Begin With The End In Mind - Selling Your Business

You've seen some success. You've probably received some inquiries on purchasing your cleaning business. What's next? Well, begin with the end in mind.

Habit Two from 7 Habits of Highly Effective People is "Begin With The End In Mind". My greatest mistake was not planning for the sale of the company when I purchased the company. I just bought it. Why would I want to sell it? But you need to plan for that to put the steps into place to when you do sell, it's sellable.

There are a few things you can do to increase the perceived value of your cleaning company:

1) Buyers want to see Monthly Recurring Revenue (MRR). They want to know that there will be consistent money next month and the month after and 3 years down the road too. If you have 1X contracts, that'll do a disservice to the buyer and could leave you less valuable.

2) Make sure none of your clients control more than 15% of revenue. If 1 client were at 50%, for example, that'll impact the buying decision of the buyer because if that one client leaves, then the business would be worth half as much.

3) The new buyer wants to know they can step into the business without needing to work in it. Buyers typically buy to have passive income as a business owner. They don't want to buy and have to scrub toilets each night.

4) Buyers want to see long-lasting client relationships. If all of your clients came on last month, then the odds of some of all fleeing are higher than ones that have been with the seller for a decade.

5) Buyers want to see systems and processes in place. They want to know that they can slide into their new role without reinventing the wheel. They want stability.

When preparing for a sale, make sure your numbers are clear and concise. Back them up with an internal audit. Begin to have convos with M&A experts. And lastly, hire a broker.

I definitely don't profess to know how to value companies. But if you're looking for numbers, there are a couple of different sources if you're not ready to hire a broker.

1) Look at comps. You can go to BizBuySell. It's definitely not reliable, so take it with a grain of salt.

2) I found one source on the web that says to take 45-50% of annual sales. Another said 2X of net profit. I can't see how these are too reliable when considering other factors and time.

3) CleanLink suggested creating an average business value of 70% of annual revenue, 80% of net sales, and 450% of net income (plus inventory), and then averaging the three together.

4) Another said consider using EBITDA (earnings before interest, tax, depreciation, and amortization), and using a multiple (enterprise value) of 1-6X of EBITDA to calculate a price. This latter method is more common in acquisitions.  The 1-6X is a range based on factors listed above (e.g. size, client relationships, employee relationships, etc.).

In any case, it's a rough idea. Definitely talk to a professional for better guidance.

Hey, I appreciate each and every one of you. Thanks for listening.

Resources mentioned in this episode:

7 Habits of Highly Effective People by Dr. Stephen Covey
My Business on Purpose - business coaching
BizBuySell (again, not fully reliable)
CleanLink article on selling
Universal Janitorial Services, Inc - We've been serving the DC region through janitorial, porter, specialty floor work, and disinfecting for the last 44 years. In fact, our first client 44 years ago we still have today. Our clientele include schools, churches, banks, country clubs, Class A office buildings, government, medical, and so many more.  

