How to Value a Cleaning Company
Cleaning companies provide janitorial services for commercial and residential properties. This can involve cleaning building interiors, exteriors, and windows. According to IBIS World, the cleaning industry has seen healthy growth in recent years. This industry generates over $18 billion in revenue each year. Moving forward, we can expect growth to continue as demand rises. This is beneficial if you are looking to buy, grow, or sell a cleaning company. However, this industry is extremely fragmented and competitive. To succeed, cleaning companies need to understand how to differentiate from competitors. You can start by learning how to value a cleaning company.
The best way to learn how to value a cleaning company is to receive a business valuation. During a business valuation, a valuation analyst determines the fair market value of a cleaning company you are buying or selling. In addition, they will discuss the risks and opportunities of your cleaning company. This information can help you take the next steps in maximizing the value of a cleaning company.
Peak Business Valuation is a professional business appraiser. At Peak, we work with many cleaning companies throughout the country. We are happy to provide you with a business valuation for a cleaning company. Additionally, Peak can discuss any inquiries you may have on how to value a cleaning company. Schedule a free consultation below to get started!
How to Value a Cleaning Company
There are several valuation methods a business appraiser considers when valuing a cleaning company. Business appraisers at Peak Business Valuation often use the market approach and/or the income approach to value a cleaning company. Both methods are effective, however, each uses a different basis of valuation. A valuation expert will determine which method is best during a business valuation. This can include using a combination of business valuation approaches.
Valuing a Cleaning Company Using the Market Approach
The market approach is common when valuing a cleaning company. To understand the market approach, consider the real estate valuation process. When valuing a property, real estate appraisers compare similar homes that recently sold in the area. This allows them to determine an accurate value of the property. With the market approach, business appraisers compare similar businesses that recently sold on the market. If the cleaning company is a private business, the appraiser refers to private transaction databases to gather relevant information.
Multiples for a Cleaning Company
When using the market approach to value a cleaning company, business appraisers work with valuation multiples. A valuation multiple is a financial ratio that compares a business’s value to a financial metric. These metrics often include cash flow, earnings, or revenue. To find the appropriate valuation multiples for a cleaning company, business appraisers apply the NAICS or SIC code for the cleaning industry. Below, we discuss SDE, EBITDA, and REV multiples for a cleaning company.
SDE (Seller’s Discretionary Earnings) Multiple for a Cleaning Company
- SDE multiples measure the value of a cleaning company based on its seller’s discretionary earnings. This multiple is common in business valuation.
EBITDA Multiples for a Cleaning Company
- EBITDA multiples measure a cleaning company’s earnings before interest, taxes, depreciation, and amortization. This indicates the return on investment (ROI) a cleaning company can expect.
REVENUE or SALES Multiples for a Cleaning Company
- The REVENUE or SALES multiples determine a business’s value in relation to the amount of revenue it generates.
To learn more about how to value a cleaning company using the market approach, see Valuation Multiples for a Cleaning Company.
Valuing a Cleaning Company Using the Income Approach
Another common business valuation method is the income approach. This approach assesses the value of a cleaning company based on its future income potential. In addition, the income approach considers the risks associated with buying or selling a cleaning company. We highlight a few of these risks below.
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- Competition: The cleaning industry is very competitive. To succeed, cleaning companies must differentiate from competitors and create diverse revenue streams.
- Regulatory Compliance: There are various regulations that govern certain cleaning chemicals and methods. It is vital for cleaning companies to understand and comply with these regulations.
- Location: Commercial clients are the top market for cleaning companies. As such, it is important for cleaning companies to be in areas with many businesses.
- Machinery and Equipment: To provide quality service, cleaning companies use a variety of cleaning machinery and equipment. It is important to ensure that your cleaning equipment is functional and reliable.
Methods to Value a Cleaning Company Using the Income Approach
There are many ways to value a cleaning company under the income approach. The most common methods are the capitalization of cash flow method and the discounted cash flow method. Below, we discuss how to value a cleaning company using these income approaches.
Capitalization of Cash Flow Method
The capitalization of cash flow method is best for cleaning companies with long and stable histories. When using this method, business appraisers determine an appropriate amount of earnings for one period. These earnings are then divided by a capitalization rate which represents the rate of return a cleaning company can expect. The capitalization of cash flow method also assesses the risks associated with a cleaning company. We discuss a few common risks above.
Discounted Cash Flow Method
The discounted cash flow method is ideal for cleaning companies with strong financial histories and reliable forecasts. This valuation method involves projecting future earnings over a 3-5-year period. The business appraiser then applies a discount rate rather than a capitalization rate to the earnings. This method measures the value of a cleaning company by taking the time value of money into account. Please note that this method is less common since it uses future cash flow estimates which can be inaccurate.
Summary
Whether you are buying, expanding, or selling a cleaning company, it is important to know about valuing a cleaning company. You can start by receiving a business valuation. As part of a business valuation, a business appraiser may use various valuation methods to determine the fair market value of a cleaning company. In addition, they can help you understand the strengths and weaknesses of your cleaning company. With this information, you can begin to increase the value of a cleaning company.
Peak Business Valuation, business appraiser, is here to help! At Peak, we work with cleaning companies on a regular basis. We are happy to provide you with a business valuation for a cleaning company. Peak can also answer any questions you may have on how to value a cleaning company. Start today by scheduling a free consultation with Peak Business Valuation below!
See also Valuing a Cleaning Company, Value Drivers for a Cleaning Service Company, and Valuation Multiples for a Cleaning Company.
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