by Chris Lude, Co-Owner of Denver Concierge.
Putting together operating forecasts is an important first step in deciding to start an independent or franchise maid service. Yet, too many entrepreneurs embark without bothering to prepare an operating forecast or understand the investment requirements and operating costs associated with a new venture. If such entrepreneurs had a better understanding of such elements before they embarked, those lacking funding might have second thoughts, and those with funding might make more intelligent decisions about pricing from the outset.
Sometimes it is difficult to glean from conversations with competitors useful information, including benchmarks for prices, costs and operating ratios. Most existing house cleaning companies are unwilling to discuss (and franchisors, are largely restricted from discussing) very much financial information with prospective start-ups and franchisees. We have a healthy interest in understanding all our competitors’ operating and financial profiles, mostly because we are on a crusade to acquire as many of them as we can digest. So, we have developed benchmarks for estimating financial performance based on operating statistics and financial results of: 1) our own company; 2) companies we have purchased, or negotiated to purchase; and 3) our competitors.
Of all the entities with which we compete, individual housekeepers are often the toughest to beat. Although many have a problem with dependability, and not all clean thoroughly or consistently, it is generally easier for them to tailor their service to meet the customers’ changing needs. We haven’t really considered buying customers from individual housekeepers, and haven’t collected a meaningful amount of data about them. So, for the purpose of this topic, when we speak of competitors, we are referring only to scaleable ventures, not individuals cleaning houses alone without employees.
For us, employment applicants have always been a good source of information about competitors. If an applicant tells us that a competitor has 6 employees and three vehicles, then we use a benchmark of $120 to $150 per day, per employee, to estimate the competitor’s revenue. Except for start-ups, we use 40% to 70% of revenue as a proxy for all-in labor costs (worker’s comp, liability and bonding insurance, employment taxes, etc), and 10% of revenue for other variable costs (cleaning supplies, gasoline, etc.). Within these very wide ranges, we settle on a unique percentage estimate for each company based on our estimation of the company’s maturity and merits in terms of: 1) how well managed it is; 2) its market position vis a vis quality and price; 3) how it pays its employees; 4) whether it is in a high-growth or start-up mode, or steady-state; and 5) whether it is relying on employee vehicles or company vehicles for transport between assignments. Generally, if a company is unprofitable it is potentially an acquisition candidate, and if it is profitable, then it is not.
If a company has a small office outside their home and manages it themselves, then we figure they are likely incurring minimum fixed costs of $2,000 per month without a receptionist.
For ambitious growth-oriented companies, we estimate advertising costs to be the greater of double the cost of their yellow page ads, or $2,000 per month. Other start-ups with no plans for expansion may be spending almost nothing. We purchased a company last year with high employee and customer churn rates, which was spending $3,000 per month on advertising just to tread water–needless to say their quality control was horrible. Conversely, our Denver Concierge, being a mature enterprise with an exceptionally low customer and employee churn rate (these two are highly correlated!!), is earning sufficient referrals, and leads from our website and vans so that we could now eliminate advertising altogether and still continue to grow (albeit at a rate that we would consider uninteresting).
In terms of investments, companies spend from $500 to $3,000 on their websites. Excluding vehicles, an initial investment of about $1,000 is required for a well-equipped team, or $400 for a poorly equipped team. Any company purchasing new vehicles won’t cover their investment for some time. Regardless of whether the vehicles are used or new, those companies unable to pay cash for their vehicles will be the first to fail. Those companies depending on employee vehicles will find it more difficult to hire and keep employees, will not deliver teams as dependably, and will have to invest more in advertising, because lettered vehicles are a steady source of new leads.