HOW TO BUY A CLEANING BUSINESS
When starting Dallas Maids (my first maid service), I quickly formed relationships with other house cleaning business owners. They graciously welcomed me to the cleaning community and some generously shared their expertise, helping lift Dallas Maids from zero to a million-dollar company. I am absolutely grateful for their mentorship!
Consequently, networking with other local home cleaning business owners has led to being approached with opportunities to buy businesses. Having an established relationship between us, I was naturally one of the first people they approached when they decided to cash out. Over the years there have been 12 cleaning services I have considered acquiring.
Here I will share what I have learned during analyzing, acquiring, and merging businesses. First, I will review the businesses I’ve considered. Second, what I took into consideration when deciding upon assets. Third, how to determine the offer price and structure the deal. Fourth, review case studies of actual acquisitions. Finally, a few tips on how to sell a business derived from what I had learn acquiring businesses.
BUSINESSES I HAVE CONSIDERED
If you are not going through a broker, the majority of businesses for sale will tend to have major issues. Of the twelve companies I have reviewed, I acquired only two, one of which I should have passed on!
Here is a quick summary of the businesses and why or why not I submitted an offer:
- Klean and Tidy (2011) – Seller did not accept because my offer was too low. Sold to office manager. Business is now closed.
- A Clean Sweep (6/2012) – Acquired 39 customer accounts for $6350.00
- DeBonair Cleaning (1/2013) – Their customer pricing was too low which was reflected in my offer price. They wanted to sell but didn’t like the offer. They sold to Bill of Golden Services who was a new entrant in the cleaning industry. He struggled due to low pricing and closed his doors.
- The Maid Next Door (7/2013) – I didn’t offer because customer pricing was too low. However, the owner gave me the customer accounts and a cleaner anyway. Lost customers due to either pricing and/or cleaner poaching them.
- B&B Maid Service (2013) – Didn’t offer because customer pricing was too. At the time, they were using independent contractors. They are still in business.
- Pearly White (1/2014) – Owner wanted to retire. The customer pricing was too low and the customers were spread thin in the metroplex. The owner didn’t accept my offer because it was less than what she wanted. Pearly White went out of business.
- Dial A Maid (6/2014) – Acquired 33 customer accounts for $12,000.00.
- A plus Maid Service (10/2014) – Did not submit and offer after reviewing their customer pricing which was too low. They are out of business.
- The Maid Place (12/2014) – Owners had a great business. I convinced them to keep it because I didn’t think it was in their interest to sell. I provided a few strategies on how to automate their systems. They have survived and today are thriving.
- Selective Touch (5/2015) – Customer pricing was too low. Didn’t offer. They went out of business.
- Texas Pro Maids (11/2015) – The owner’s office manager along with a group of cleaners stole many of her customers. Owner was tired of the business and wanted out. She had good pricing but clients were spread thing throughout the DFW metroplex. Didn’t accept offer because I was only interested in customer accounts located within my service area. She was able to sell entire business and is still in business.
- Maid to Sparkle (11/2018) – Owner had been forced to convert ICs to employees, hurting the bottom line. Didn’t offer because customer pricing was too low and customer accounts geographically undesirable. They went out of business.
Notice a pattern?
Most of these cleaning companies are not charging what they are worth resulting in low or negative cash flow. Having low pricing institutionalized in a cleaning business is the most common reason sellers want to sell and/or go out of business.
Low Customer Pricing = Disaster
Low priced services have been the biggest issue with cleaning companies for sale. Four reason for this: 1) Customers will leave when you raise pricing, 2) low pricing tend to attract high maintenance, less profitable customers, 3) less cash flow to pay the performing staff, and 4) danger of our of work staff poaching the cost-conscious customers.
First, customers can understand a slight increase with pricing. However, when rates need to be raised 50% or more (some cases a 100%!) clients tend to jump ship. The biggest mistake owner’s make is having inappropriately low cleaning pricing. They assume lower pricing brings in more customers. It’s an assumption that drives directly to disaster. Gradually raising my maid service’s pricing during the first year of operation didn’t degrade demand. Rather it was instrumental in success, allowing Dallas Maids to compete on quality, not price. If you compete on price it’s a race to the bottom and out.
Second, customers who seek the lowest price tend to be the most expensive customers to service. Not only from slim margins, but also in terms of your staffs’ morale. Cheap customers complain more, stressing staff and straining their time. Avoiding these customers free up precious time better allocated for your best customers along with creating a more positive work environment. Happier staff means happier customers!
