Canine Residence Evaluation – Part I
Once you’ve evaluated the projected revenue of a kennel operation, you’re ready to do some math to arrive at the correct asking price. Please note that there are experts in this field whose sole job is to calculate trade values. They can complete a comprehensive analysis of the business and arrive at 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 go a long way. First, you must be able to purchase the business with a 20% down payment (20% is considered the minimum down payment for business loan purposes). The business must be able to pay all 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 do a business valuation based on the cap rate. This is a way of measuring how quickly an investment will pay for itself. In the kennel business, the desired cap rate is typically around 12%. The formula is as follows. Business Value = Net Operating Income/Cap Rate. For example, if the annual net operating income is 100,000, the calculation would be as follows. 100,000 / .12 = $833,333. Cap rates may vary by region. And you should definitely consult professionals, ie your CPA, real estate agent, attorney. I’ve oversimplified it, but my purpose is just to point you in the right direction.
As we determined in the previous section, when looking for that perfect kennel, look for income, income, income. If they have done their books correctly, 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 the projected income to the best of your ability. Please note… if they cannot verify your income, they must be prepared to accept a lower offer.