Private Business - Attributes, growth, acquisitions, ROR, etc.

[FFHWatcher]

In the past year I decided to make a big change. Move away from my home country, get a US Business Visa (E2), buy a business, invest my capital and time, and now I am looking to continue that growth.  I have mainly been living off my investment income from selling previous businesses but after almost 10 years, I was getting a bit bored and felt I could get an even better ROR on my capital in a private business.

 

Curious to hear others opinion on what I think has the potential to be a great little business with an opportunity for me to invest my capital at very good rates of return.

 

- Residential Cleaning Business - Mainly Recurring Cleanings - Weekly, Bi-Weekly, Monthly

- Cleaners are licensed contractors - 60/40 split, company gets 40%. 40% Gross margin.

- 40% Gross Margin with 25% SG&A (Scheduling Mgr/Gen. Mgr (me) market based salary/Rent/mkt/Ins, etc.). 15%+ EBIT (20% with a bit more scale+technology)

 

Attributes that lead me to this type of business

- Mainly Recurring revenue with low customer turnover

- 40% Gross Margin and 15-20% before tax margin

- No Inventory

- Virtually no receivables (< 7 days sales) with no bad debts

- No Capex

- Simple fragmented industry where consolidating is possible and virtually unlimited

- no PhD needed

 

Acquisition Opportunities

- Now that I have my base company, I want to scale it

- My initial acquisition had 10 cleaners. Needed 1 Scheduling Mgr - Employee/10 cleaners

- Purchased at 0.65x's sales (just above industry norm due to favourable attributes)

- Based on my anticipated (conservative) 15% pre-tax margin on Sales, my original ROR should be 23% (20-25%)

- Acquisition candidates - the business is fragmented, lots of individual 'cleaning ladies' or small companies with <5 cleaners who are willing to sell (many just walk away or give away business for $5-10k) but would look at bigger ones too

- I have been able to pick up a couple small ones that represent about 10% of our sales (10% immediate growth if we retain all the customers) at an interesting valuation....with downside limited due to purchase formula used

- My base formula for a buyout is 50% of the first years sales (if the business does $4,000/mo, I pay them $2,000/mo). 

- I pay as little as I can upfront (ie. 15-30%) and then after the sales threshold that represents the initial deposit, I start my payments of 50% of the monthly sales to the previous owner.

(If the business did $48,000 in the previous 12 months, then the previous owner may expect to receive a max. of $24,000 (50% of sales formula) if all goes perfect in the next 12 months. I pay $5,000 up front and once the sales from that business hit $10,000 (50% of $10,000 is $5,000, so my initial deposit is covered) then I start paying 50% of monthly sales for a total of 12 months from closing, to a max. of 50% of the previous 12 months sales.

- I hire a new cleaner/or use existing cleaner, to replace the seller, pay the new cleaner 60% of the cleaning revenue (standard), leaving the company with 40% gross.  Of the 40% gross margin cash flow, I give it all to the seller (like an earn out) for the first year and ONLY have to take 10% out of my pocket to top them up (plus the business has the overhead expense but we can generally add on 10% at a time without adding to our overhead).

 

- In the above scenario, where I am buying $4,000/mo of revenue, 60% goes to the new cleaner ($2,400), 40% to the gross margin ($1,600) and I pay the seller $2,000/mo leaving the business with a cash expense of $400/mo (buying at 0.1x's sales) (plus the added overhead which can be close to 0% in some cases but never more than 10%), so my max purchase price using seller's company cash flow is 0.2x's sales. 

 

- Annualized, the max the business is paying is  $9,600 ($400/mo is 10% above gross margin proceeds + $400/mo (10% in added overhead) purchase price+added admin, based on $48,000 sales) for 1 year to purchase a recurring $7,200 of before tax earnings (based on 15% before tax margin) in perpetuity (base business actually grows without marketing $).

 

- $7,200 of future before tax earnings for a $9,600 investment = 75% ?

