151: Your Salon Valuation

If you are considering selling your salon, there are a few things I’d suggest. Maybe you hire a broker. Maybe you sell it to a stylist. Whatever your decision, you first need to know what your salon is worth. So, let’s talk about how you do that. 

The Two Common Business Valuation Methods are:

1.       Total revenue multiplied by 25% to 35% + fair market value of inventory

2.       Two to Three times the pretax income + fair market value of inventory

Example Salon

Let's assume a Beauty salon is 1500 sf, located in a retail strip center, and has a ton of foot traffic.  There are 10 stations and waxing and facial rooms.  It's the only salon within a 3 mile radius and there is 6 months remaining on the initial lease.  To generate additional sales the salon also sells hair, face, and nail products.

The financials are as below

 |   | 2014 | 2015 | 2016
| Service Revenue | $300,000 | $350,000 | $400,000
| Product Revenue | $100,000 | $120,000 | $130,000
| Total Revenue | $400,000 | $470,000 | $530,000
| Payroll | $250,000 | $300,000 | $350,000
| Pre-tax Income | $74,000 | $81,000 | $90,000
| Inventory | $30,000 | $30,000 | $30,000

 Steps to Calculating the Value of a Beauty Salon

1.       Estimate the fair market value of all the inventory.  In the beauty salon business products can expire.  It's not uncommon to factor in a discount of about 20% to 30%.  After using a 25% discount the inventory for 2016 would be valued at $22,500

2.       Determine the right multiple of pretax income.  A strong business will have a higher multiple.

3.       Determine the strengths and weaknesses of the business.  

4.       Take all the factors into account and run both formulas.  For this example, let's assume the middle of the road seems best.

$530,000 X 30% = $159,000 + $22,500 (fair market value of inventory).  Total = $181,500

2.5 X $90,000 = $225,000 + $22,500 (fair market value of inventory).  Total = $247,500

Splitting the two numbers above and taking all the other factors into account a good place to start is somewhere around $225,000

If you have any questions about this, please don't hesitate to contact me. Until next time…remember, when you know better, you do better. 

