The first of a two-part series

Glenna Barnes started Pets Day Out, a pet grooming and boarding business in Duncanville, Tex., with an initial investment of $45,000 in 1992 and manageable volume of 100 pets a week. Six years later, she was working 12 hours a day and handling 500 animals a week. "It grew so fast, it was just a little bit more than I could handle by myself," she says. Overwhelmed, Barnes decided to sell. She contacted a business broker in June and had a tentative agreement in July. She closed in September for $322,000 -- about 2.5 times her net annual profit. "That was right around what I expected to get," she says.

Barnes's good fortune is no isolated case. Small businesses are sitting pretty, according to business brokers and other valuation experts from across the U.S. Thanks to a hearty economy, buyer confidence is strong -- and financing is cheap. "This is about as good a time to sell a small business as ever," says Steve Benson, an owner and broker with VR Business Brokers in Huntington Beach, Calif.

UP ON THE BLOCK. The business valuation numbers are persuasive: In the first half of 1998, the average sale price for a small business rose 8.3%, to $458,000, up from $423,000 in 1997. This is according to the latest survey from VR Business Brokers, which has tracked sales of U.S. businesses valued at $500,000 or less since 1992. What's more, small ventures are selling faster, VR found -- within 174 days on average, vs. 192 in 1997.

Across the country, several markets look strong: VR found demand for card and gift stores, florists, prepared food businesses, liquor stores, and auto/truck service businesses. A November, 1998, International Business Brokers Assn. survey of U.S. private investment groups and midmarket intermediaries shows that manufacturers worth $10 million or less sold for five times earnings before interest, taxes, depreciation, and amortization, or EBITDA, while distribution and service companies captured between 4.5 and 4.9 times EBITDA. "Niche companies are remarkably attractive in today's marketplace," says IBBA President Michael S. Hoesly, who adds that EBITDA multiples haven't changed that dramatically but dollar values have risen considerably in the past few years.

Conditions sound tempting. But most entrepreneurs who might want to take advantage of the current market are in no position to do so. That's because they don't know what their companies are worth. In the absence of such benchmarks as a public stock price -- or even the relative transparency of real estate prices -- most entrepreneurs find out what the market thinks when they want to cash out or bring in an outside investor or at major turning points in their lives, such as divorce or transfer of ownership to a child. At worse, an owner's heirs get stuck with the task.

Waiting until you must know the worth of your business is a mistake, says Mike Hartman, managing director of Valuemetrics Inc., a business valuation and advisory company in Atlanta. "For a manager to run things properly and make the right decisions," says Hartman, "he or she has got to have a sense of what the value of the business is." Moreover, if a company faces financial problems that hurt its value, knowing the valuation in advance gives the owner a chance to fix them -- instead of swallowing a discounted price.

VALUATION VARIABLES. Another reason not to wait till you're under pressure to sell is that valuing privately held businesses is not a matter of science: There are several ways to go about it (see "What's the Magic Number?"), and it's important to choose the right one and feel confident in the assessment.

For example, many entrepreneurs -- especially mom-and-pop businesses -- get their valuations from business brokers to save money, rather than paying accountants or lawyers for independent assessments. Since an owner isn't obliged to use a broker, the assessment looks like a freebie. Of course, it isn't. If the broker does the deal, he or she will charge a commission of up to 12%. In any case, John W. Newman, a senior lecturer of entrepreneurship and management at Babson College in Wellesley, Mass., contends that it's worth paying for an independent assessment. Why? A broker's ultimate interest is to push the deal through, and that may color the price he or she gives. "I would argue it's money well spent," Newman says of an assessment.

And a good broker won't dissuade you from getting a second opinion. "If you have any concerns [about a valuation], we encourage you to get an independent valuation," says Benson of VR Business Brokers. "But a good broker will have the information and resources to provide to the buyer so they can determine what the fair-market value of the business is."

How can you tell if your company is being fairly evaluated? Of course, the core value of a company is based on its earnings, prospects, financial health, assets, reputation, customer base, and the quality of its management. But an array of external factors can make the price fluctuate, and their impact is -- as much as anything -- a matter of timing. For example, retail businesses tend to do well and are likely to garner better prices when the local or national economy is strong. And oil-services companies thrive when oil prices are up, and so on.

Other price-affecting factors include market fashions. Take the Internet. Although few doubt that doing business on the World Wide Web has great potential, the results have yet to show in profit figures. Still, a certain market hysteria has developed, and many small Internet companies are posting extremely high valuations.

The worth of a small businesses can also change depending on who's interested in it -- and why. A strategic buyer, someone who wants to purchase a small enterprise because it complements an existing business, will often pay more than someone who has no other concerns. By the same token, a buyer who knows a seller is desperate has good reason to believe he'll get a better price by staying aloof.

If getting a fair valuation sounds like a complex task, there's good news: "What you're really looking for is a ballpark value," says Newman. "After you decide to sell, it becomes a negotiation issue. And the precise value will never be established until two parties come to some sort of agreement." And, as in any negotiation, the better you know the worth of your offering, the stronger your position.

By Laura Castañeda in Philadelphia

TABLE: What's the Magic Number?
To: FINANCE