Buy or Selling Salons … here is how you learn the lingo
Reading an advertisement for a salon for sale can be a very confusing exercise. Below is a list of all the common phrases and abbreviations so you know what you are looking at.
- Rent per square meter (sqm) – a key area in any business is rent paid vs the location of the business. It is essential to have a good location but make sure you are not paying too much for it. The easiest way to benchmark rent is to break it down into a dollar value per square meter. For example a salon in Sydney CBD Westfield Shopping Centre would come in at around $2700 per sqm. Some might say that’s expensive but that rent guarantees millions of people each year walking past your door. Most shopping centre rents are in the vicinity of $1500 per sqm. Strip Shops around $1000 per sqm and boutique (not on main road) sites can be as cheap $150 per sqm.
- Stock at Value (SAV) – this is often tacked onto the price of a business and suggests that you will be required to purchase the salon at a certain price plus you will be required to purchase the current stock in the business as well. Eg – Sale Price – $100K (By the way K means thousand) + SAV
- Walk In Walk Out (WIWO) – the other option when buying a business is to purchase it on a WIWO basis where all the stock is included in the sale price. This often happens if the business does not have a lot of stock (less than $5000) or the owner just wants to sweeten the deal. Eg Sale Price – $100K WIWO.
- Net Profit – once you have paid all your bills then you’re left with a net profit. This is the most important figure when buying or selling a salon. Often the net profit may be small at around $15-$20K however the owner lives an extravagant lifestyle … trips to Paris each year, leases a Porsche etc. This is done to lower the net profit and avoid paying too much tax. When selling a salon, many of these expenses can be ‘added back’ into the net profit as the new owner may be a bit more restrained. Always remember the bigger the net profit the higher the sale price will be on a salon.
- Earnings Before Income Tax (EBIT) – this very important term relates to net profit and how it is displayed. An EBIT net profit means that the owner has taken a wage and there is still profit at the end of the day. This is often referenced to managed salons where the owner does not work in them. An EBIT profit is one the best profit figures you can get and this type of profit commands the best sales price of a salon.
- Proprietors Earnings Before Income Tax (PEBIT) – this type of profit has the owners wage added back into the net profit which means it is not as appealing as an EBIT profit. You don’t need to get too hooked up on this concept, just understand that there are different ways of representing net profit.
- Addbacks – when calculating the real net profit of a business it is a common practice to add back into the net profit certain expenses to give a true indication of the actual money you will earn out of the business. Justifiable addbacks are depreciation, one off expenses like getting sued, interest on a loan, often business coaches, leasing of motor vehicles, overseas trips, excess wages or superannuation. All of these expenses can be stopped when you buy the business.
- Return on Investment (ROI) – this figure is very important as it lets you know how quickly you will get your money back on your investment. For example if a salon had an EBIT net profit of $100K and you purchased the salon for $200K then your ROI would be 50% which means you would make you money back in 2 years. To work out ROI all you need to do is take the net profit and divide it by the sale price of the business then multiply by 100. EG $100K ÷ $200K x 100 = 50%.
For more information on appraisals and finding the right salon. Contact a salon specialist broker today on 1300 366 521.
Benchmark Salon Sales – Selling salons Australia Wide