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Transcript

Unknown: 1:32

Hey there, welcome to the salon ownership Made Easy podcast. As a former salon owner, I know how tough it can be to deal with things like hiring new team members, managing your KPIs, and fixing everything that seems to break in the salon. It's enough to drive anyone crazy. But don't worry, I'm here to help you navigate the ups and downs of the industry. Let's face it, beauty school didn't prepare us for the real world of Salon ownership. But with the right techniques, systems and mindset, you can achieve amazing success. With over 30 years of experience and for successful salons under my belt, including two that hit over seven figures. I've learned a thing or two about what works and what doesn't. So buckle up and get ready for some practical tips and real talk. Let's do this. Hey there. Welcome back to the podcast. I don't know if you might have caught my interview with Katie Whitley edge on the beyond the technique podcast a few weeks ago. If you didn't listen to it, or if you didn't catch it, I will link it in my show notes for you. I think it's a conversation worth listening to. We talked about how I've sold my four salons in the last 30 years. Each one was a completely different experience. And for those of you who didn't listen to it, let me just summarize real quick. My first salon, the hairs spa in Carlsbad, California, it was back in 1995 9697. The reason why I had to sell that salon was because my husband took a job in Arizona, and we were going to be making a move pretty quickly. So I actually found a buyer through just the links of stylist in in the community pretty quick. And she was very, very interested in it. And so I told my staff, if small staff I think I had three stations in a nail tech. But I told them that I had found a buyer for it the reasons why we were excited to move to Arizona, things like that. And the very next day, it was a Saturday morning, I'll never forget this. I came into work. And no one showed up. There was a note on the front desk, who said thank you. But they were scared. And so they all quit. They left their keys. It was terrible. I mean, it was a Saturday morning, think about it, full books. And I didn't know what to do. I was terrified. So I did end up calling the buyer and letting her know Hey, guess what they all walk to you're gonna end up buying a salon that doesn't have a staff. And she was so so understanding and she said, if you can give me a few days, I'll come over and I'll work beside you. I'll just move my clientele over there. And we'll work this out. So that I mean it could have ended a lot, lot worse. But okay, so that's how that ended. And but the transaction, we just went to an attorney and wrote up a simple sales transaction of the assets. And she paid me she might have paid in payments, but I can't remember it's been too long. But it went pretty smooth after that. My second salon was called oz salon. And it was in Chesapeake, Virginia. And I tell you, that was a lot bigger salon. It was a full service salon. It had eight stations, two pedicure chairs, a esthetician and we did manicures. That was a very busy salon, and it took a lot of work. And at this time I had my son I think he was like six or seven. But my daughter was like one or two. And to tell you the truth, I was working 80 hours a week in the salon. And I was working behind the chair too. I think it was something like I missed my daughter's first steps or something. I don't remember what it was. But I was just I told myself, I couldn't be a mom every day. I didn't want to miss out on those those precious moments. But I could own a salon or be a business owner anytime I wanted to. So in that season of life, I really thought it was best if I sold the salon. But this time around. We went through a broker so we found a business broker online. And we had them come in they evaluated our salon for what it what it was worth and we'll go over that in a few minutes. And they found a buyer and all this was confidential so I never did tell my staff because I didn't want them to leave like the first salon that I sold. The broker found a buyer and I met with him and he wanted to buy the salon. And so we set up a team huddle if you will a team meeting. And then that's when I dropped the bomb and I introduced the new owner and it was going to start immediately but I would be there for a couple of weeks to help train him. And oh my gosh, let me just tell you, that was the worst experience ever. It was like, instantly. They hated me instantly. It was like I didn't even exist. And I had put in almost two years of just building this business up and being their support and their leader, and then all of a sudden, they were so hurt I'm, and I'm sure, I would not suggest going that route. Transparency I think is best. But you know, from my first experience, I was gun shy, I guess, if you will. So I spent two weeks training the new owner, the staff didn't talk to me at all. And I remember my very last day, no one even said goodbye. That hurts so, so and but I'm sure they were hurt, too. And I'm sure that it still brings back bitter memories for all of those involved. So I wouldn't suggest that route. Let's see, my third experience was with artistry. That was my second Xanadu salon, that we had rebranded and completely revamped the brand, the look. Anyway, that's a whole other story. But what happened, there was probably one of the best experiences what it was one of my stylist, she started in a management position. And I kind of let her have free rein of the place. How because she had some great ideas and say the truth. I was kind of burnt out. I was I was burning the candle at both ends. I had two salons, they both needed me. So she came to me and she's like, Hey, I've got all these ideas. I think this would work. And I was like, great. Go for it. And then one day I sat her down. I said, Girl, you're doing all the things. Except payroll, why don't you just buy the salon from me? And she was just like, I don't know, I don't know if I could do that. And so I sat down, we walked over everything, what it would take what it looked like what I wanted to get for it. I basically just wanted to get my money out of it that I put into it. She said, Okay, and so we set up a payment plan, she, let's see paid a percentage down. And then she set up a payment plan for a few years. With me, you know, on the other end, like if she needed any help or anything I'm here for. I mean, I still have a vested interest in the place. And now we're in great, we had a team huddle. Everybody respected