Buying And Selling A Hair Salon: Business Valuation For The Beauty Business

When buying and selling a hair salon the valuation can be the trickiest part.

How do you know what is a fair price when buying or selling a salon/spa?

Fortunately we have recent reliable data on what salons across the country have sold for. Using this data as a starting point it becomes much easier to determine the real-world value of your salon. Whether you are the buyer or seller.

For 2014 BizBuySell.com reported 227 completed sales of hair and beauty salons. While this number is just a fraction of all the sales that took place it is the biggest survey of recent salon sales. So it is a good starting place.

Data For 227 Completed Hair Salon Sales In 2014

Median Selling Price $94,080

Median Cash Flow $64,311

Median Multiple Of Cash Flow 1.75

Median Revenue $208,698

Median Multiple Of Revenue 0.45

We can see that salons most typically sell for around 1.75 times their annual cash flow.

Of course these are just the median sales prices and multiples. You may do much better. Or maybe not.

It all depends of a few key factors. Let’s look at each of the most important factors.

5 Factors That Impact Your Hair Salon Valuation

1.) Multiple Streams Of Profits– The most profitable salons make money on more than just hair-styling. Nails, waxing and massage are the most common extra services. And add to that products such as shampoos and conditioners — which usually bring in the highest margins. Of course just offering these services/products is not enough. If an owner dedicates the space, personnel and marketing resources to these additional services they have to be profitable. They can’t just increase revenue. That is why this section is labelled “Multiple Streams Of Profits” and not “Multiple Streams Of Revenue”. As a salon owner who is looking to sell, you will be better off dropping any extra services that have not been profitable. Better to offer a limited number of services that all contribute to the bottom line than to have a long list of offerings that just eat up space and energy. And as a buyer you want to look for efficiency not size. A salon that offers a few services that are all profitable will be much easier to manage than one with a laundry list of services that don’t generate profits. You should pay for the bottom line profits of the salon and not the top line revenues.

2.) Quality Of Staff — The most attractive salons will have a crew of stylists who are willing to stay after the sale………… and an owner who isn’t. Best case scenario is that the customers are coming in to see the stylists and not the owner. This way the business maintains its value after the sale. If current revenue depends on people coming in to be served by the owner/founder that will be a red flag to any buyer. If you are not just the owner but also the salon’s star stylist, you may be better off delaying the sale until you can develop a team of stylists that will stay with the business after the sale. In the sale of any small business the key question for the buyer is always:

Do I have a reasonable expectation that I will have the same level of success after the sale that the owner has enjoyed up until now?

Not a guarantee — just a reasonable expectation that things will stay the same. If most customers are doing business with stylists that won’t be there after the sale it is not reasonable to expect profits to stay the same. And that will impact the price at which the salon can be sold.

3.) Competition — The salon business has a relatively low barrier to entry. Compared to other businesses it can be cheaper and quicker to open a new salon. So the amount competition is a big deal for both a salon owner and a salon buyer. This is why the first two factors — multiple sources of profits and a high quality staff — are so important. It is very hard to duplicate these two assets. In a sea of competition they can make you stand out. And not just to clients but to potential buyers. Anyone interested in buying your salon will also look at the other salons in your area that are for sale. So there are two types of competition. The salon must compete on a daily basis for customers. And once it is put up for sale it must compete with other salons for a buyer. You can’t do anything about the number of other salons that are for sale in your area. But it is something you need to be aware of.

4.) Conditions Of Facility — Most salons operate in rented space. This can cause a problem if the landlord only cares about collecting the rent. If upkeep has be neglected for any length of time it will affect the valuation. Appearance is a big deal to buyers. It is an emotional factor. No one wants to invest their life savings unless they can take pride in the appearance of the building. Buyers will always add the perceived costs of new tiles on the floor and new paint on the walls into any valuation they place on the business. If your landlord is unwilling to invest in the upkeep you may have to take matters into your own hands. You are better off fixing, cleaning and/or replacing what you can. What you actually spend on these improvements will be less than what the buyer imagines they are going to have to spend to make those same upgrades.

5.) Lease — In addition to the monthly rent amount, there are two significant features in any lease: 1.) Assignment — Can your lease be taken over by the buyer without your landlord’s approval? 2.) Length — How much time is left on the lease and does the renter have the option to extend it. Leases are usually written with a “no-assignment” clause. This means the buyer can not take over the lease without the landlord’s consent. Unfortunately, some greedy landlords will see this as an opportunity to dramatically increase the rent — often to the point that it kills a sale. Before you put your business on the market you should read your lease to see just what the terms and limitations are concerning assignment. If you have only a year or two remaining on your lease, the buyer will be forced to make a purchase-offer contingent upon her ability to negotiate a long term lease with the landlord. At that point, the fate of your sale will be out of your control and rest in the hands of the landlord. Even if you have a few years remaining on your lease you should consider negotiating a new lease now. You don’t have to tell the landlord that you are selling, just that you’d like to lock in a good lease for the long term.

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Originally published at www.thebizseller.com.