Despite the current economic headwinds, many building maintenance service companies with established client contracts continue to thrive. There are some 92,300 such firms in the US alone, classified under the SIC code 7349.
The industry segment contributes an impressive $28B in annual revenues to the economy employing just under 840,000 people. The typical janitorial services company is quite small – generating around $300,000 in gross annual sales with a staff of 9.
Business valuation methods for janitorial service companies
Given the size of the market and the recurring need to clean and maintain office buildings, the janitorial companies tend to be “recession-resistant”.
Companies with stable earnings from long-term commercial contracts are bought and sold regularly. This is very good news: business selling prices and terms from such deals offer you an excellent way to estimate the value of your janitorial service company.
The typical tools are valuation multiples that relate the actual selling prices of similar companies to their financial performance. You can apply these valuation multiples to estimate the value of your company based on its revenues, profits, EBITDA, cash flow, asset base and owners equity.
Example: valuing a building maintenance business using valuation multiples
To demonstrate this market approach to valuing a business, let’s pick a typical private janitorial service company with the following current financials:
- Gross revenue: $300,000.
- Net sales: $290,000.
- Net income: $60,000.
- EBITDA: $75,000.
- Seller’s discretionary cash flow (SDCF): $110,500.
- Furniture, fixtures and equipment (FF&E) assets: 55,000.
- Inventory: $10,000.
- Book value of owners’ equity: $35,000.
To calculate the fair market value of this business, we choose a set of sensible valuation multiples as follows:
|Multiple||Multiple value||Business value|
|Business value based on gross revenue||0.7||$220,000|
|Value based on net sales||0.8||$232,000|
|Value based on net income||4.5||$270,000|
|Value based on EBITDA||3.8||$385,000|
|Value based on SDCF||2.5||$286,250|
|Value based on FF&E assets||5||$285,000|
|Value based on owners equity||6.5||$227,500|
|Average Business Value||$257,964|
Note that this averages to about 0.86 times the business gross revenues.
Other business valuation methods for janitorial service companies
To supplement the market-based valuation and check your results, consider using the Multiple of Discretionary Earnings method. This well-known technique lets you assess business value from a totally different point of view: based on the company’s earning power and 14 key financial and operational performance factors.
Companies with a long history of success in their market may have built up significant business goodwill. As a result, they may be worth well above the value of the business tangible assets. The Treasury Method is a great choice to calculate the value of business goodwill and total value for such firms.
The best way to handle business valuation is to use a set of established methods. This gives you a solid view of business value – by showing how the business measures up from a number of important perspectives.