Third, the owner lacks the cash to raise pay for his top performers. Salary is a chief reason why talent leaves. After all, why would a 5-star cleaner stay with a 1-star, minimum waged job when another company will pay 50% more (like Dallas Maids)? Therefore, expect mediocre staff not suitable to bring over.
Finally, raising customer rates coupled with workers out of a job creates serious risk those workers will be tempted to poach those cost-conscious customers. This is what had happened with The Maid Next Door. Though since I was given those customers for free, it didn’t matter much.
In conclusion, avoid businesses with inappropriately low-priced products and services or adjust the offer price to reflect the risks. From my experience, you will encounter more duds than doable deals. After all, owners tend to keep profitable businesses while offloading the lemons.
How you value a company’s worth depends on whether you already own a home cleaning business or not. I’ll focus on the assumption you already own a cleaning business because, if you are reading this article, you most likely do.
First, we’ll determine which type of purchase is right for you, then analyze target assets, and finally determine an offer.
Asset Purchase vs Stock Purchase
Owning a successful cleaning business means you already have an operational system, good paying customers, talented staff, an established brand, a good reputation, etc. Therefore, you do not need to acquire the entire business, just certain assets such as the customer accounts. You may also want the website and phone number to avoid confusion with their current customers and ensure a smooth transition. Cheery picking assets instead of purchasing the entire company is an asset purchase.
On the other hand, a stock purchase is when the purchase includes the entire company as a going concern. This would be more appropriate for new entrants seeking a way to break into the cleaning business. They need the operational system, an established brand, website, staff, etc. Stock purchases are more expensive than asset purchases because you are buying the entire business and not just selected assets.
An asset purchase is preferable for established cleaning companies. In addition to cherry picking the assets, another advantage of an asset purchase is better protection against liability for target business’s obligations. Therefore, it would be advantageous for both established cleaning businesses AND new entrants to structure the deal as an asset purchase.
We’ve established this should be an asset purchase, especially if you already own an existing cleaning company. Fortunately, an asset purchase is easier than a stock purchase because of fewer factors to consider. Also, it is cheaper.
You are mainly interested in acquiring the customer accounts. To minimize disruption to their service you may also be interested on-boarding the company’s staff (if possible) along with acquiring the website and phone number.
To analyze the customer accounts, request the seller to send the following in an excel sheet:
- Location (city or zip code)
- Job Size (using data you can use to determine how much you would charge such as number of bedrooms and baths, square feet, etc.)
- Rates (how much the seller charges their customers)
- Frequency (weekly, bi-weekly, monthly)
- Cost of Goods Sold (mainly labor cost)
- Assigned Staff of Customer
Once the excel sheet is received, do the following:
STEP 1: Choose the customer accounts that are within your service area or where you may want to expand. All or most of the customer accounts should be within your service area. Otherwise the less accounts you can purchase, the less you can offer and thus the less likely the seller will sell.
STEP 2: Using the job size, determine how much your company would normally charge the customer. Request the information you use to calculate your pricing such as number of bedrooms and baths, square footage, etc.
STEP 3: Subtracting the seller’s rates from your pricing provides the price difference. This will indicate how much rates need to be increased and likelihood of keeping the accounts; The higher the increase, the more likely the customer will look elsewhere.
If pricing is substantially lower than yours, walk away! People tend to shy away from steep increases in price. Also, the more expensive customers to service tend to actively seek the lowest price.
STEP 4: Using the price difference along with any other information provided by seller (such as customers that are price sensitive, chronic complainers, hoarders, etc.) determine likelihood of a customer staying or leaving after price hike. I use a scale of “high”, “medium”, and “low”.
Are customer rates comparable to yours? If not, can you raise the pricing without substantial loss of customers? If there is a high risk of customers leaving, structuring the deal with payments to seller provided over a period of time based on profit. Therefore, payments are adjusted according to client retention. If a customer is lost, payment decreases appropriately.
There is other useful information you can extrapolate from the data such as potential annual revenue (annual freq x rate) and cost of goods sold (rate – staff’s pay). Though since the purpose is to purchase the customer accounts, we will focus on determining if the customer accounts are a good fit.
Acquiring staff is often attractive for a buyer. After all, a good employee is worth more than any customer. Ideally you want to bring the cleaning staff over, keeping them with the acquired customers to maintain congruity. However, whether due to a flawed hiring process or inability to retain good performers due to inadequate pay, expect mediocre employees.