Transcript

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To begin with the end in mind, hey, you probably seen some success. You've probably even received inquiries about acquisitions for your company. Well, what's next? In this episode, I'm going to talk about beginning with the end of mind, and also selling your cleaning business. But first, with every episode, I offer a guy to tip up, full cup of resource, something that really help your business grow. So let me ask you this are some of your processes multi step where you're entering in or completing information over and over and over and over and over again? Almost redundantly? Do you wish there's a way to resource that information to automatically communicate and automate your workflow with your computer? Guys, go check out zapier.com. Zapier is a huge time saver with absolutely no coding involved. And as good as I don't know anything about code, maybe top secret code, but I'll know how to program that. With no coding involved, I could get Zapier to be the go between for different software. And they'll transfer that information from one program to another and beyond. The best way I could describe Zapier is with examples. So have you ever had that sinking feeling that you deleted an email by mistake and had those attachments that you really needed? Well worry about that no more, because with Zapier, it will automatically take any attachment that you receive through an email through Gmail. And I'll take those attachments. And now you can save it wherever you want, like Google Drive, or Dropbox, or even both at the same time. Automatically, you don't have to move anything or touch anything, it just does it for you. Or maybe you have a CRM like HubSpot, and an email or like MailChimp, now you could automatically get those two programs to talk to each other and swap leads if one has one lead but the other one doesn't. Or use Zapier to automatically pull data through your banks credit cards to track expenses with Google Sheet. So imagine, well, heck, we just finished tax time, imagine going through all your statements and stuff like that match and having an all imported straight into Google Sheet. And now you just filter through and eliminate what you don't need in there. It'll save you tons of time. Or here's another example, each time you go to make a new blog post, that blog post is shared across social media platforms. So you type it once and now appears on Facebook it appears on it or maybe a link through Instagram or a link through there or straight on your website, whatever. How cool is that. And then you can use Zapier to automatically generate receipts for your clients within QuickBooks Online. You know, maybe they want to receive a copy of their invoice at the moment you charge them. So you charge them through your web, the merchant program, and they automatically get a receipt or a copy of an invoice through QuickBooks so they can have for their records. Here's another one. If you use panda doc for creating proposals, we talked about that before in creating proposals, you could automatically send a PDF version of that proposal, straight to Google Drive automatically just automatically saves right over there. Here's another one with each Google My Business Review, you get a text on your phone. So imagine someone comes in say, Hey, your company's the best company I've ever did business with for cleaning, it now pops up on your phone, you get alerted to it right away. And that gives you a proactive chance to reach out to that customer and think him or her. Or conversely, maybe it's a bad review. Maybe they're when your competitors out there trash talking. Yeah. So now you get an alert right away. And you could be super responsive on it versus waiting and seeing it another time. Well, here's here's a couple more, you could, oh, we talked about barking, you know how I feel about bark. But you can use bark to automatically input your leads into the CRM that you use. So we go the purchase that lead that person's information goes straight in to your CRM, like HubSpot. And then here's the last one, it will automatically send police crime notices to your clients based on their geographic area, as those reports get published. So imagine being a value add for your clients and you let them know, hey, there's crime in such and such neighborhood or hey, there's crime nearby you, you could create print parameters on your thing. And every time a crime report gets published, that's within that geographic region. You could send emails automatically to the client and say, Hey, I just got an alert. Here's what it is, and the computer will do it for you. You don't even have to say any of that. It'll just send it straight to them. If that's what you want, man, there's so many things you could Zapier with over 4000 application integrations. There are endless possibilities on ways he used Zapier to automate your cleaning business. Definitely go check them out@zapier.com. Well, back to beginning with the end in mind, if you ever heard that before, it's actually Habit number two from a great book called Seven Habits of Highly Effective People, by Dr. Stephen Covey. And if you look in there, you got to think, well, if I want to begin with the end in mind, then I need to work backwards and work those steps in. So that way, when I do get to that endpoint, one day, I'm ready to go, I'm good to go. And one of the biggest ones is selling your business. If you wait to sell your business, when you want to sell your business, meaning, you start it now and you decide 10 years down the road, oh, now I want to sell it, it's already too late for you, you're too late to the game, there are steps you need to take in between to get that business sellable and ready. My biggest mistake when I acquired universal janitorial services, was not planning for an exit. Before I began, I didn't do that. I was thinking, Oh, I just bought this company. It's my little baby, you know, yeah, shirts, stinky diapers, or whatever. And it's kind of running around chasing things and pulling the hair off the cat. But you know what, I didn't want to sell it because it was mine. I wasn't even thinking about selling it. And that hurt me and that hurt the business. Because now he could have sold it for a whole lot more than what I could sell it for you right now at this point. But if you don't plan, you'll never know, if you're interested in selling, there's a few things you could do to increase that value of your business. Before you're considering to sell. Here's one, buyers always want to see monthly recurring revenue, right? They don't want to buy a business that stacked