'll need a documented track record of success for several years. You can't wait until the last minute to create that, which is why always being prepared is the key to a profitable sale.
Here is an excerpt from a class on buying and selling a commercial cleaning business:
How to Get Ready for Selling Your Cleaning Business
“Due diligence” is the process of appraising a business' assets and liabilities to evaluate whether it is a smart purchase. Buyers must do a lot of research before purchasing a business, but a seller would be wise to also do some homework.
A savvy seller will be prepared for the due diligence phase of a purchase long before it begins. That means getting your financial house in order so anyone can see that your business is a sound investment.
At any given moment, you should be able to answer questions like:
- How many accounts do you have?
- What is the volume of sales for each account?
- What is your customer retention rate?
- What is your employee turnover rate?
- How long have your supervisory personnel been in place?
- Can you account for every penny in your books?
- How reliant is the business on the daily presence of the owner?
If you can't precisely answer those questions, or if the data isn't impressive, then you have work to do.
Now is the time to begin cleaning up your books so an outsider could easily understand. It's also the time to begin reducing your employee turnover and customer churn rates. Your goal is to create a business that can run without you; a buyer wants to feel confident they can continue to find success with the company after you leave.
Also, start thinking about what you'll do after you sell your business. If the perfect offer came along tomorrow, what would you do next? Buyers will require a non-compete agreement, so starting another cleaning company is not an option (unless, perhaps, you are moving out of the area). Unless you are planning to retire, you'll want to have an idea of what comes next so you're not left floundering when you sign the sales agreement.
How to Find a Buyer for Your Commercial Cleaning Business
When the time comes to sell your business, perhaps most daunting is finding someone to buy. Again, it's not as simple is putting out a for-sale sign or advertising on Craigslist.
That's one reason many people turn to professional help in the form of a business broker. Like a real estate agent for homes, a broker (also called a business transfer agent or intermediary) help in the purchase and sale of privately held companies. They typically receive commission for the sale, often about 10% of total transaction value.
The benefit of using a broker is it allows you to focus on running the company until it sells, which takes an average of 9 months for small businesses. Enlisting the help of an industry-specific broker means getting access to their pool of prospective buyers. Plus, they have expertise about all the many moving parts involved in selling a business. They will serve as your guide and help ensure a smooth transition.
If you don't hire a broker, there are two smart ways to find a buyer:
- Turn to the competition. Who is aggressively trying to gain market share in your area might be ready to pay for greater reach? Or, who are the major players in neighboring cities or states who may be looking to expand into your territory?
- Find a strategic buyer. Who sells a complementary product or service to your customers? As an example, a window-washing company could acquire your business and then easily grow his profits by also offering cleaning services to his accounts.
In your earliest interactions with prospective buyers, proceed with caution. They'll expect to see tax returns and other financial data that contains very personal information. Have your attorney draw up a letter of confidentiality and get that signed before opening your books for examination.
Also, until a sale is on firm footing, don't hand over information about your clients. A serious buyer should be perfectly happy to see a spreadsheet of data without identifying markers. If they care more about client names than numbers, that's a red flag for a potential poacher.
A broker can also help you analyze the creditworthiness of a buyer. It could be that you'll want them to put up collateral, like a home, or take out a term-life insurance policy for the value of the loan with you as the beneficiary. If you don't have a broker, be sure to think through this part of a sale. Don't rely on a handshake.
How to Price Your Cleaning Business
Sellers are always looking for a simple formula for pricing their business. Unfortunately, it's just not that easy. First-time sellers almost always learn that their business isn't worth what they think it is.
In fact, your business is only worth what someone will pay for it. Automatic multipliers (like three times monthly volume) are generic starting points, but rarely have much bearing on the actual price.
That's because your income statement at the end of the year is not an accurate reflection of what you are selling. There are other considerations that affect the price. Perhaps you have a partnership and pay two owner salaries, but the buyer will only pay one manager salary. Or, perhaps you have two vehicles in your fleet that won't be part of the transaction.
A broker can be incredibly helpful in this area by giving you a realistic valuation of your business. They'll recast your financial statement, removing redundancies in staffing or tools. They repackage your company to show specific buyers what they can expect to make given their individual circumstances.
You can take steps to make your company more attractive, however. Working to boost numbers like account longevity and sales-volume-per-account will help demonstrate payback to a new owner.
It's also important to be prepared for how you'll get paid. Very rarely do sellers receive a single check for the entire purchase price. In fact, your tax accountant may recommend against this due to the tax implications.
Typically, buyers make a down payment of 30-40% of the total purchase price, and then finance the rest over time. Or, they may make a down payment and then a final payment at a set date, perhaps one year later.
You may need to consider a variety of payment options, and also consider what time of year to sell. If you're not using a broker, a lawyer can help you structure the terms of a deal. Either way, be sure to consult an accountant, who can analyze various scenarios and discuss the potential tax ramifications of each. Just be sure your lawyer and accountant each have experience with selling companies.
Finally, watch out for red flags throughout the selling process. Be prepared to walk away from a bad deal. This is an important decision, and you should be 100% comfortable with what you do. Take the time to find a buyer who doesn't rush you or trip your BS meter, who you feel confident is creditworthy, and who you believe can run the business successfully.
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