Things to consider:
- Performance – Viewing the company’s online reputation on Google My Business, Yelp, AngiesList, etc. and conducting performance evaluations will provide an idea of staff performance level.
- Pay – If underpaid, this is a positive if they are performers because they can expect more pay. Overpaid staff is an issue since a step down in pay often leads to staff leaving.
- Operational System – Even though you are not buying their operational system, still compare it to your own. Change is unsettling for both customers and staff alike. Therefore, the more similar things are done, the less the boat is rocked. Preferably the differences with your system will be an improvement for the staff and customers.
If changes are required, ease into it. For example, you should keep the acquired cleaners with the clients they serve. If the staff performs satisfactory, great. Otherwise if a cleaner is mediocre, then lessen the new jobs they receive and gradually hand over their recurring customers to new teams. A couple of ways to do this:
- Call the new customers and ensure they are happy with the service. If not, ask if they’d like to change teams.
- If the cleaner is absent, hand over to another team. Call the customer after service is provided to check on quality. If they love it, ask if they’d like the new team.
- Do not give new, recurring customers to the mediocre staff.
Evaluating assets and determining their value is an art. Overall, it comes down to risk: The higher risk of clients deserting the new company, lower the offer price.
My philosophy is: Why pay more for customers than you would otherwise have paid through your own marketing efforts? Therefore, use your client acquisition cost as a bench mark to determine offer, assuming an acceptable chance new customer accounts will stick with your company:
Number of Client Accounts x Your Client Acquisition Cost = Offer Price.
This provides a baseline for an offer price. It can then be tweaked for additional assets such as a highly ranked website, seller’s consultation during transition, etc.
There are different ways to structure the deal. If there is a danger of losing customers, structure the deal to pay out monies over a period of time based on the number of customer accounts retained. For example, you could offer 20% of revenue from the customer accounts acquired for a period of two years. If a customer leaves, then payout is adjusted down for the seller. This would also provide motivation for the seller to stick around for a smooth transition.
Since I decided not to deal with mergers with high risk of customers loss, I opted to pay out the amount in two payments, the first done at closing, the other once merger had been successfully completed. The advantage being for a quick purchase, both wanted by the seller and myself.
The legal documents my attorney prepared included Agreement of Sale (structured as an asset purchase of course) including Restrictive Covenant Agreement and Bill of Sale cost over two thousand dollars. However, I’m happy to share them with you here for free. You have my permission to use them for your own purposes.
Of the 12 companies I have evaluated, only 2 were a good fit: A Clean Sweep and Dial A Maids.
Case Study 1: A Clean Sweep
The owner of A Clean Sweep had initially emailed me regarding purchasing A Clean Sweep because he had a falling out with his partner and was brutally burnt out from running the cleaning service by himself. Instead, he wanted to start a lead generation business, possibly selling the leads to Emily’s Maids. Emily’s Maids was a new company and I was interested in this asset purchase to jump pass startup pains and the possibility of gaining more leads so this was a perfect match.
A Clean Sweep customers’ location were perfectly in my area of service. The pricing would need to be adjusted slightly upward, though it was manageable. Here is the initial information sent by A Clean Sweep:
The customer locations were within our service area. The seller’s estimated TIME to complete the job may differ, therefore I determined the time my crews would complete each job thus figuring out Emily’s Maids rates. Then I compared my rates to the seller’s pricing:
The pricing difference was not too much. I estimated 24 of the customers were likely to stay while 5 would leave with 12 up in the air. Emily’s Maids was likely to keep the majority of the customers. The next step was to offer a deal.
I based my offer on Emily’s Maids client acquisition cost. After all, why pay more than it would otherwise cost you to acquire the customer on your own?
The cost for Emily’s Maids to acquire a regularly scheduled customer (weekly, bi-weekly, and monthly) was estimated between $142 and $166.66. For simplicity sake, I used $150.00 per regular scheduled customer. With 38 recurring customers, the total was $5,700.
In addition, the seller had negotiated $500.00 for his consulting services during the transition which was fine. When you purchase a business, having the seller available for questions and further help is vital for a smooth transition.
Settling on a price, we drew up this simple purchase agreement:
I would not recommend drawing up your own agreement without consulting an attorney. This amateur agreement came back and bit my buttocks. The seller decided to start another maid service, stealing back some of the customers. This led to a lawsuit with the judgement in Emily’s Maids favor.
Other than the lawsuit, this was a great acquisition. All that was needed for a transition was a call from Emily’s Maids’ office manager introducing our company. Paying a little more than my usual client acquisition cost (along with those later lawyer fees) was well worth it. Emily’s Maids was propelled pass the problems associated with starting a business from scratch. However, I would not make this mistake again, hiring an attorney to provide a solid, purchase agreement next time.
