If you have sufficient funds to buy a house cleaning franchise or start a company, and you are in the evaluation process, then this article is for you.
House cleaning franchisors cite a statistically lower failure rate as a compelling reason to buy a franchise. It’s a fact: independents are seven times more likely to fail than franchisees. Of course, obscured in the statistics is the effect of adverse selection: those favorably capitalized qualify for franchisees, while those grossly under-capitalized spill into the industry as independents, but that is not the point of this article. This article is about comparative probable payouts for success.
Buying a house cleaning franchise is like buying a little piece of America. I’m not talking about apple pie. I’m talking about postage stamp. If you want to sample the experience, then you might try walking into the US post office and buying your own stamp. Don’t even walk out with the stamp—just lick it and stick it right there on the post office counter. Take a couple of steps back. Look at your new stamp. Now imagine it’s a service area, and you are going to do your very best to provide the very best service you can to that precious investment of a postage stamp. How big of a difference do you really think you can make, relative to the planet, for example?
OK, as usual, I’m going a bit too far with my analogies. The point is, when you first start out, service area is not your constraint. Getting your first ten clients in a concentrated area is a positive development, so service area restriction or not, any new company is going to manage its launch in this way. Unless you’ve chosen a lame service area, it’s not until you’ve cleared your first year hurdles that you begin to feel the effect of the service area constraint. As you get more satisfied customers, they refer your company to family members and friends located outside your initial target service area. If you’re a franchise, you pass along the referral to a fellow franchisee; if you’re an independent, then you’re likely to use the opportunity to expand your service area. And this is logistically how you will come to service an entire metro area if you’re an independent. You’ll concentrate your marketing efforts to the extent you can on your highest concentration of customers, and expand from there opportunistically.
What does this have to do with cupcakes and failure rates? Nothing directly yet, but I’m coming to that. My point is that I believe comparative payouts upon exit should be carefully considered when making a decision whether to purchase a franchise or start an independent house cleaning company. Your payout from either venture will be largely determined by your ultimate size. And as long as you perform exceptional service for a competitive price, there is nothing that is going to put a crimp in your ability to grow your enterprise more than a fixed service area. And that’s where we believe, the comparative payout, for someone meeting the prerequisites, favor starting an independent house cleaning company over purchasing a house cleaning franchise. Our recommendations based on an entrepreneur’s attributes, and the comparative payouts can be illustrated as follows:
How much dough will you need? Let’s say $50,000 for starters, because if you don’t have that, then you simply won’t survive for 18 months with no salary.
If you are under-funded, then an honest assessment will bounce you to the far bottom left of the decision tree. Better to succeed with a hotdog stand, than fail with a larger venture, simply because you’re under-funded.
If you’re not confident of your managerial skills and are unsure about your ability to manage the business side of a new venture, then you might benefit significantly from some supervision in the form of a franchise. Better to succeed with some coaching and earn your cupcake, than altogether fail.
If you have sufficient funding, coupled with above average management savvy, then you might qualify for starting an independent house cleaning company with a shot at having your cake and eating it too.
No doubt, if you can afford it, the conservative thing to do is to buy the franchise, because if you do, the franchisor is going to show you how not to fail. Focusing on a smaller geographical area will result in a higher concentration of customers, less drive time and a higher profit per clean On the flip side, striking out as an independent might involve more degrees of freedom than you can handle. A broader service area will require particularly clever scheduling. Each day will entail original decision making, and in many ways you will each day recreate the wheel. Marketing without help from a head office will be riskier. Operating support will be wanting. As a result of these factors, you’re sure to have a much tougher initial six months as an independent than you would as a franchisee. But after six months, the playing field will become level; by then franchisees will have received assistance during the start-up period and received answers to most questions relating to the industry. That’s because cleaning houses is not rocket science. Developing the systems for cleaning houses is done by about 100 new entrepreneurs in every city of 2 million across the US every year. People all over America are recreating their own little house cleaning wheels daily.
As part of the decision process, let’s focus on the primary reason an entrepreneur might choose to start a service enterprise. Ignoring those who just love providing great service, entrepreneurs set out on a venture for the payout. If you’re looking for a payout, as the primary reason for starting a house cleaning venture, then think 60 to 72 months as a reasonable investment period. As an independent with unfettered access to a metro area having a population of over one million, in our experience, you might be lucky enough to capture a customer base sufficiently large to generate revenue of $1.5 to $2.0 million per year, or almost $40K per week.
During the same period as a franchisee, expect to capture, say, a 29% market share of your postage stamp. How many households, really? Go on do the math—you bought how many households including all those with just enough income to be disqualified for food stamps, in a market picked over and not chosen by existing franchisees. Let’s assume despite those factors that you get exceptional penetration, in accordance with the franchisor’s plan. How much revenue do you really expect to pull out of your postage stamp? Don’t forecast, just ask existing franchisees. The franchisor is going to refer you to the company’s poster child, but the handful of franchisees with revenue in excess of $1 million are not representative of what you should expect to earn. Instead, call up five franchisees which are five or six years old and ask them how much revenue they currently earn.
For what price do you expect to sell your franchise? I asked this question once to the owner of a major house cleaning franchisor; his reply was “four month’s revenue.” If your five franchisees earn average revenue of $10K per week, then you might expect a gross payout of about $150K, assuming the franchisor chooses to facilitate the sale. A larger enterprise will be valued as a going concern based on cash flow to owners, so a company with revenue of $40K per week, netting over $400,000 cash flow per year might sell for 10x the payout of a franchise, or about $1.5 million. The relative payout is like comparing an iced lemon cupcake to a great big five-deck Greek wedding cake. One is a retirement snack for two; the other might just last a residual lifetime.