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The ‘Pros and Cons’ of Buying an Existing Business Part 1
September 16, 2012
Besides starting your own business from scratch, there are three other ways of getting started in the contract cleaning business:
One of them is to buy an existing janitorial business -
When you buy a cleaning business you usually don’t get much in the way of physical assets – some cleaning equipment supplies, inventory, etc. Whatyou are really paying for are customer accounts and goodwill.
Customer accounts – this is where the true value of any janitorial service exists. This is your income source. When you pay for a janitorial service business you must make sure you’re getting good customers with solid contracts. Never, repeat, never, purchase a cleaning business without personally inspecting the accounts and speaking with the customers.
Have a clear understanding of your responsibilities and the assurance of the customers that you will be retained as the new cleaning service contractor. While it is true that most janitorial contracts are set up to run a year at a time, they often include a 30 day written notice of cancellation. You do not want to pay top dollar for accounts that are about to be canceled!
Goodwill – this is the value of the company’s name and reputation. It is the accumulated results of jobs well done, word-of-mouth and advertising during the lifetime of the business. It includes the results of a company’s contacts with its public, its suppliers, and other businesses. It is an ‘intangible’ asset. It is not a physical entity, you cannot pick it up; but is extremely valuable. It is an asset that has much to do with the company’s ability to grow and to acquire new customers. If you are able to buy a company with excellent goodwill and a strong reputation, you are at an advantage
Beware, many businesses are being sold off with little more than ‘badwill’. The owner is burned out, contracts are being canceled, employees are disgruntled and revenues are going down. This is not a business opportunity – it is a disaster waiting to happen!
An important element in buying a business is to have an agreement ‘not to compete’ written into the sales contract. Its purpose is to prevent the previous owner from starting up a new business in direct competition with you.
When you purchase an existing business, be aware that the initial sales price is often way too high. Just as in the case of purchasing a car, the seller’s idea is to start high and be willing to lower the price. In most cases the seller of a contract will have to accept payments; rarely does a start up purchaser have access to the full purchase price. As a result, most business purchase agreements involve a down payment with the remainder of the money being financed over a number of months or even years. In this way the purchaser is able to pay for the business from the revenue that it generates.
In our next post we’ll look at Key Questions you must ask before buying an established janitorial business.