Business owners may often wonder about the value of their business. Knowing the value of your pet sitting business helps business owners determine if they are pricing their services effectively. It can also help them better understand what they can do to improve the value of their business. Valuing your business service is an important undertaking if you plan to sell your company.
There are a number of ways to determine the value of your pet sitting service. Though arriving at a valuation is a complex process, it is important to note that determining the value of your pet sitting service is just as much an art as it is a science. Below, we will discuss the most common ways that you can determine the value of your business.
4 Ways to Determine The Value Of Your Pet Sitting Business
There are four common ways to determine the value of your pet sitting service. Though some are more accurate than others, you can take a weighted average of the four to arrive at a more accurate valuation. Here are four methodologies you can use to determine business valuation:
1. Book Value
The book value is the easiest to identify, but it is also the least accurate way to determine business value. Business owners can determine the book value by looking at the balance sheet and considering the value of hard assets minus the debts. For example, a restaurant has kitchen equipment, which would be considered hard assets with value. The restaurant owner could determine the value of these assets by estimating what the resale value of the equipment would be.
The book value or assets-based method of determining business value often results in the lowest valuation. This is because this type of valuation does not take into account what accountants would call “Good Will.” Good Will is the difference between what someone is willing to pay for your company, or its market value, and the value of your net assets, or assets minus liabilities. Most companies have some Good Will, which provides a higher overall valuation.
In your pet sitting company, Good Will ends up being the majority of your businesses value.
2. Publicly-Traded Comparables
The public stock market provides a valuation to each company with shares being traded. This can provide a basis for valuating your company. Especially when you compare your business to similar companies. Using this method, you would look at the last twelve months (LTM) and next twelve months (NTM). Or you could look at revenue and earnings before interest, taxes, depreciation, and amortization (EBITDA).
You can take the average multiples in each category – LTM revenue, LTM EBITDA, NTM revenue, NTM EBITDA – and multiple this by your company’s performance over the past year and projected performance over the next year. This provides an estimated value for each category. Then, you can take the weighted average of the four different estimates to arrive at a valuation.
3. Transaction Comparables
The transaction comparable approach is similar to the publicly-traded comparable approach that we just discussed. With transaction comparables, valuation experts focus on recent transactions.
This time, you take the multiples of LTM and NTM revenue and EBITDA for recent transactions. Then, you apply those multiples to your business. This allows you to arrive at another estimated value based on historical and projected performance.
This method would be used more for dog walking companies where there is a lot of repeat business.
4. Discounted Cash Flow
The discounted cash flow method of valuation is different than the other three. It is driven by long-term projected performance rather than focusing on historical performance. With this method, you are estimating what your future cash flow stream is worth in today’s dollars, or net present value (NPV).
You start by attempting to determine how much profit you expect to make in the next few years. Once you have determined how much profit you will most likely make in the future, you apply a discount rate. This considers the time value of money.
Cash flow is one of the greatest determinants of business value. By looking at how much cash you have generated and how much you will generate in the future, you can have a clearer idea of business value. The more consistent and predictable your company’s cash flows are, the higher the value of your business.
Once you have the four different estimated values, you can apply a weight to each to determine the overall estimate. The lowest weight should be assigned to the book value. This is because book value is the least accurate of the four valuation methods. Then, apply equal weights to the remaining three estimated values – (Publicly-Traded Comparables, Transaction Comparables, and Discounted Cash Flow).
This will give you the most accurate valuation for your business.
Now that you have an estimated value for your pet sitting service, you can work toward finding ways to increase your business value. One way to start is by gaining access to working capital for your business. Another is finding ways to expand your offering to increase cash flow. You may also want to reevaluate your pricing model for products and services. Why? Well, you may not be charging as much as you should!