Boarding Kennel Assessment – Part II
Once you’ve evaluated the projected income from running a kennel, you’re ready to do some math to arrive at the correct sales price. Note that there are experts in this field whose only job is to calculate trade values. They can complete a thorough analysis of the business and come up with an estimate of the value of that business. Unfortunately, they can be prohibitively expensive … to the tune of $ 5,000. For a buyer, this could be quite expensive. So, you are forced to do your own calculations.
Some common sense calculations will help. First, you should be able to buy the business with a 20% down payment (20% is considered the minimum down payment for business loans). The business should be able to pay all the expenses plus the mortgage payment and still provide you with a decent income. Obviously, this is a sweeping generalization, so take it with a grain of salt. But, this should get you in the right direction.
Second, you can perform a business valuation based on the capitalization rate. This is a way of measuring how quickly an investment will pay off. In the kennel business, the desired cap rate is generally around 12%. The formula is the following. Trade Value = Net Operating Income / Capitalization Rate. For example, if the annual net operating income is 100,000, the calculation would be as follows. 100,000 / .12 = $ 833,333. Capitalization rates may vary by region. And you should definitely consult professionals, that is, your CPA, real estate agent, lawyer. I’ve oversimplified, but my purpose is just to point you in the right direction.
As we determined in the previous section, when looking for that perfect lodging kennel, look for income, income, income. If they have made their books above the table, they should be able to show bank statements to show the money being deposited. Of course, some operators pocket cash without informing the government. If this is the case, it puts you in a bind. You should calculate the projected income to the best of your ability. Please note … if they can’t verify your income, they should be prepared to accept a lower offer.