her and loved her. And so when we had the team huddle, you know, we announced it to the staff. And they were so excited because it was part of their family. You know, it was it was basically like handing the baton over to somebody else. And you know, I thank them. I love them. You know a few of them express thank you to me, which made me feel really good. And then I walked out the door, and I haven't been back and she's been kicking ass. She has been so good. She hasn't lost one single team member. And she's completely rebranded it, it looks great. She's doing amazing things. And then my Xanadu salon. You guys probably know that I moved to California. I just recently moved back to Virginia. But I didn't move to California, it was very, very hard to lead a team from across the United States. I know there's some salon owners out there that do it. And they have a strong leadership team in their salon. I at the time did not I was training someone to be as a strong leader, but maybe it was clear across the United States. I don't know my heart wasn't in it anymore. I don't know what it was. I was just I was kind of done. And so I don't know, I remember something happened. But I was coming back for a team huddle. And I reached out to another salon owner that was just right down the street from us who had reached out to me when I moved, expressing if I'd ever wanted to sell my salon, let her know because she was looking for another location. Okay, so I just emailed her and her husband and said, Hey, I don't know what season of life you're in. However, I think it's time I'm going to be in town. I would love to meet with you if you're interested. And basically they met me at the salon from the airport after I landed and took a look at it. And basically within three days. They bought my salon. The staff was wonderful about it. I took them to dinner. I told them hey, you know how what a struggle this has been? It's been a struggle for them as well. They would probably agree that it was hard when your leader isn't in the room, right? And I told them who I was. I told them what was going to happen. I was completely transparent. They were relieved actually that you know a few people left but that's to be expected. Then the new owner came in the very next day, got to know the players got to know the staff introduce themselves, ask them if there's anything they needed, things like that, why I was still there, before I went back home. And within like three days, cut me a check. It was all theirs. And they are running with it. It that was an incredible experience a little risky. But it happened beautifully. So, you know, if you're considering selling your salon, you know, there's a few things I'd suggest I've done it a lot of different ways. So maybe you might hire a broker, you could do that, especially if you don't know what your business is worth. Maybe you sell it to one of your stylists, you still need to know what your salon is worth. You don't want to undersell, and you don't want to oversell I mean I know as a salon owner, you put your sweat equity you put your love you put your whole life in the building the salon, and you might think that it's worth a lot more than it is I've talked to a lot of owners, and I've looked at their p&l and their revenue. And they think their salons worth way more than on paper, what is shown it's worth a couple of things might be driving that they might not be completely honest on their p&l. So I don't know what their way to put it but or they just have this inflated idea of what it should be worth because they put so much of themselves into it, I totally get it totally get it. But let's just talk about if you're considering selling your salon, or if you're considering buying a salon, there are a few main drivers of what drives the value of the salon. And a few of those are the revenue streams to keep your salon afloat. It's crucial. You have a reliable source of income and preferably more than one. So not just your services. Because you know, with services if a stylist leaves, they are taking those those service dollars with them. Or if you step away from the chair, you don't have those service dollars, there's no guarantee. So if you add offer like additional services or products like massage or waxing or nails or retail retails huge that can keep you afloat. Anyway, all these different revenue streams memberships, we haven't even talked about memberships. Anyway, it can boost your profits. If you add like extensions, smoothing treatments, those services tend to be higher than just hairstyling or hair cuts, and it'll boost your profit margins. Okay. The second thing you want to consider when when you're evaluating your salon is the demographics. The success of your salon actually does depend on its clientele. So if you're a salon, or a new salon and you want to target like young, trendy clients, it might not go so well in a community with an older population. So you do have to consider that who you trying to target. The third thing is taxes. If a salon that you're looking at rents, chairs to stylists, the IRS could classify them as employees instead of independent contractors, which may result in unexpected tax bills, if they have not filed correctly. So I know, I know. There's a lot of salon owners out there intentionally or unintentionally not doing their proper taxes. So you really do need to look into that. All right, let's talk about the existing staff. I've already told you what happened in some of my cases. For salon I, I sold, the whole staffs left, and I was selling it with a staff. So that was scary. So the successes of any salon is really dependent on the skills and the reputation of its stylists to maintain a top notch team. You really need to invest in marketing efforts to attract new talent. So that really does need to be in your business plan, if you will. Because this day and age turnover tends to be high. People are jumping ship left and right grass is greener on the other side. It's, it's tough. And then also the fifth thing I would look at the competition, you know, because basically starting a hair salon is pretty easy. And the market can get quite crowded pretty fast. So the more saturated the market, the less valuable the salon might be. With those five things in consideration. What are the two common business valuation methods? Okay, let me let me break this down to it. There's two ways of looking at this. We're gonna go through an example here because you want to look at it both ways and then get an average of what those are The first way is your total revenue, multiplied by 25 to 35%, then you add