Hey— it’s Dave,

This week’s newsletter is short, but packs a punch.

Today I’m breaking down how to build a home service business that can sell for millions of dollars.

I’m writing it from the scope of my cleaning business, but the same principles apply to most small businesses.

I spoke with Amit Washad this week, a business broker specializing in the sale of cleaning businesses. He dropped some truth bombs on me that are forcing me to realign my strategy.

We spoke about what makes a business okay, good, and great, and what buyers are looking for.

Skip this if you’re familiar with multiples

Primer on Business Valuations

When a business goes up for sale, a frequently used metric for valuing the business is a ‘multiple’. The multiple is a value that gets multiplied by the business’ Net Profit. (For the sake of this conversation, I’m going to just reference Net Profit instead of EBITDA. Investopedia can explain EBITDA a lot better than I can if you want to get in the weeds)

The better the business, the higher the multiple.

It has two main purposes:

1. To compare other business transactions in the same industry

2. Analyze how much a buyer is paying for the businesses cashflows

Let’s run through a quick example.

Maria’s Hair Salon 💇‍♀️ :

Maria works her hair salon and makes $50,000 per year in profit.

When she goes to sell the business she can expect a 1X multiple, or $50,000 × 1 = $50,000 Sale Price. 🥱 

Jose’s Catering 👰 :

Jose on the other hand has a catering business and has weddings booked for every weekend of the year. He also serves corporations during the week on a recurring basis.

He has a kitchen manager, cooks, a sales manager, and full staff to cater events. Jose’s main role is to ensure the ship is steered in the right direction. When he goes to sell his business, he can expect a 3.5X multiple on his profit. If his Net Profit is $300,000 then 300,000 X 3.5 = $1,050,000 Sale Price.

You get the point.

*Quick disclaimer: This is only one metric that’s used when valuing a business. Other metrics must be considered.

Back to the conversation with Amit

Cleaning businesses can fetch anywhere from a 1X multiple to 4X multiples depending on the quality of the business.

Let’s look at what traits make up a high quality business:

1. Commercial accounts

2. Contracted revenue (predictable)

3. Net profit in the $400k to $500K

4. Semi-absentee owner

5. Clean books (not too many personal or shady expenses)

These aren’t breakthrough ideas and I think they’re all pretty obvious. Except one.

Semi-absentee owners

This one sounds counterintuitive. Why would you want a business where the owner is considered “Semi-absentee”. Don’t you want to be fully hands-on 100%?

Not exactly.

Building a business with systems in place, aka, managers, training guides, Operating procedures, etc. is extremely valuable to the next owner. That tells the next owner that the money-generating machine doesn’t need them 100% of the time.

If I go clean offices, and my whole revenue is based on me cleaning offices, that’s going to fetch me a super low multiple when I go to sell. I would have to find another buyer that wants to own a business, AND have a cleaning job.

If instead I have a cleaning staff and I’m more focused on the sales and marketing side of things, that becomes pretty attractive to the next buyer.

✍️ Writing’s on the wall

The past 5 months I’ve grown to really like my house cleaning business. It’s extremely satisfying seeing a house go from dusty and dirty to super clean.

But here’s the deal- a house cleaning business won’t sell for 4X in 10 years.

The goal here is to build a business and accumulate a couple million along the way.

I’ll continue to acquire house accounts, especially because there’s clearly a demand and I’m already doing it. But the writing’s on the wall. I have 3 commercial clients right now, and it’s time to double down on that over the next few months. 😈 

🔫 Your takeaway

Talk to a broker who’s active in the industry that you’re in, or that you’re thinking about getting in.

They see it ALL. From shady, to lucrative businesses. They’ll tell you exactly how to build a business that has all the right traits.

Even if it feels like you’re putting the cart before the horse(Insert any phrase you want).

Building a business with the end in mind is super important. Getting the right systems in place, clean books, and the right customers, can literally determine if you become a millionaire or not.

In my case, it’s house accounts versus commercial accounts.

Don’t listen to me, though.

Talk to a broker who’s seeing these deals on the market. Who’s living and breathing business valuations. There’s a 100% chance it’ll Bi*ch slap you.

Dave

Weekend Reading 📖 

Well worth the 30-minute read.

Helped me find my inner Elon Musk (Pre-2024)

Found on the Interweb 🌎️ 

There’s clearly a regression going on with consumer technology. Last week we saw what Slate is doing to trucks. This week we’re seeing companies scale back the features on phones. I like the trend.

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