A reader wrote me recently with the following question:
"I came across your website. I was thinking I might want to buy a cleaning company instead of starting one, and I thought I'd say hello and like to ask few questions in regards to the cleaning business.
First of all, thank you for sharing some of the information on your website, it is very helpful. Let me tell you little about my situation. I'd like to own a cleaning service, but I'm not sure if I've got the 'skills' to start one from scratch. What is your opinion on buying an established business that is for sale?"
The following information is from Chapter 4 of my book Make Money Cleaning Offices.
Some people would rather buy an existing business instead of starting their own. When you buy a cleaning company you usually don't get much in the way of physical assets - some cleaning equipment supplies, inventory, etc. What you 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.
If you want to buy a cleaning company, 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 startup 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.
Key questions you must ask before buying an established janitorial business:
Why is the company for sale?
Where are the accounts located?
What is the monthly gross billing?
What are the monthly expenses, and what is the monthly net income?
What kind of salary as the owner paying himself? Can you live on that salary?
Does the business have growth potential?
Are there outstanding liabilities which you will be assuming? If so, how much are they? Are the monthly payments factored into the current cash flow figures?
What has been the trend over the last few years? Has there been growth, stagnation, or decline?
Note: examine the owner's financial records for the previous three years and for the current year to date. Ask to see tax records to verify the owner's claims of revenue and profit.
What equipment and supplies are needed to service these accounts?
How big are the accounts, and how many hours nightly does it take to clean them? Monitor the operation. Spend a few days of observing the work being done.
Are the existing employees willing to stay on under your ownership?
How long has the seller had these accounts?
Is there a good mix of business customers? Is the company relying on one or two large customers for the bulk of its revenue? Are there contracts in place to ensure that those relationships continue under new ownership?
How quickly do the customers pay their bills?
Will the seller be willing to work alongside you for a few weeks or months after you get established?
Note: speak with current customers. Are they happy with the service they are now receiving? Ask if there's anything you can do to improve the service they're receiving. Remember, customers are under no obligation to stay with you when you take over!
If you decide to spend several thousand dollars to buy a cleaning company, get legal advice, preferably from an attorney with experience in small business sales and acquisitions.
Pros and cons of buying an existing business:
Immediate cash flow
Potential owner financing
Possible existing employee base
Existing management and operational structure
Working business concept
Taking on debt with the risk that involves
Possible steep learning curve
Unknowns: lack of information, hidden liabilities, etc.
Would I buy a cleaning company rather than start one from scratch?
Probably NOT. I think you need to develop your marketing and management skills to run a business. If you go into debt to buy a business without those skills, your inexperience might cost you the business and leave you with a lot of debt.