Know what your Salon is Worth

The sale value of a salon is the most asked question I get as I travel around the country to various businesses … So let’s look at what makes up the value of a salon and how to establish a realistic price for your business.

In my experience 90% of all salon owners think that their business is worth more than what it really is and the reason is that most salon owners have put in blood, sweat and tears to get their business to a point where they think it will sell at the price they want.

The reality is a little different. As a salon owner about to sell you are totally focused on how much you want for your hard work; of course why wouldn’t you be, your aim is to get the best price for your salon.

However owners are often blinded by the fact that their business is viewed by a potential buyer as a risk and the irony is that while you are focused on the highest price they are focused on getting the cheapest price they possibly can.

So let’s talk about how we make this transaction work so that all parties are happy with the result.

The first thing we need to look at is value…

1. The value of your salon directly relates to your financial figures. In the industry a good rule of thumb for the value of your salon can be derived by multiplying your Net Profit inc owners wage by 1 or 2 depending on weather it is an owner operator or fully managed.

Example 1 – owner operator salon with a net profit of $50,000 per year x multiple of 1

= $50,000 + STOCK

Sale listing price would be around = $65,000 + STOCK

Example 2 – fully managed salon with a net profit of $50,000 per year x multiple of 2

= $100,000 + STOCK

Sale listing price would be around = $115,000 + STOCK

How to increase the value of your business…

• A salon that has a good turnover e.g. $15,000 to $20,000 per week is often worth more as this provides a guaranteed cash flow with a large stable team.

• A totally managed salon (owner does nothing on a day to day basis) is worth much more and these salons are often highly sort after.

• An outstanding long lease, low rent for the position or high traffic flow is also a premium.

• Detailed Policy & Procedures with regards to every aspect of the business, implemented on a daily basis and user friendly also add value.

If you combine some of these factors above you may be able to achieve a net profit multiple of 2.5. We have seen many salons sell for these figures because they are such a good investment for a buyer.

Steps you can take to increase the value of your salon …

• First and foremost you must increase your net profit. Net profit is the money that is left after all operational expenses e.g. – product purchases, rent, wages including yours if you work in the business, marketing etc. You can often leave out things like Depreciation, Personal Expenses and odd purchases. This figure is called the EBITDA. (Earnings Before Income Tax Depreciation Amortization) The way you increase your net profit is to control the expenses above. Keep on a few casual staff that you can send home if work is not busy, don’t order too much stock and control wastage. These are the best places to start.

• The other thing you can do to increase your net profit is to increase revenue .i.e. money coming into the salon. Have training with staff, get a business coach (this can be added back into your net profit) or invest in results driven marketing.

• The final thing we recommend to do is get yourself out of the business over the next few months without affecting your net profit. We are inundated with enquiries from people who what to buy a managed profitable salon. The best way to get you out of the business is to develop good policy and procedures and hire a quality manager.

Now that your business is highly valued, it is time to sell… We always have the motto of “When things are going well that’s the time to sell!”

• The first thing you need to do is make sure your financials look good, go and see your accountant.
• Read your lease again and make sure there are not going to be any hiccups with the transfer.
• Decide on what sale price you want to put on the salon. Be realistic and leave room for negotiation.
• Take a few pictures while the salon is busy and also when it is closed so this can be used in an information pack for the potential buyer.
• Contact a salon specialist broker and introduce them to your business, ask for an appraisal.
• Let the broker advertise the business and negotiate the deal for you as this is more likely to get the desired result. Leave your emotions out it!
• Most importantly keep the whole thing confidential (including your clients and team) until the deal is done and unconditional – meaning the money is in the bank!

For more information on appraisals and finding the right salon. Contact a salon specialist broker today on 1300 366 521.

Benchmark Salon Sales