A dire situation leads an owner to implement a new business model.

Desperate times call for innovative solutions. When faced with escalating workers’ compensation insurance rates, over 50% of payroll in 2002, this Southern California house cleaning company needed a new game plan quick. The owner knew that his business would not survive unless he could find a way to lower his labor costs. After much research he realized he could legally transform his cleaning company into a domestic referral agency.

Rules of the New Game
Under this model, cleaning technicians are treated as contractors rather than employees. As the owner explains, “I would guess that roughly 25% of the homes being cleaned for pay in California are being serviced by domestic referral agencies. There are a lot of rules that have to be followed and if you don’t know what you are doing, the California Employment Development Department (EDD) will reclassify your contractors as employees. This would be a very expensive mistake. We’ve built a model where we are 100% legal. We just completed an audit by the [California] EDD last winter and the results show we are fully in compliance. “

Limitations and Advantages
The owner does caution that there are some limitations to this business model. “I miss not being able to provide training, equipment and cleaning products to my cleaners,” he says. “Doing any of these, however, would create an employer/employee relationship.” 

The company has two full-time employees who handle the day-to-day activities. The owner’s involvement is limited, spending only two to three hours a week in the business. He started it as a maid service franchise in 1999, and believes that the processes he implemented then are a big part of the agency’s success to this day.

The Numbers
The owner is now offering his business for sale, with plans to move to the high deserts of California afterward. The numbers
break down as follows: 

The owner is asking $450,000 for his business. He is willing to finance up to 50% of the purchase price for 3 years at 6% interest.

The information contained in this column was supplied by the current business owner, and is without warranty of any kind. For further analysis and an explanation of the terms used in this column, click here.

Steve Shwetz is the owner of Mesa Property Management. To discuss purchasing his business, Steve can be reached at 909.524.9541 or steve@mesaproperties.net.