How to Sell a Janitorial Business
| February 2022
Janitorial and cleaning services are crucial to both residential and commercial life. The market has sustained a lot of activity in recent years, driven in large part during the COVID-19 pandemic.
According to IBISWorld, there are more than 1.1 million janitorial businesses in the U.S. as of 2022, and the number of businesses in the industry grew 6.4% on average over the 5 years prior. This represents the strength of the industry during the COVID-19 pandemic, as sanitization services were heavily relied on in the first few months of the outbreak in the U.S.
With all indicators being strong for cleaning and janitorial businesses, you may be wondering how to sell your janitorial business, and how much you might be able to gain in terms of a sale price.
Maximizing the price of your business is indeed possible with the help of an experienced broker. They will be able to advise you on increasing the value of your business, doing your due diligence, and approaching serious buyers.
Planning The Sale Of Your Janitorial Business
Early on in the process, as much as a year or more out from when you hope to sell, it’s important to take inventory of your business as a whole.
Doing this will reveal areas of improvement for better sales and smoother daily operations. If you act on what you find, you’ll ultimately be in a better position as a seller.
Your tangible assets include office equipment, computers, cleaning technologies, and vehicles that belong to your business. Intangible assets include your customer list and industry relationships you’ve built over the years.
Assess whether you can transfer each of these assets to a new owner. The more transferable these assets are, the larger the pool of buyers your business will appeal to.
Take stock of all contracts your business has open, whether they’re residential or commercial, long-term or short-term. Having a mix of large and small accounts is a sign of a healthy business that doesn’t completely depend on a few core customers.
Also, consider increasing your sales volume per contract. Buyers will want to see repeat business over time from satisfied, loyal customers.
Employee documentation is important to present to buyers and investors since the success or failure of your business depends so heavily on staff performance.
Gather up records of everything from demographic information and length of employment to performance evaluations. This will help buyers see how stable your business is on the inside, how much sales is tied to staff performance, and what to expect from employees if they stay on the job after the business is sold.
Maintain and clean up your cash flow statements, profit and loss (P&L) statements, and balance sheets, among other financial instruments, long before the sale. Buyers will want to understand your company’s financial health, and what costs and burdens they can reasonably expect to take on.
An accountant experienced with janitorial businesses is your best bet to help with this. They can help gather all filings and make sense of your business’s financial picture as a whole.
While taking stock of your company’s assets and readiness for sale, it’s wise to work with a broker who knows how to sell a janitorial business and can offer a professional valuation.
Valuation Methods For Janitorial Businesses
To value a janitorial or cleaning service business, a broker will often use a multiple of earnings. Either EBITDA (earnings before interest, taxes, depreciation, and amortization) or SDE (seller’s discretionary earnings) can be used to represent earnings, depending on the size and complexity of the business.
Smaller cleaning businesses are often valued using SDE, which adds back expenses of personal benefit to the owner, like company vehicles or travel. It follows this formula:
(Pre-tax, pre-interest earnings) + (vehicles, travel, other transactions listed as business expenses) = SDE
EBITDA, on the other hand, adds back certain costs related to business processes, as the name implies. It’s often used for larger janitorial businesses with revenue figures in excess of $1 million per year.
Janitorial businesses in desirable residential areas, or areas with access to lots of commercial clientele, may be more likely to find long-term contracts and could be valued at higher multiples. Cleaning businesses with healthy financials also fetch higher valuations, because they are more likely to sustain revenues and build on them well into the future, reducing risk for the buyer.
Smaller janitorial and cleaning companies, however, can still do a lot to build value over time.
Actions To Take Before Selling Your Janitorial Business
There are a few items to take action on before the sale of your business. Following the process will help you build up advantages as a seller well ahead of negotiations with buyers.
Separating Yourself From Daily Operations
It’s essential that your janitorial business does not just depend on you.
If you have staff that can handle cleaning services, use your equipment, and ensure customer satisfaction without your constant presence, that’s a great start. Use the opportunity to remove yourself from those tasks and focus on higher-level business priorities, like beginning your seller's due diligence with a broker and bringing on more contracts.
If your business runs independently of you, it means a buyer can come in and realize quick profits and a smoother transition into management.
Protecting Your Interests
While you’re following your exit strategy and putting things in motion to sell, you’re in a vulnerable position. There are several potential threats to your personal finances, as well as to the viability and value of your business, that you must defend against.
These include dealing with unscrupulous buyers who will try to haggle you down to an unacceptable price, breaches of confidentiality that can allow a competitor to undermine your efforts, and various legal and financial blind spots.
It’s important to work with a competent broker who understands the janitorial industry, as well as an attorney and CPA who are experienced in exit planning, to help you avoid any unforeseen pitfalls.
Selling To Your Employees
You might consider selling to employees rather than to buyers you don’t know. Loyal staff members have a certain vested interest in seeing the business continue to succeed. You would be able to rest easy knowing that, after you spend some time training your staff to lead, you’ll leave your janitorial cleaning business in good hands.
An Employee Share Ownership Plan (ESOP) is one way to go about this. It allows employees to have equity in your business and eventually take over ownership.
After grooming your staff to head the business and closing the deal, with an ESOP, you can choose to give away anywhere from 1% to 100% of your company. This means it’s possible to maintain a small ownership stake after making your exit.
Strengthening Customer Relationships
Follow up with loyal customers to see if they have ongoing needs and ask for new business.
If you can perform more services for them, or suggest complementary services such as window washing or deep cleaning, you’ll go a long way towards creating customer loyalty and repeat business.
Securing long-term contracts, in turn, gives you a very valuable asset to advertise to potential buyers. If you can transfer those contracts to a new buyer, you’ll give them immediate revenue and relieve them of the burden of finding new long-term customers right off the bat.
Approaching Different Kinds Of Buyers
While it’s best to work with a broker, there are many ways to start your own search for buyers.
BizBuySell is a leading online marketplace for buying and selling businesses, including janitorial and cleaning companies. While listing your business, you can provide gross and net income among other details. Interested buyers will then contact you directly.
You can also reach out to professional service businesses that might acquire your cleaning company as part of their strategic expansion. For example, a sanitization and disinfection company might be interested in buying your business to increase their offerings.
Expand your networking opportunities by joining ISSA, a leading international association for the cleaning industry, or other associations such as the American Cleaning Institute (ACI) and the International Janitorial Cleaning Services Association (IJCSA).
These memberships are especially helpful if you care deeply about the brand you’ve built over the years, and would like to pass it on to a buyer with personal experience in the industry.
Working With A Broker
When you’re exploring how to sell your janitorial business and you’re ready to take action, the safest route may be to work with a professional broker.
A broker will help you increase your company’s value, market your business to qualified buyers, and walk you through all the proper due diligence steps to ensure a clean transfer to a new owner.
Consider working with the experienced brokers at Raincatcher. Our brokers are well-acquainted with the janitorial industry and stand ready to help you maximize the selling price for your business.
Are you ready to sell?