Case Study 2: Dial A Maid
The owners of Dial A Maid and I had known each other for years, helping each other out occasionally with customers and sharing ideas. They were moving out of town and wanted out. I offered to help automate their system. However, they responded that they were too burnt out.
Initially when they had approached me, we could not agree upon a sales price. We amiably parted. I did not want to negotiate too much because their expectations on price were too high. Allowing them to seek out other buyers was the best option to temper expectations on the amount they could sell the business. When they were not able to find a buyer, I figured they would come back… and they did.
They originally wanted $35,000.00 for Dial A Maid. This is a copy of the email declining their price:
Julie and Ryan,
Unfortunately, $35k is a bit more than what is able to be paid. No hard feelings. It’s been a pleasure working with you and look forward to in the future. Please let me know if circumstances change with Dial A Maid (especially the cash flow) and I’d be glad to reexamine the deal.
Here is the customer information the owners had sent:
From this I extrapolated the difference in pricing along with labor costs.
Let’s start with the price difference:
Dial A Maid pricing was lower than Emily’s Maids, albeit not nearly as bad as I had seen before.
Normally, I would have probably passed on this purchase if I hadn’t known the seller personally. The owner had built trust with her customer base over the years. I felt confident her glowing recommendation of Emily’s Maids and the history both our companies shared; we could convince most of the customers to stay despite the price increase.
In addition to the owner contacting the customers herself to persuade them to stay, I chose to be transparent with the customers, explaining the financial situation of the company. The financial statements shown a loss for 2 of the previous 3 years:
2011 tax returns – ($44)
2012 tax returns – $4562
2013 tax returns – ($899)
Therefore, my introductory letter to the customers included the truth why we had to increase pricing.
In addition to low pricing, the current staff were being underpaid. The owner was not happy with their pay, but could not afford pay increases due to the low cash flow resulting from the low pricing.
At the time, teams were paid $9.70/hour while individuals were paid $9.75/hour.
The owner was concerned for her staff, wanting to ensure they had a job after closing. Therefore, they would be part of the deal. Fortunately, if the staff demonstrated their productivity, there would be an opportunity for raises. Unfortunately, none of them did and were either let go or left.
In addition to the customer accounts, the website along with the company’s phone number would be included. This would make it easier for the customers to transition over, not needing to learn a new phone or website immediately. Another positive was the websites first page ranking on google.
To ensure a smooth transition, a comparison how both companies operate needed to be taken into account. The less changes that occur for the customer and staff, the better. So, I created a list of “The Same” and “The Different”:
- Staff do not need to come to office often.
- No Sundays, Saturdays are optional.
- Same pay – By law we can’t give contractors gas, however their salary will be increased to compensate for gas.
- Same customers – My intention is to keep them with the same customers because you don’t want to rock the boat. However, if a customer is not happy with their service and request another team, we will accommodate them.
- Honor existing employee agreements. All Emily’s will need is their 1099 and Employment Agreement.
- Payed every two weeks instead of weekly.
- W4 to 1099 (Employee to Contract).
- Potentially more jobs for current staff.
- Different office location.
With more similarities and easily overcome differences, this was a good fit.
The offer of $12,000.00 was more than I would normally pay. However, having known the owners I was a bit generous. With both parties agreeing, I had my attorney draw up an Agreement of Sale.
On the day of closing, we worked with the seller to create a To Do list for the merger:
1) Get Customer & Employee information to Blanca, Emily’s Maids’ office manager, to input into the computer
2) Julie & Greg: Send out written letter to customers – Julie’s letter
3) Greg: Call customers personally
4) Transfer dfwdialamaid.com to Emily’s hosting company. You’ll need to get an authentication code along with unlocking the domain (if it is locked). You’re hosting company will be able to tell you how.
5) Greg: Place “new ownership” notice on www.dfwdailamaid.com
6) Transfer phone number to Emily’s. If it is a cell phone, then it will be easy. Just call company to transfer ownership.
7) Drop off all paperwork, equipment, assets at the office: 2606 Manor Way.
8) Orientation Meeting: 11am Saturday 28th at the office. Blanca will also attend. Be transparent and reassure cleaning staff there will be few changes.
9) Email all digital data such as operation manual, handbooks, logins to all online (facebook, yelp, directories, etc) logo pics, etc to firstname.lastname@example.org
The transition went smoothly with Emily’s Maids keeping most of the customer accounts.
