Valuing an Existing Business
Is the selling price fair and reasonable? If the seller hasn’t had their business appraised by a reputable commercial business opportunity appraiser, their asking price is probably what they would like to get; it’s as simple as that. It may be worth more or less. Don’t expect most grooming business sellers to show you the results of a formal appraisal. However, you can still order one on your own with the agreement of the seller.
Appraisers generally require copies of the last three tax returns for the business. That’s where many business owners halt the appraisal process and don’t disclose. Some may show you bookkeeping data. That is never the same thing. Bookkeeping data is not the same as tax returns filed under penalty of perjury. Is it any wonder why appraisers won’t value a business without its tax returns?
If all you can get is bookkeeping data, attempt to rectify the number of regular clients with sales income. Here’s how you can do that quickly. First, how many clients does the seller have? Second, what was the total sales income for grooming services generated by those clients? For example, we saw a classified ad saying 5,000 regular clients come with the sale of their business, and last year their gross sales income for grooming was $75,000. What? Do the math. Divide the sales income by the clients; in this case, $75,000 divided by 5,000. Do you see the problem? The result is $15. Each client is only spending $15 a year on grooming services. No way. The 5,000 clients figure is actually more like 500 clients spending about $150 a year. That’s a 1,000 percent overstatement. The seller is probably not lying intentionally and does have 5,000 clients on record. However, the vast majority of them have not patronized the business in years. Only the current regular clients add value to the purchase price!
Are there more variables in valuing a business for sale? Indeed there are. You are purchasing their equipment and leasehold improvements, and these need to be stated in the contract of sale in fine detail. Perhaps you are buying a mobile business. If vehicles are included in the sale, these are important assets adding value to the business. In a commercial location, you may be purchasing a nice long lease. But what if the lease is about to face renewal? Will the rent jump? It could. Check it out.
Sometimes there are alarming leaps in high-growth areas. Beware the seller telling you what the landlord will do. Always talk directly with the landlord before you purchase a business in a commercial location on a rent or lease basis.
Grooming businesses that have successfully operated for many years develop “goodwill” in their community, and this “intangible” can be appraised and purchased. We participated in a business sale where three certified commercial appraisers appraised the logo and goodwill for over $80,000. You know that one smart groomer-owned business.
If you are not going to require an appraisal or simply cannot get one from the seller, remain skeptical without plenty of evidence. Follow our instructions to determine how many clients you really are getting with the purchase. It may take hours spent onsite to go through the records, just do it. Value the used equipment, furniture, fixtures, sign, and other assets included with the sale. Does the business have much goodwill and recognition in the community? Ask around if you must.
Most importantly, we strongly recommend calculating a profit/loss projection for the business. The most popular way is to use Pet Grooming Business Plan Helper & Sampler by Grooming Business in a Box®. You can use its income and expense projection worksheets to fill in actual bookkeeping data provided by the seller. You can then input what you think the income and expenses will be under your management. Now you will know with far more confidence if you can make the profit adequate to recoup the purchase of the business.
Now you are buying a business like a pro and perhaps saving yourself plenty of money. You can also use your project to negotiate the final purchase price. On the other hand, we suggest sellers prepare a business plan for potential buyers. You just may find a buyer more motivated when you supply a business plan. Many sellers tell us they give buyers a copy of our book, From Problems to Profits, to give them the confidence they can run the business.
Realize that some clientele may be lost when the previous owner departs. Some sellers will stay as consultants for a specified time and support the transition. This can be especially important if you are purchasing your first business. We’ve even seen sellers stay on and train the new owner how to groom for 12 to 16 weeks. The buyer is taking some risk should the seller depart early, but it has been done successfully.
Oh yes, there have been stories where an owner sold a business and a year later decided to re-enter the industry and opened up a new grooming business near the one they sold! Yikes! Will they take back some of the clientele? Talk to your attorney about non-competition clauses in the contract of sale. Never buy a business without a contract of sale reviewed by your attorney. No attorney? Now is the time to find a general or contract attorney.
There is still more to learn about valuing a grooming business.
What About the Selling Price
Recently we talked with a CPA who valued a moderate size grooming business at two times gross. What does that mean? If the gross sales of services were $100,000 last year, the selling price is $200,000. As a management consultant of nearly 20 years, I have only seen a handful of grooming businesses sell at that level. It may be appropriate for other industries but rarely grooming. If you can get it, great!
More often than not, grooming businesses are valued by the net operating income. For example, the same business earning $100,000 annually shows a net operating income of $55,000 after deducting operating expenses. Now we get to the variable modifier. You multiply the net operating income figure instead of the gross. For example, the seller wants two times the net operating income, or in this case, $110,000.
Backed by nearly 20 years of experience as consultants, we have seen well-established grooming businesses with excellent goodwill and other factors sell for two times the net operating income. However, when the U.S. economy is sluggish, flat, or even declining, we see a distinct increase in businesses selling for around 1 to 1.5 times the net operating income. Remember, if real estate is included in the sale, its value is added. We are only talking about the “business opportunity” and not the real estate included in the sale.
Have you considered the costs of opening your own business? Refer to the Outfit a Grooming Business™ area under the PRODUCTS category for great assistance. You can estimate startup costs and compare them to purchasing a business. Remember, you won’t have many customers in the beginning. The fewer customers you have, the more you need cash reserves to account for operating losses until you develop a steady clientele.
As you complete the investigation and compile the records, you will likely gain more insight into if the purchase of the business is for you. Unfortunately, it has been our experience that some pet grooming business owners are lax in maintaining well-organized documentation, and if that is so, you are at risk. If you cannot investigate at minimum what has been mentioned here, and your lawyer and accountant are likely to require more, you may be at risk of buying a business and inheriting undiscovered problems. It does happen, be very careful.
Are you thinking about owning a grooming business and not grooming pets?
Non-Groomers Purchasing a Grooming Business: A Warning
Most career seekers entering the grooming industry plan to groom pets. That’s important. Our biggest concern for new grooming business owners is those that plan to own and manage but not groom. If their businesses do not have strong sales from other departments such as retail, training, or boarding, they may find that their employees earn more than them, sometimes more.
You may be surprised if you have never accounted for the labor costs of grooming staff. In fact, we’ve asked accountants to review the financials of grooming businesses. Their eyes widen when they see the ratio of payroll costs to sales income. Ideally, accountants advise payroll costs to be 30% to 40% of the sales income. Even graduates fresh from grooming school want 50% commission. Look how much higher that is compared to other industries.
Experienced groomers ask for 55% to 60% and commissions and payroll taxes still have to be accounted for! Pet grooming is labor-intensive and costly. It doesn’t mean that pet groomers are overpaid! It means that pet owners should actually be paying more for grooming services. But the industry can charge only what the market of pet owners will bear. It takes wise planning to make enough sales income in a properly staffed business to support the owner/manager with a paycheck when they don’t groom. We finally achieved that level of operation, but it took years.
The same warning applies to owners/managers/groomers who want to groom less and manage more. Generally, they need two full-charge groomers working full-time and a busy bathing department doing plenty of bath-only pets before they can entirely resort to a management position and support a steady paycheck as manager. We encourage them to look to add more specialty retail and other sources of revenue as well under their management to once again bolster their expected personal income from the business. Accurate numbers don’t lie!
We have examined the financial statements of hundreds of non-grooming owners and groomers going into semi-retirement from grooming duties and tracked their success. They always had additional sources in addition to their grooming department.
We’re almost done. It’s time to set you loose with some last thoughts.