 

Question : Why wouldn't I want to use as much capital as I have to purchase 'bolt-on' acquisitions similar to the above and just make it a formula and perfect it going forward?  What are others thoughts on this?  Any other suggestions on how I might structure the buy-outs?  Of course I use non-compete agreements, I just buy the assets not a corp., really looking at the numbers, not the business risks. 

 

 

 

[Pelagic]

I like it. Much of your description of the industry reminded me of my own industry where there are many fragmented small businesses with few employees.

 

I assume when you're purchasing a cleaning business the asset you're ultimately buying is the clients and perhaps their relationship with the cleaners. Have you looked at the numbers in terms of new clients acquired per purchase?

 

It sounds like what your business will evolve into if you continue to scale it is a platform for small residential cleaning services to operate under your brand so to speak with the economies of scale that come with it. Have you thought of steps you might take to build the brand and acquire new clients organically rather than buying them through new cleaning businesses?

 

Sounds like you have a solid plan to work with. Maybe consider spending a few $1,000 on a decent app for scheduling - who knows you could sell the whole business to one of the bigger players in the freelancing space like taskrabbit for a nice multiple.

 

 

[valuedontlie]

This is a pretty competitive industry with literally no barriers -- have seen this model popping up in my town...

 

There is a widely known/followed reddit post by a guy who started this trend and now outsources his booking/scheduling website to other users...

 

https://www.reddit.com/r/EntrepreneurRideAlong/comments/2w84bs/first_2_million_year_and_a_quick_look_back/

[DTEJD1997]

I actually tried a more commercial cleaning company for a few months....

 

It did not work out...

 

Here are my observations and thoughts:

 

A). Like a lot of business, it is all about the connections and relationships.  The reason I wanted to get into it was that I know a guy who runs a business part time and is VERY successful.  HOWEVER, he has a rather unusual situation...He is older and very well established.  He runs the business as more of a hobby.  He is well to do and does not need it to pay the day to day bills.  He can pick & choose business.  More importantly, he knows the business people through social connections & past business dealings, so he already has an "in".  He is a known quantity...conversely, I am somebody from out of town, and have no/few "ins".  That makes it much more difficult to get the business.  His connections could NOT be replicated or overcome by me in a reasonable time frame.

 

B). There are a lot of competitors who are not very skilled business people....That is both an advantage & problem.  If you do very good work and have a very professional company & presentation, that is a plus!  The negative aspect is that there are many guys who are out to get "business".  They are out to build their businesses and will take on business that is NOT profitable.  They may be doing this to "get their foot in the door", they may try and get the business and renegotiate at a later point, they may try and get the contract and then work on bringing down the cost, OR they may simply be "not that smart". 

 

Several times I was told what my competitor(s) were willing to do and their billing.  I simply could not figure out what was going on.  In one particularly bad instance, my competitor (if they honored the contract terms) would not be able to pay their workers minimum wage, let alone make a profit!  I finally confronted him on this...he hemmed and hawed, but I walked him through the contract and the numbers...stunned silence, he literally yelled "oh shit".  Now he has a contract with a major company and is losing money, BIGLY.

 

So you are going to have competition that is simply not a rational actor.

 

C). You very well might be able to buy out competitors and other businesses, but remember, a lot of the business is built on relationships.  When ownership/management changes, there is going to be a very real risk of losing customers.

 

D). If you are buying out small family owned businesses are not going to go for complicated contingent payments.  They are going to want their money UP FRONT for the most part.  If they do go for an extended/contingent payment...the price of the business is going to go up.

 

E). If you get established and are really good...might it not be better simply to grow organically and simply take business rather than acquire it?

 

F). This is hard, physically demanding work.  I did it and actually worked along side with my workers on some jobs.  I have a new respect for maids/cleaners.

 

Finally, I knew some people doing residential work.  I decided NOT to go into that as it is difficult to scale, is even MORE physically demanding than commercial work, and finally you up against independent cleaning ladies.  Very tough to do well and make a good profit.

 

Hope this helps...