with revenue from one client. So if you have a million dollar business, your business isn't worth a million dollars if you only have one client, and that client has 100% of that revenue, right? Because no one's gonna want to buy that business. Because once they buy the business that client quits or whatever. Now they're totally our business and you're broke, right? So you need to plan ahead and figure out well, how many clients would I want to have? Where do I want them to be at how much revenue revenue do I want them generating? How would our business look like in five years, 10 years, 20 years down the road when you are ready to sell. Here's another one, make sure your clients don't control more than 15% of your revenue, one 5%. So if you have a million dollar business, make sure none of your clients are bringing in more than 100 $150,000 a year. Or if your business is $10,000 a month, make sure none of your clients are bringing in, what$1,500 A month how that 10,000. So always make sure your biggest client isn't greater than 5015, one 5%. Here's a great example of universal, I talked about this already. By the way, check out websites about to go live 99 days to 33 k.com. I'll link in the show notes when it's ready. But within that website, I'm detailing my loss of one of the clients, one of universals clients we just lost about I like to say 30% of revenue, give or take maybe a little less than that. And that one client is bringing in $33,000 a month, and we just lost it. Now, we didn't lose it all once they're giving us a large runway they want to experiment do in house, they're hiring everyone factor hiring all of our employees. And I gave him my blessing on that. And I hope they succeed with that. But you know what they're gonna realize after a while, hey, we got all these other expenses. Now we got paid for unemployment. And these guys now we have to offer all these benefits, like health insurance, and all these other deals. And what if employee gets sick? Or what if five of the employees get COVID? All at once? Now what's going to happen? So they're gonna learn real quick the value of a building service contractor like universal janitorial services or like your business, but I'm conically in that website, our loss and how we're going to regain that. Well, that client was 30%. Imagine taking 30% of your revenue in a race and off the map today. What would that do to your business? How would that impact you? How will it hurt you? It will hurt you. I promise it'll sting at the very least. But how would that impact you? So when someone's coming in, they're interested in buying your business and they see 30% on there and they realize that same client could flee once they purchased the company. They'll think otherwise they got this businesses worth as much as what I really hoped there was a couple of times where we turned around, we tried to acquire other companies we never successfully did. But we're looking at acquiring other companies, I remember as one we looked at 50% of the revenue was tied up with one client, and they only had that one client for a year. So imagine that the end of the year, a contract, they said, up sign, RSE, goodbye, thing, you're out tons of revenue. So there's dangers in doing that a business owner wants to slide in and realize, hey, I have monthly recurring revenue and solid. And if I lose one, great if I lose two, great, but if I lose one, and it's 50%, I'm devastated. Right? They don't want to do that. They also want, the new buyer also wants to know that they can't step into the business without working inside the business. So people are buying businesses so they could have another job. They're buying businesses so they can have passive income. So when you're selling the business, and you're doing all the work, and you don't have the employees filling in those roles, that does harm to your business, it does harm to you, unless you like doing that kind of work, not for me, but I'll do if I have to do it. But the new owner, they want to know that they can slide in and continue growing the business contain you pulling in revenue without working a single day. In terms of the physical work, they don't mind working on the back end to build it up the growth and market and so forth. But they don't want to be out there mopping and changing trash, if you know what I mean. So they just want passive income. They also want to see long lasting client relationships, they generally don't want to step into a business where there are brand new clients, new clients equals a higher chance of instability. So they want to know that your client relationships are there for a long time at Universal, our oldest client relationships 44 years old, our average client relationship is over a decade at this point, now we're losing this big client. So that might change a little bit. But our average relationship is over 10 years. So they want to step into a business and realize, hey, there's a history there. I got decades of revenue I could pull in for next decade or even two or three, if I cultivate this right? It'd be a cash cow for someone, right? So they always want to know is are they working inside the business? Is the owner working inside? What are they doing? Or are they stepping back relaxing, cayenne, giant join retirement, and they're just looking to sell it for extra cash. And so they're always comparing and contrasting those things. Here's another one, they want to see systems and processes put in place. Years ago, I hired a coach to help me with this. Shout out to Scott BB with my business on purpose, Scott helped me figure out those tasks that suck the life out of me can be done better by others, and also which tasks produced the greatest return on investment. And then with these tasks, systems were created. Now if I want to get now if I got hit by a milk truck, or beer truck tomorrow, everything's documented, and my successor, I'll be up in heaven looking down, hopefully, my successor will be stepping in. And they'll know exactly what to do and how to do it. Because everything's documented in Google Docs. There's videos attached to it. So they know they know exactly where to go and what to do. They don't have to reinvent the wheel. And so if they just do everything we put in these processes, then the business will continue on, we do the same thing for all of our employees within the company. So the employees know exactly day one, what to do, how to do it. And there's actually video tutorials on how to do said work. And that includes not just administration, but all the way down to the cleaner. There's a few things you need to do. If you're looking to sell, you