BUSINESS
Thinking of Buying a Pet Business? Rick Ingram details methods of determining what a business is worth Whether you are looking to buy a pet business or thinking of expanding your current business by buying a competitor, there are many important issues to consider. Key among these issues is how to determine the value of the business you are considering. In this article I present a broad overview of business valuation options and will cover the details in future editions
W
hatever your goals are when you are considering buying an existing business there are a few fundamentals that will help you determine whether the business is right for you and what the value of the business is. Determining what you should pay for a business can be tough, part hard-nosed financial fact, and part “school-of-hard knocks” artful intuition. But armed with a few ‘rules-of-thumb’ and a spreadsheet or two you can make sure you are getting what you are paying for and be able to approximate the potential return on your business-buying investment. Business pros pretty much use one of, or a combination of, five basic methods for determining what a business is worth.
1. One method that can be used to determine the value of a business is to simply add up what the business assets are worth. Lenders like this method because assets are ‘real’ (vehicles, real estate, inventory etc.) and can be sold to raise cash if need be. But this method is not very effective for determining the value (to you) of a service industry business (which most pet businesses are). In fact, many seasoned business buyers will not consider assets as part of their valuation, reasoning that the only value of an asset must be reflected in the company’s income. Remember, you are most probably buying the business to increase your income and improve
your life, so unless these assets make more money for you they are of limited value.
2. A second method for valuing a business is based on how much money you would get by selling everything the company owns. Although lenders will often use this method to determine their ‘worst case’ risk, this method, like the first example, does not help you understand what the business will be worth to you.
3. Still another method bases the business value on an estimated future income using a variety of estimates and assumptions. This method is o ot Ph k better suited © Can Stoc for hi-tech start-ups and initial public offerings (and are very often hugely optimistic) so is not useful to you in determining the value of a typical small business.
4. Yet another method bases a business’s value on a simple comparison with the selling prices of other similar businesses. Though this method can be useful if there are sufficient comparisons to use it, it is the final method I will mention that I think is the most effective in determining the value of a small pet business to you.
5. The last, and most practical, as well as most commonly used for small service businesses like a typical pet business, is to value the business based on the net
BARKS from the Guild/July 2014
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