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Commercial Cash Flow
By Fred Geyen
March 22, 2011
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A "rule of thumb" is one of the ways of determining the value of a business.
The cleaning industry has its own "rule of thumb", which provides fast, easy guidelines for approximating the value of a cleaning business.
Certainly, values obtained this way are not precise nor should they be used in setting the price to sell a business, but can be used to define the real differences in the values of various types of cleaning businesses.
Let''s look at what these selling values are when based on the "rule of thumb" for cleaning businesses.
In no particular order, let''s start with janitorial at 35 percent of one year''s gross revenue. If you are doing $100,000 a year of revenue, the thumb value for that business in a sale would be $35,000.
Smoke, fire and water restoration would also be 35 percent of gross revenue.
Residential carpet and upholstery would be 60 percent. Rug cleaning would be 50 percent.
An apartment carpet cleaning business would be valued at 30 percent of gross revenue.
And here''s the good news… commercial carpet cleaning tops out at 70 percent.
The numbers
At this point, many of you are looking at these values and strongly disagree with one of them — or perhaps even all of them.
Remember, this is not precise. We are not attempting to be specific where you would look at profit, revenue trends, P&L statements, tax records, etc.
What the rule of thumb value points out is that each business has a different selling point, nothing more. Each business is unique and holds separate, individual values.
If we can agree that each business is valued differently, then we might also agree that if you''re going to grow a business you may want to grow the business that would have the biggest return if, in fact, you ever want to sell it.
What makes the values so different? When business brokers attempt to justify a selling price for a business, you may end up with 40 pages of different information, from population trends to a recast projection of actual owner benefit/income.
These 40 page reports don''t, however, answer the question of why values are so different. The reports merely represent facts, but not interpretation, of the real value.
There are some common sense test questions about any business that can show you its true patterns and tendencies, plus the feel of what it would be like to run that business day to day.
The five test questions are:
1.
Is the business easy to manage?
For example, how many people does it require to produce $100,000 of revenue? More people, more equipment and more time equals lower profit margin with more management time ending in lower value to a buyer.
2.
Does the business spend a large percentage of capital?
This would apply to either acquiring new business or to keeping revenue up.
A business that spends 20 to 35 percent of its revenue on marketing is a "direct drive" business. It can be an exhausting style business to run with high up and down trends.
This fluctuation of sales can result in severe cash flow problems.
3.
Are there repeat customers?
You need repeat customers to produce a constant revenue stream.
This is not the same as past customers you can call on. These are customers doing business with you all the time.
Commitments from them for future revenue are important.
Repeat business is golden.
4.
Are the revenue dollars earned uniformly with many customers?
Another way to look at this question is, "Are all the eggs in one basket?"
A business having 100 customers doing $1,000 each is more valuable than a business having five customers doing $20,000 each.
When you have fewer — but bigger — customers you give up a lot of control to those customers; those few big customers can wind up having their hands around your throat, controlling you and asking for the moon.
Large customers can be less profitable, while at the same time being more problematic.
5.
Is a third party at work for you?
Some companies use a third party to either obtain new business or to put you together with your customers.
If your business sales are coming from insurance companies, national retail customers or other third parties where you don''t control the customer, the business has less value.
Sometimes, you''ll even find that the third party is doing the billing as well, which makes your business a labor house to fulfill their needs.
Increase the value
No matter which type of business you own, you are most likely making money doing what you want and you are happy.
So don''t stop doing what you''re doing, but realize the value of the business you are building and how you could increase its value.
You want to see a business producing high revenue per employee, which in turn will give you lower production costs in labor, equipment, vans and insurance.
To add more value, a business would benefit from having repeat customers with no individual large dominant customer accounting for more than five percent of its total revenue as a benchmark.
Developing a sales and marketing plan that generates business at a lower cost will also increase value to this business.
Commercial carpet cleaning can be the best example of this "value" business by following these guidelines.
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Fred Geyen is president of the Geyen Group (www.geyengroup.com). His background includes commercial product sales and program development for residential, commercial and disaster restoration with ServiceMaster. He has a Leadership in Energy and Environmental Design Accredited Professional (LEED-AP) designation and is on the board of directors with the LMCCA. Geyen can be contacted at (612) 799-5111.