got to make sure your numbers for your business are clear. Right? If you're guessing on these numbers, if fear haphazardly using QuickBooks, and maybe only including revenue in there, you're not adding in your bills and you're focused on your bank's bill pay for the bill, the payables part. You can't do it that way be you need to have everything clear and then backed up by an accountant or at least certified by an income. You need to also have conversations with m&a experts meaning mergers and acquisition experts. Well, where do you find these folks? We find them online you find brokers, my bank, one of my bank branch managers I should say whenever I go to him, he is an expert m&a guy. I could ask him hey, what other cleaning companies are being sold in the area and He'll feed me the information. Right? He'll tell me what the the revenues going for. Different companies are being sold in the earning potential and so forth. And you'll give me all the stats and figures. And they're awesome. You could also hire an accountant to help you do all this. There are accountants out there that specialize in mergers and acquisition. And lastly, I always, always, always, always recommend hiring a broker to help you broker deals with all this. So for example, I mastermind with a buddy, he owned a pest control company, the past were mosquitos actually and he's down in Atlanta area. And he goes to sell his business he tried to do and self and he got a really respectable, nice number, I should say. Or at least in his own head, I thought was pretty good when I first heard it. But then you know it, he hired a broker, and he came in double what he was expecting, which surprised me. So that's phenomenal, phenomenal success for him. So was hiring a broker worth it? Yeah, they're gonna take a percentage, but he made a heck of a lot more money with the broker they did. He could have without? Well, the last section I want to go to is talking about general ideas on how to value your business. I want to say this perfectly honest, upfront, I know nothing about this. All I did was Google and I got some general ideas, some general numbers, same information you can easily find. And so don't rely on me as gospel. I'm not m&a guy. Just trust other people, right? But there's different ways you could come up with a number you can look at comps, right, figure out what other companies are being sold other cleaning companies figure out, you know, roughly what their revenue is, and earnings and so forth, and then come up with a general idea of what that sell price could be. An example through that is a website called biz buy, sell, you can go in there, it's not reliable, I've talked to a lot of people have said the exact same thing, where you could actually go in there and kind of get a general feel of what cleaning companies or other companies are going for being sold for and so forth. I was unclean link. So our industry, one of our industry newsletters or newspapers, right? They suggested taking an average of three different categories. Number one, take an average of 70% of your Avenue annual revenue. So if somebody percent of that, take an average of 80% of your net sales, and then take an average of 450% of your net income plus inventory added on top of that. So like computers, or desks, or maybe you have a really expensive for machine, vacuums don't count guys, those are cheap. But you add all that up, average it and he'll come up with a number that could generally give you a good idea of what your business is going for. I saw on the web 40 to 50% of annual sales plus inventory, that doesn't seem entirely reliable definitely doesn't tell you the full picture. I saw someone post, hey, take two times your net profit. Well, that's not very good, especially if you're structured in different ways. Like for example, we're C Corp and my, my pay is a I have to be an employee. So my pay is not taken out profits like an S corp or pass through entity would be. Here's another one, take one to six times earnings of a bita. So this is Earnings Before Interest, tax depreciation and amortization. So there's a whole formula for that and that one to six times earnings is based on enterprise value of that industry. So for example, if I don't know if if you were in the buggy whip business, your earnings ratio should be terribly low because not too many people are selling buggy whips, right? Or records or what have you. Right, there's really no market for it. There's no real demand for both cleaning businesses a little bit better, right? Or maybe electronics or data or what have you. Those earn a heck of a lot more and you could come up with higher values. So I hope this information helps. I know it's a little vague there. And last part I really enjoyed putting all this together. This is episode eight of eight plan episode. So this is the final one for the season. I might do a second season. I am not sure yet. But we'll see. But thank you for listening all these EYDAP says I appreciate each and every one you guys rock. And if I come up with some sort of content or idea maybe I'll toss in a bonus episode beyond this. But if I did do a second season I do got a couple ideas. But in the meantime, I'm actually launching a new podcast coming out this summer geared towards our clients. It's So I'm gonna dive in and dive in deep into the value of our clients and what they do and how we could help them through a podcast format. So really excited about some things we got coming on with that. Finally, if you liked the show, I'd appreciate a recommendation, a review or rating a share. You could catch the show on all the platforms out there, Apple podcast, Spotify, Google, where ever you listen to this podcast again, this podcast was brought to you by Universal janitorial services, and we're located right here in the heart of the Washington DC area, serving schools, churches, banks, post our country clubs, car dealerships, and so many more office buildings, serving them with janitorial porta, specialty floor work, disinfecting, and so much more. And we would love to help you out if any of this fits the bill. We offer unique solutions to your business including a proprietary Quality Control Program. We're not gonna lock you into a contract so you have a 30 day escape anytime you want. And on top of that, we offer tremendous value because we're there to help your business grow outside of cleaning. We got a referral network that we're always trading and and looking to pair with other people here in the community. If rising tide lifts all ships, right, so if you guys grow, then we grow with you. So I enjoyed this. Thanks again. Over and out.