Cleanlink News 11/13/2012

What's Your Contract Cleaning Company Worth?

Successful BSCs often consider either selling their cleaning company or acquiring another cleaning company. But, what is a contract cleaning company worth? Tornado Industries will try to answer this question.

First, it is important to understand that janitorial accounts and entire cleaning businesses are purchased and sold regularly. They do have market value, especially if the accounts and business have stable earnings from long-term (three years or more) commercial customers.

However, to make the sale requires that the value of the business be priced correctly. Unfortunately, there is no exact formula for determining the value of a contract cleaning business that everyone agrees on. Instead, an "average business value" (ABV) is often determined based on several different formulas.

For example, consider a contract cleaning company with annual revenues of $300,000; net sales of $290,000; and the owner has a net income of $60,000 per year from the business.

The ABV of this business might be based on an average of the following valuation multiples*:
• 0.7 percent of the annual revenues, which is $220,000
• 0.8 percent of the net sales, which is $290,000
• 4.5 percent of the net income, which is $270,000
• Furniture, equipment, and miscellaneous inventory valued at $10,000.

In this case, the ABV of this company would be $260,000, plus $10,000 for furniture and equipment.

"Of course, there can be other factors that influence how much the business is actually worth," says Michael Schaffer, president of Tornado Industries. "Before making any decisions…consult with an attorney that specializes in buying and selling businesses and valuing businesses in your community."

*Valuation multiples are derived from historical data based on business sales of similar businesses; they are often used to estimate the likely selling price of a business.

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