in the fair market value of your inventory. This second way is two to three times the pre tax income, plus the fair market value of inventory. Let's look at an example. Because I know that's a lot. Okay, let's assume that a salon is 1500 square feet. It's located in a retail strip has a ton of foot traffic. And let's say there's 10 stations, a waxing room and a facial room. And it's the only salon within a three mile radius. And there's six months remaining on the initial lease to generate additional sales. The Salon also sells hair, face and nail products, so they have a strong retail. First of all, you want to make sure whether you're selling or buying. So if you're buying a salon, you want to make sure you are looking at the last three years of their revenue. So you want to ask for their p&l bills, their income statement, those two documents will tell you a lot of things. If you are a seller, you want to make sure you have those documents for the last three years, okay. And these documents are going to show you a few things, you want to break down your service revenue, how much revenue is coming in with services, how much revenue is coming in with products or retail, that'll give you your total revenue. And then especially if the it's a team based or commission salon, you will have payroll. And so you want to deduct the payroll from that you also need to know what your pre tax income is. And that'll be on those statements as well. And then your inventory and all the computer programs nowadays, whatever, regardless of what you're using, there's a ton of them out there, it should tell you the amount of inventory you have on your shelves. And then what you want to do is you want to estimate the fair market value of all the inventory, because you know, the inventory either expires. Or maybe it's just been sitting there a long time, it's not uncommon to just take about 20 to 25%, straight off the top of that inventory. Like say your inventory is$30,000. So So you have $30,000 of product. If you used a 25% discount for the inventory, then the inventory would be valued at 22,500. Does that make sense? So you're, you're just subtracting 25% Off the top of what you actually have an inventory. Okay, so you estimate the fair market value of all the inventory. And then you determine the right multiple of pre tax income. So remember, I had said, there's a couple of different ways to evaluate your business. And one of those ways was two to three times the pre tax income. Well, the pre tax income should be on your statements. And if you're if you have a really strong, busy, strong business, you can multiply it by three. But maybe you've only been in business a couple of years. And for some reason you need to sell. And it's not really a strong business, it's an OK business, you might want to go with two times the pre tax income. And to determine your strengths and your weaknesses. Ask yourself a couple of questions. Is the business is it running? Well? What are your margins? Is the owner working behind the chair? Is the owner taking customers? Because, you know, if you're the owner, and you're selling your business, well, all those customers are not going to be part of the business anymore. So that determines that when does the lease expire? If the lease is expiring next month, that's not a lot to stand on. And also if the lease has like a five year lease on it isn't negotiable. And are the rents going up or down? That's that's huge, too. So you got to ask yourself those questions. And then you take all the factors into account. And then you run both formulas. And so for example, let's assume that, well, I'm going to do a graph, because I like Excel graphs and charts. So I will actually attach to my show notes. But let's just for this sake, say that a salon brought in total revenue, that services and retail of $530,000. And if you multiply that by 30%, they're pretty strong salon, that would be 159,000. And then plus the fair market value of their$30,000 in inventory. So that's a total of 181,500. And then if you take the middle of the road of the two to three times factor of their pre tax income, let's just go with 2.5 middle of the road and They have pre tax income of 90,000, then that would be 225,000 plus their fair market value of inventory for a total of 247,500. Okay, lots of numbers I know. So if you split the difference of 101 181,200 47,000, that gives you roughly around 225,000. That's a good place to start. So that this salon would be worth 225,000. That would be a fair asking price. That is if the service revenue is over half a million, and their inventory was around 30,000. I hope this makes sense. If not, if you have questions about this, don't hesitate to contact me, I would love to hear from you. This is a lot a lot of numbers, I will try to at least put in the show notes a little bit more about this. I mean, you know, maybe my example. But there's a lot to consider when you're buying and or selling a salon. A lot of is emotional. A lot of its emotional. But if you really just look at it on paper, and black and white numbers do not lie. Well, unless they're lying on their tax returns. But But numbers don't lie. And so if you can take your emotion out of it, whether you're buying a salon or selling it, really take a hard core, look at the numbers, you are going to get a starting place. Now you might not sell like this salon might not sell for 225. It might sell for 150. I don't know, you have to ask yourself, is that going to be worth it to you if you're the seller? See one of my salons. I knew I knew I sold for a lot less than what it was worth. But it was okay. Because I was okay with it. I was ready to let it go. So you just have to ask yourself that, because that's a lot better than just letting it run its course and shutting the doors. That's a heck of a lot harder. Plus isn't passing the baton to somebody else who's excited to uplift our industry. Isn't that a wonderful thing? So look, like I said, if you have any questions about this, don't hesitate to contact me. You can direct message me, you can email me you can go to my website, all the things. And until next time, remember when you know better, you do better. Thanks for hanging out with us on today's podcast. We hope you found it interesting and learned something new. If you liked what you heard, hit that subscribe button so you don't miss out on future episodes. We're always open to your feedback and suggestions for topics to cover in the future. So don't be shy. Drop us a line on social media or shoot us an email. Thanks again for listening and we'll catch you on the next one.