My friend grosses $300,000 a year with her pet-sitting business. She pays herself $50,000. Should I do the same?

I have an acquaintance who started her own pet-sitting business four years ago.

She has a client list of around 300 people. She says she grossed $300,000 last year and netted $90,000. She told me she paid herself $50,000 and, with deductions, was able to get her taxable income down to around $30,000.

She still does a lot of the pet sitting herself, but she's trying to pull back and hire more sitters. She currently has about 15 sitters, all independent contractors, and says she keeps 20%-30% of each client fee.

She believes she could sell the business in a few years for $300,000. That sounds very high to me. My understanding is that small businesses like this are often valued at roughly 2-3 times net income, although I realize there are other factors involved.

I'm thinking about starting my own pet-sitting business and am trying to understand how businesses like this are valued. I'm asking for input specifically on the business valuation and financial aspects. Thank you in advance.

Do what a dog does when it approaches dark, unfamiliar territory: Tread carefully.

For small pet-service/dog-sitting businesses, buyers often value the business based on the seller's discretionary earnings (SDE) rather than just the bottom line. At first glance, pet-sitting services have valuations of around 3X average earnings, while broader pet-grooming services have a valuation of 2X earnings to 2.6X earnings.

A $90,000 net income would suggest a valuation of roughly $300,000, more or less in line with the gross sales. But your friend's $50,000 salary could move that valuation higher if it's not already included in the $90,000 net profit. That could have the valuation closer to $400,000, which sounds aggressive.

Your friend brings a lot of value to the business, as the managing director and founder — and the person who oversees the client list and the network of dog-sitters. There are risks that she would have to include in any prospectus, including the economic backdrop and the likelihood that some dog-sitters do what she does, and take a slice of third parties' pet-sitting fees.

The obvious advantage of buying a business such as this is the client list and the fact that it's a going concern, but I'd also want to know how long it took her to get where she is today. That could cut both ways: If it took her 10 years, you're paying for that time; if it took her two years, who's to say that you couldn't create the same business model in your area?