Selling Hair Salons in South Florida

Many successful hair salons in South Florida are owned by an active stylist who works in the salon, but there are also many partially or even totally absente-owned hair salons. No matter how involved the owner is in the business, when it comes time to sell the owner should prepare by obtaining an organized set of financial records, streamlining operations to incorporate automated booking, and reducing the level of owner-dependence while highlighting the value of the salon’s brand. Buyers closely examine the salon’s lease, location, physical assets, and the degree to which the future cash flow of the business will be affected after the owner leaves. Purchasing and operating a hair salon has its challenges, but still may be a very satisfying and profitable endeavor for both active owner-operators and more absentee owners.

Valuing Hair Salons

Determine salon’s cash flow or owner benefit while adjusting for the profits from the seller’s own clients.
Analyze the leasehold rights of the salon, which flows from the lease and right to use commercial property.
Analyze the location of the salon and how visible it is to prospective customers.
Determine the tangible or physical assets of the salon such as equipment and fixed fixtures included in the sale.

Adjusted Owner Benefit

The term ‘owner benefit’ refers to the true economic profit derived by a working owner. This includes EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) which can be found on the financial statement such as a tax return. Then one must ‘add-‘back’ any unrecorded sales, personal expenses of the owner that flow through the financial statement, and the owner’s salary. For hair salons with a working owner who services a substantial amount of clients, the profits derived by the owner’s clients should be excluded from adjusted owner benefit. This is because a buyer of the salon may not be expected to personally service the seller’s clients and derive the same level of profits as the seller.

Working Owner-Stylists

The profits from hair salon clients serviced by a working owner are profits for the owner. But for a potential buyer of the salon, the same level of profits for servicing those clients may not exist. The buyer will likely have to pay someone to service those clients (assuming those clients even stay with the salon). This cost must be deducted from the adjusted owner benefit. If the buyer is a working stylist, then the buyer could try to absorb some of the seller’s clients. But this does not always work out and can never be guaranteed. Importantly, many sellers who are working stylists may be persuaded to stay after the sale and work for the buyer. Usually this is on a (roughly) fifty percent commission basis.

Family Members May Also Work in Salon

Often times, spouses or family members of the owner work in the salon as stylists. In these circumstances, the same adjustment to owner benefit must be made in order to account for the true cost that a buyer would face to service those clients. Many owners of hair salons allow family members to keep most (if not all) of the revenue derived by clients they service. If the family members of the seller agree to stay after the sale and work on commission, then the profit from such customer sales (after a fair commission split) may be used by the buyer in determining the owner benefit.

Valuation Determined By Adjusted Owner Benefit

The valuation of a hair salon is typically determined by a multiple of its adjusted owner benefit. The multiple may range from about 1.5-4 times the annual owner benefit. Hair salon chains or larger salons with a transferable staff typically receive valuations on the higher edge of the scale. Other factors also are of critical importance and greatly affect the valuation range. Specifically, the leasehold rights, location, and physical assets of a salon greatly affect the valuation range.

Leasehold Rights of Hair Salons

A leasehold right is the right of a commercial tenant to occupy and use leased premises. The lease is thus a very critical factor to determining the salon’s valuation. A long term lease with reasonable rent increases (starting from a market-average or below market-average base rent) is preferred. The net rent should not exceed 10-15% of the total gross sales of the hair salon. After all, most salon owner pay at least half of the sales in wages for their stylists, along with other expenses for utilities, supplies, marketing, and administrative overhead. If rent takes up too much of a portion of the sales, then the salon may have trouble turning a profit.

Location Critical For Hair Salons

As in real estate, a good location is of paramount importance for a hair salon. A hair salon location in a busy retail plaza (with plenty of parking) surrounded by dense residential and commercial areas will result in a better valuation. Additionally, many buyers of hair salons who plan to be active owner-operators want the salon to be close to where they live. They also only want to be in certain areas that better cater to the type of clients they wish to serve.

Salon’s Physical Assets

The physical assets of a salon include the movable equipment (such as the stylist’s chairs) as well as the build out costs (such as electrical, plumbing, and HVAC work). In general, the cost for the build-out and equipment is far higher than its depreciated value. A gorgeous build-out for a salon is still extremely important and enhances its valuation for many buyers. The value of the equipment is usually on an ‘as is’ basis and may always be ascertained by the buyer during formal due diligence.

Sell Salon for the Best Price Possible

All the factors affecting a salon’s valuation must be carefully examined in order to derive the best possible asking price. Selling a salon should not be a painful experience, and hair salon owners should sell their business confidentially and with zero business interruptions.

Give Martin at Five Star Business Brokers of Palm Beach County a call today for a free evaluation for your hair salon, nail salon, or spa.