SELLING A CLEANING SERVICE
The day may come that you want to sell your business. And when that day comes, of course you will want to sell it at the highest bidder. Do this by finding buyers who seek to buy your entire company, not just certain assets. Yes, that means avoid selling to other cleaning companies.
So how do you determine the selling price?
The average selling price is 2 to 4 times earnings based on what I have heard from other cleaning service business owners. Both the assets and the intangibles will affect the sale price along with riskiness of the purchase:
- Revenue – Bigger companies command higher revenue. The more revenue lessens risk.
- Cash Flow – Higher profit translates to less risk of going into the red
- Automobiles – Wrapped automobiles provides advertising
- Staff – Quality staff provides the better service. Better service lessens the risk of customer attrition.
- Turn key – Can the business mostly run by itself? This lessens the risk for the new owner. Worse case is the company requires the owner to survive so the new owner is not buying a business, they are buying a job!
- Reputation – Does the company have a good reputation? Have they garnered a high rating online such as Google My Business and Yelp? If so, this lessens the risk by ensuring a flow of customers.
- Employee Turnover – Less turnover with employees lessens disruptions to business which lessens risk.
- Customer Attrition – Low attrition lessens the risk of losing business.
- Established – Older, established companies are less risky because they have a proven system, reputation, staff, etc.
Risk = Selling Price
Price is related to risk. Lower risk results in higher price. If you are able to transfer a profitable business to the new owner with minimal risk, you will command a better asking price.
Broker or No Broker?
Selling yourself requires more work however the savings can be substantial. Brokers command a high fee for their services.
On the other hand, a broker may be a smart choice especially if you have a large, profitable business. In fact, the highest asking price I have heard a cleaning business going for was 4.5 times earnings! And they used a broker.
A broker will thoroughly investigate your business to gage worth. Questions they should ask are how many clients and employees the company has and how long they have been with the company, what are the profit levels versus expenses, how healthy are the books, how much have similar companies sold for, and how high are the company’s online reviews.
If you decide to hire a broker, 1) ensure you seek a broker within your city for face to face communications with buyers and 2) has had at least 10 years of experience in selling businesses.
Brokers are expensive however they provide advantages:
- Time – It takes a lot of time to put a sale together in a proper way
- Sales – a broker may be able to sell your business better than you would have. People tend to take a third party such as a broker more seriously than if an owner was trying to sell himself.
- Expectations – Brokers have experience matching people with expectations and needs.
- Due diligence – The broker will investigate your business, learning it inside and out. This enhances the quality of information allowing the broker provide an accurate portrayal of the costs, benefits, and risks.
- Communication – Brokers, through experience and their due diligence, can effectively communicate with the buyers and help them understand the business during the transition.
- Vetting Buyers – Brokers will bring qualified buyers to the table
- Legal Agreements – Broker will have the confidentiality agreement, agreement of sale execution, bill of sale, etc.
- Confidentiality – In order not to alarm your staff and customers, you may want to keep the prospect of selling a secret. An advantage of a broker is that they can do the work in secret until closing day.
Hiring a broker has it advantages. And if you have the time maybe selling it on your own could be an option, especially if you have a smaller or less profitable company. Then it’s just a matter of placing your company info on websites such as bizbuysell.com, bizbuysell.com, craigslist or reach out to your network.
One final tip on to gage whether the price you have decided upon is fair are bank loan applications. If the bank agrees to loan the monies after reviewing the business financials, then both you and the buyer can be assured this a good deal.
Whether you use a broker or not, your target buyer should be an individual wanting to break into the cleaning industry, not preexisting owners. This way you can offer more value (thus command a higher price) to the new entrant who needs the system, branding, reputation, customers, etc.
This concludes the article on how to buy a cleaning business. I thought you might find the documents listed below useful. They include an Agreement of Sale Execution (that sucker cost me over $2000.00!), an effective direct mail letter request to buy a business, and a power point presentation for a presentation I had given on this topic. You have my permission to use the sales agreement and direct mail letter for your own purposes. I hope this article was of value to you and has helped your own acquisitions pursuits.
Agreement of Sale Execution – Attorney-vetted sale agreement for buying a business. Also includes Bill of Sale and Restrictive Covenant.
Buy Your Business Letter for Direct Mail – A request to buy your business letter you may use to direct mail potential targets.
How To Buy a Cleaning Business Power Point Presentation – Native Genius Mastermind Group presentation 2020