[gfp]

For what it's worth there is a similar / complimentary business that is blowing up big for one of my neighbors - turn key management of airbnb rentals for absentee owners - labor is same as a maid business and they charge more.  Not sure if your market is big on airbnb but New Orleans (where I live) has had a huge airbnb phenomenon the last few years.  Managing them looks like a nice business - either that or my neighbor is drastically outspending his income on automobiles!

 

 

[rawraw]

For what it's worth there is a similar / complimentary business that is blowing up big for one of my neighbors - turn key management of airbnb rentals for absentee owners - labor is same as a maid business and they charge more.  Not sure if your market is big on airbnb but New Orleans (where I live) has had a huge airbnb phenomenon the last few years.  Managing them looks like a nice business - either that or my neighbor is drastically outspending his income on automobiles!

Yea!  I've known people to rent second and third apartments just to AirBNB them.  I worry when my pedicab buddy is telling me about these schemes, that it is late in the cycle ha!

[FFHWatcher]

Yes, there are virtually no barriers to entry but I don't see that as a reason not to enter it :-)

 

I don't mind competing. My experience that the majority of customers who have a cleaner are loyal.  I don't like getting customers based on price as they are not loyal and will eventually be an ex-customer.  Find the loyal people and keep them.  In the business I purchased, over 50% of the customers have been with them for over 5 years.  The customers that have been with us for less than 5 years represents the growth.  Our retention rate is over 90%/yr.  For every 100 customers we have, we lose 10/yr but add 20/yr based on referrals, for a net 10% organic growth.  After purchasing it the business, we didn't lose one customer or one cleaner, so it worked out great so far (9 months into it). The key attribute in selecting the business I did buy was that the cleaners all stayed on.  Nothing changed.  I hired a manager and basically replaced the owners/manager (who didn't clean houses) with a new manager that I hired. Customers didn't really realize (or care) the business ownership changed hands but they were told the old owner is no longer working in the business day-to-day.  All they cared about was that their existing cleaner didn't change.

 

Ideally, I buy bolt on additions where I can keep the existing cleaners (similar to what I did almost a year ago) and not buy really small businesses where the owner actually does the cleaning.  My dilemma is that I can buy those businesses for so much less money (less than half the price) that the risk MIGHT be worth it.  I think I just need to be become an expert at this transition and make it a system that is repeatable over and over and over.....

 

I am starting to see the Airbnb and VRBO opportunity.  I am in a tourist type of market in South West Florida where vacation rentals are a huge opportunity.  I also just purchased a housecleaning scheduling website that is already built and working where you can select from  a Menu for what you want, schedule your cleaning, input the details, address,  it prices it out and then the customers pays right there.  In the back end of the software, we input our openings for cleanings in our schedule so we don't double book, we then follow up, assign it to one of our cleaners and move fwd from there.  I haven't made it live for our customers/prospects yet as I don't know exactly how I want to us it yet (plus we are pretty much 100% booked up right now, so there is no point in getting more business).

 

Commercial cleaning does seem to be about connections but I also find it very price and economically sensitive. The residential business I purchased actually grew a lot in 2008-2010.  All the small 'cleaning ladies' ended up returning to their home countries which meant a lot of customers were in the market for a new cleaning lady and decided to hire a company instead of a cleaning lady, to avoid that problem in the future.  The business grew at least 40% in 2 years (off a relatively small base).

 

I will check out that Reddit thing. Thanks.

 

I am definitely buying a customer list but the Scheduling Manager in our office has all the communication with the customer.  The cleaner has a bit of a relationship but in many cases, customers aren't home when their cleaning is done and the cleaner/customer are not supposed to share their phone numbers with each other.  One of our competitors has a 10:1 ratio of cleaners : scheduling manager/customer service rep., and I expect to do the same unless I can use technology to do more of the scheduling/changes which would be great.

 

I did invest in software and use a cloud based/App Based software, invoicing, scheduling, CRM, e-payments, etc. that all our cleaners, scheduling manager and myself use.

 

Any other ideas for structuring a deal or any input on the numbers, taxation, etc.?

 

Thanks for all your input.