A $2M Cleaning Business Sale, But Will the Clients Transfer?
A $2M Cleaning Business Sale, But Will the Clients Transfer?
The sale of a commercial cleaning business for more than $2 million can look attractive on paper, but the headline price is only part of the story.
In a recent transaction, the key considerations for both buyers and their financiers were not simply turnover or profitability but the quality, security and transferability of the business’s recurring income.
Commercial cleaning businesses can be particularly attractive to strategic buyers, with the strongest interest often coming from other cleaning companies and larger facility management groups. These buyers can potentially achieve operational efficiencies, expand their geographic footprint and add established clients to their existing operations.
Recurring Revenue Matters
One of the most important measures of value was recurring revenue.
Buyers and banks wanted to understand how much income was generated from clients who were serviced on a regular basis; daily, several times a week, weekly or under another established recurring arrangement.
The more predictable the revenue stream, the easier it was for a buyer and financier to assess the sustainability of the earnings.
However, selling a cleaning business also presents some unique challenges. Contract assignability can become a major issue.
A buyer may be prepared to pay a significant amount for a portfolio of clients, but if contracts cannot readily be transferred to the purchaser, the perceived value and bankability of that income can change.
Sensitive Client Information
There is also a difficult balance between due diligence and confidentiality. Buyers need sufficient information to assess the business, its clients, contracts, employees and financial performance.
At the same time, vendors understandably do not want sensitive client information, pricing, contracts or commercial arrangements disclosed to competitors or third parties before a transaction is certain to proceed.
In transactions of this size, buyers will often initially submit a Letter of Intent (LOI) outlining the proposed price and broad terms. The subsequent due diligence process can then identify issues that may affect the final consideration.
Structure the Deal
This is where mechanisms such as clawbacks, retention amounts or deferred consideration can become important.
A portion of the purchase price may be withheld until key customer contracts have been successfully assigned or other agreed conditions have been satisfied.
For vendors considering selling a commercial cleaning business, the lesson is clear… preparation goes well beyond producing financial statements.
You will need to understand recurring revenue, documenting contracts by revenue and current status, ensuring assignability and developing a controlled due diligence process.
This can have a significant impact on both the buyer’s confidence and the ultimate structure of the transaction.
For buyers, the message is equally important… when acquiring a commercial cleaning business, you are not simply buying equipment, staff and a client list you are buying a stream of future income, and the quality and security of that income needs to be carefully examined.
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