How to Sell Beauty Salons

Beauty Salons Can Be Excellent Investments

A beauty salon can make an excellent investment for both active owner-operators and more passive owners who seldom if ever work in the salon.¬†Beauty salons are relatively recession-resistant, as 58% of Americans in a recent survey said they would not cut spending on beauty or personal care services even under a serious recession.¬† It is simply part of human nature to care and value one’s own appearance, and beauty salons cater to the human desire to look and feel one’s very best. They also can serve as a friendly venue for people to gather and socialize. The financial stability of repeat customers in a recession-resistant environment makes for a potentially excellent return on investment from owning a beauty salon.

Selling Beauty Salons

Beauty salons may be hair salons, nail salons, day spas (which offer various facial or other aesthetic services), or salons offering a combination of hair, nail, and aesthetic services. The customer base for any type of beauty salon is always its most important asset when it comes time to sell the salon. The customers create the revenue for the salon which in turn creates economic profit for the owner (or owner benefit). The value of a beauty salon is ultimately a reflection of the owner benefit.

Why Are Customers Going to the Beauty Salon?

  • In order to understand the value of a beauty salon, one must analyze why the customers are going to the salon.
  • Sometimes the excellent location of the salon attracts customers.
  • Salons located in busy retail plazas surrounded by dense residential or commercial areas will have added value.
  • This is because the location of the salon (and the leasehold rights or lease securing the location) will stay with the buyer after the sale.
  • Further, the goodwill, quality brand, well known name, or trust built from servicing the community for many years are also reasons as to why customers use a particular beauty salon.
  • These valuable intangible assets also stay with the buyer after the sale.
  • For many beauty salons, however, the customer base is attached primarily to the particular stylists (such as a hair stylist or nail technician) that the salon employs.
  • If such a staff member left the beauty salon for any reason, then many of their customers would stop coming to the salon.
  • The quality of the staff for a beauty salon is thus of paramount importance and must be separately analyzed.

Quality of Staff Affects Valuation

No matter the type of beauty salon being sold, the quality of the staff that will stay after the sale is critical to its valuation. Most hair stylists or nail technicians are employed on a commission split basis. This means that the stylist receives anywhere from 40-60% of the sales that they generate from their own clients. The higher the percentage of revenue that the stylists or nail technicians keep, the lower the profits left over for the salon owner. In general, longer tenured staff members that are desired by repeat clients will greatly enhance the value of a beauty salon.

Payroll Taxes of Staff Affects Valuation

The staff of a beauty salon may be treated as either regular employees or independent contractors. If staff members are paid as regular employees on a W2 basis, then the salon owner will also have to incur payroll taxes. On the other hand, salons employing staff as 1099 independent contractors face no payroll taxes. This is an important point to consider, since the employer’s portion of payroll taxes is currently 7.65% of gross wages. Further, beauty salons employing staff as regular employees also may face higher workman’s compensation or other insurance costs. The extra costs associated with how the staff is treated (either as independent contractors or employees) seriously affects the profits of the salon and hence its valuation.

Staff Sign Non-Compete Agreements?

Some beauty salons employ staff members who have signed non-compete agreements with the salon. A non-compete agreement between a salon and a staff member governs the extent (in terms of geography and time) in which the staff member may not compete against the salon by opening a competing salon or by even working at a nearby salon. Most staff members of beauty salons will not want to sign non-competes since it restricts their freedom of movement, but some beauty salons insist upon them (especially if the salon spends time and money training its staff members). Beauty salons with non-compete agreements will have a higher valuation because it reduces the likelihood that staff members leave after the sale.

Is Owner A Working Stylist?

The best way to enhance the value of a beauty salon is making it an owner-absentee salon. This means that the owner does not work in the salon servicing clients at all. The entire staff (assuming none of them are related to the owner) should stay after the sale at their current pay rate. The buyer will not have to worry what will happen to their cash flow after the owner leaves. The financials will not need to be adjusted in order replace a working owner (or a member of the owner’s family) with another paid staff member.

Adjust Financials if Owner A Working Stylist

If a salon owner actively works in the salon servicing clients, then all of their sales from servicing their own clients flows to the bottom line. Sometimes, a buyer of the salon is also a stylist and can take over those clients themselves. But this is rare and can not generally be relied upon when selling. The buyer will usually have to pay someone in order to service those clients, or possibly lose those clients if no suitable replacement can be found. In any case, the financials must typically be adjusted to reflect the costs of replacing a working owner and their family members (if the family members received above market wages).

The valuation of a beauty salon – whether it be a hair salon, nail salon, day spa, or some combination thereof – ultimately depends on the successful transfer of the staff and customer base to the buyer. In most cases, this can be accomplished and the buyer can enjoy a recession-resistant investment for many years to come.

Give Martin at Five Star Business Brokers of Palm Beach County a call today at 561-827-1181 for a FREE evaluation of your business.