How to Value a Cleaning Service Company
Back in late 2015, I had the opportunity of working on my first SBA business valuation for a cleaning service company. This company was a franchise that operates under the name, Merry Maids®. Merry Maids is a world leader in the residential cleaning industry and has more than 1,100 franchises in 10 countries. I was familiar with Merry Maids and explored opportunities for opening a cleaning service franchise after this engagement. Needless to say, I did not purchase a franchise. Instead, I remained at my current company where I had the opportunity to work with a dozen more cleaning service companies. As I came to learn, there are dozens of cleaning services firms/franchises for sale at any given moment.
As such, I want to highlight some of the research that I have identified over the years.
The proper name for the industry is janitorial services, which includes firms that clean building interiors and upholstery for commercial and residential clients. The industry is responsible for about $61.1 billion in revenue annually as of April 2019. There are over 835,000 janitorial services firms in the United States with an average net profit margin of around 5.9%. Net profit margins have been consistent over the last five years.
The annual growth rate has been around 1.9% over the past five years ending in April 2019. However, moving forward over the next five years, the growth rate is expected to decline to about 1.1% annually. Although growth is slowing, businesses that operate in this space remain attractive to buyers due to the ability to survive dips in the economy.
If you are looking to understand your company’s value or simply interested in purchasing a franchise, etc., you should consider obtaining a business valuation. Here are some of the market multiples that are currently being recognized in the private markets. Please keep in mind that a valuation specialist can provide a more in-depth value of a company and that the multiples below are merely a guide.
Market Multiples for a Cleaning Service Business in the $1 – $5 million in revenue
- Annual Revenue: 0.35x – 0.50x, including inventory
- EBITDA: 3.0x – 6.0x
- Seller’s Discretionary Earnings: 2.5x – 4.5x, including inventory
With a clearer understanding of what your business is worth, you can begin taking steps to increase the value of your company. I will touch on general concepts in which you implement to increase the value of your business. If you are searching for a more extensive valuation and evaluation, reach out to a valuation firm like Peak Business Valuation.
There are several success factors that help distinguish a cleaning service company (information below from IBISWorld – Janitorial Services Report):
- Being part of a franchise chain
- Being part of a franchise chain may assist with obtaining access to larger national and regional contracts.
- Access to niche markets
- Over time, operators must move away from a client base consisting only of price-sensitive clients and contracts to large-scale contracts.
- Use of a high volume/low margin strategy
- Providers of janitorial services must be able to operate in an environment with high volume and low net margins as fierce competition among players keeps service prices low.
- Ability to alter mix of inputs in line with cost
- Due to price competition within the industry, the ability to alter labor, material and cleaning inputs in line with the contract price and agreed quality standards is important for success.
I hope these tips have helped you in your search to build, grow and eventually sell your cleaning service business. Understanding the value of a cleaning service business is important, regardless of any near future transactions. The first step in that process is a business valuation, which we are happy to provide you with. We can also help to identify ways to increase the value of your business through an evaluation.Schedule Your Free Consultation Today!