Still On the Floor???

It was the night before Christmas when all through the house not a creature was stirring except for the hairdresser down the street who was cramming in another client so she could have a week off and still be able to pay the team’s wages and keep the doors open. This situation is far too common and one of the first signs that a salon owner is under financial stress.

 

So how do you find yourself in such a bah-humbug of a situation?  Let’s wind the clock back 12 months earlier…

 

I love to see the magic in the eyes of a new salon owner, excited, enthusiastic, just like a child on Christmas morning. They’ve gotten their hands on the biggest present under the tree and are busily working at the wrapping to discover the spoils. Just like a new present, a new salon is fun to play with for a time, but then something unexpected happens; a wheel falls off or the batteries run out. Unlike a broken toy, a new salon can’t just be pushed aside or thrown out on Boxing Day.

 

Most owners find it difficult to get out and sell a salon with problems, so they keep operating it with all its broken equipment, lack of staff and financial woes.

 

Here’s how a salon ownership downward progression can often go…

 

A hairdresser gets annoyed at working for $20 per hour so s/he decides to set up a new salon or buy an existing salon (or worse still go into partnership with another hairdresser). They poach the clientele from their current salon, which hurts the previous owner’s bottom line, and they set up their new salon down the road.

 

they spend too much on the fit out

they pay too much for the salon

they choose a poor location

they forgot to negotiate the lease and wind up paying high rent

they don’t have enough capital to get through tough times

 

After one or a combination of these scenarios occurs, the bills start to mount up.  The owner works harder to pay the bills, stress increases and suddenly the owner is working for way less than $20 per hour for more than 50hrs per week.

 

Some hire more team members thinking that will solve the problem, but this usually accelerates the decline.  Others get help and advice from business mentors and often pull through.  Sadly, the majority ride the failure train on its one way journey to bankruptsville.  Sometimes owners will drag out this trip, but others prefer to arrive there on the express train.

 

Finally, the salon team tire of the low pay and stress, take their clientele and open up down the road, continuing the salon failure cycle.

 

Before you can say “Jingle Bells” one more salon has closed and our intrepid entrepreneur is back working for someone else, once more earning their $20 per hour. Except now they have racked up about $100,000 – $200,000 in ATO bills, outstanding super and a credit card bill to rival Elton John’s.

 

This sad scenario is typical of 80% of the business that cross my path. They arrive at many different stages in their business evolution, but if I had a dollar for the amount of times I hear … “I wish I had know about your services when we first thought of opening the salon we could be in a much better position.” I’d be a very wealthy person.

 

So let me try to end your sleepless nights and make sure that when you do take the step into salon ownership you will be one of the survivors and not one of the victims.

 

Here are my top 11 tips to buying a salon …

 

Location

Decide on the type of clientele you want to attract and put your salon smack bang in the middle of the suburb where they live.  The website www.abs.gov.au is a great resource to find out the demographics in a particular area.  Another great website to look at is yellowpages.com.au and obviously google.  It will tell you how many salons are located in that area.

 

Rent

Look for cheap rent vs. good location.  This may seem obvious but it is the number one reason why salons don’t make money. The rule of thumb is: rent must be around 10% of turnover in strip shops, 15% in shopping centers and below 7% if it’s out in the ‘burbs. Work out how close the salon you are considering buying is to reaching these benchmarks using this formula: Turnover ÷ Rent x 100 = Percentage Rent

 

Finance

Make sure you have the money to act quickly when the deal needs to be done.  Establish the value of equity in your home, the amount of cash you can raise then take 25% off that total and you have your purchase price for that salon.  This will leave you with a little in the bank for the tough times and to pay your lawyer for the transfer of the lease and general business which goes with buying a salon.

 

Price

The price is never the price.  However at Benchmark we do price our salons at market so that they don’t sit there forever. Just like when buying real estate or a car, you need to negotiate – and hard! Don’t be scared to put in offers on a few salons to see if you can pick one up within your budget. Remember, the bargain of a century can come along at any time and you need to be ready to jump in quickly.

 

Budget

Understand your budget and stick to it. If you over-commit on the purchase price you’ll find it very difficult to make the business return enough to get back your investment. A good way to measure this is: net profit by a multiple of 1-2 plus stock and also depending of a multitude of factors. E.g. Salon 1 nets $50K in the year above fully managed and owners earnings (Ebit) would be worth around $100 + Stock. Salon 2 nets $50K includes owners wage then business may only be worth $50 + Stock + (Pebit).

 

Lease

A salon with no lease is worth next to nothing. A salon with a long lease is an asset.  I would rarely buy a salon with less than 2 years left on the lease with no option period. But there are always landlords that will issue new leases on favorable terms if your are the right tenant for them.

 

Plant & Equipment

When you decide on a price for the business you must take into consideration the depreciation of the plant and equipment. A business may have a $200K fit out, but if it has been in operation for 3 years, the value of the fit out can depreciate till it’s only worth $120K. Also make sure you have financial statements including a depreciation schedule which substantiates the figures.

 

Stock

“Stock at Value (SAV)” means the stock will be paid for by you in addition to the agreed sales price. Make sure this is within your budget or that you negotiate to only take a certain amount of stock. “Walk in walk out” means stock is included in the agreed sales price (WIWO). Neither is better than the other.  It really just comes down to good negotiation. You need to decide whether you want to keep the current product supplier in your new salon.  If you do then make sure you could receive the same vendor credit terms and discounts offered to the last owner. If you don’t, then talk to your desired supplier before signing the contract to see if they will buy out or swap your unwanted stock for their stock.

 

Cash Cow

Often sellers will try to bargain with you based on the amount of cash they’re taking in the business and not declaring to the tax department. We all know that the cash cow is regularly practiced in the industry but fortunately you don’t have to pay a premium to get this little hidden bag of goodies. I always view this cash component as a surprise bonus if it even exists at all. After all, without clear book keeping proving the amount of cash taken, you can’t trust a seller isn’t exaggerating about the extra $25K they’re skimming off the profits. Never negotiate on this hidden commodity.

 

Salon Team

A key factor in the price of a business is the team attached to it. Bigger salons with more than 6 people in them tend to get a higher sale price than ones with less. Always do a secret shop on a potential salon (keep it very confidential) to see where they can improve and whether there is a sense of camaraderie and strong teamwork skills. Bigger salons offer a more stable structure if someone leaves under the new ownership. This reduces a new owner’s risk level. Another component to consider in the sale price is outstanding staff leave entitlements.  These can be rolled into the sale price or off set against stock or transfer fees, so make sure you keep an eye open for these little surprises.

 

X Factor

Some salons sell for quite a lot over the multiple of net profit rule because they have the x factor. This could include a good computer system with very accurate data, fully managed so the owner is not required to work in the business (these are rare), award winning, business plans, proven tested marketing, killer location and very cheap rent, chain of sites, accurate financials, quality policy and procedures, and good supplier discounts due to volume. I would easily pay an extra premium for these kinds of business assets.

Now that you know the rules of how to play the buying game, get out there and look around, you just may find a mystery gift under the tree this Christmas!

 

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

 

Benchmark Business Sales and Valuations