Boarding Kennel Valuation – Part II
Once you have assessed the projected income of a boarding kennel operation, you’re ready to do some calculations to arrive at the right selling price. Keep in mind that there are experts in this field whose only job is to calculate business values. They can complete a thorough examination of the business and come to an calculate as to the value of that business. Unfortunately, they can be extremely expensive… to the tune of $5,000. For a buyer, this could get quite expensive. So, you’re forced to do your own calculations.
Some shared sense calculations will go a long way. First of all, you should be able to buy the business for 20% down (20% is considered the minimum down payment for commercial lending purposes). The business should be able to pay all expenses plus the mortgage payment and nevertheless provide you with a decent income. clearly, this is a sweeping generalization, so take it with a grain of salt. But, this should get you headed in the right direction.
Secondly, you can do a business valuation based upon the capitalization rate. This is a way to measure how fast an investment will pay for itself. In the boarding kennel business, the desired cap rate is generally somewhere around 12%. The formula is the following. Business Value = Net Operating Income/Cap Rate. For example, if the yearly net operating income is 100,000, the calculation would be the following. 100,000 / .12 = $833,333. Cap rates may vary by vicinity. And, you should definitely consult professionals i.e. your CPA, realtor, attorney. I’ve oversimplified but my purpose is only to get you pointed in the right direction.
As we determined in the past section, when looking for that perfect boarding kennel, look for income, income, income. If they’ve done their books above board, they should be able to show bank statements to show the money being deposited. Of course, some operators pocket cash without reporting it to the government. If this is the case, it puts you in a bind. You should calculate projected income as best you can. Keep in mind… if they can’t verify their income, they should be prepared to accept a lower offer.