Nail Salons Are Steady Businesses
Nail salons exist in most major commercial shopping plazas in the South Florida area. Some beauty salons offer both hair and nail services (and other services such as spa treatments), but nail salons only specialize in nails. Often, nail salons will have an exclusive right to provide nail treatments within their commercial plaza. Customers of nail salons often feel that they ‘must’ get their nails done on a regular basis. Even when the economy goes into recession, nail spas often still thrive. Moreover, many customers of nail salons often become attached to a specific nail salon by virtue of their relationship with the nail technicians or by virtue of the salon’s convenience and pleasant atmosphere.
Valuing Nail Salons
As with valuing hair salons, the first step in valuing a nail salon is properly determining its ‘owner benefit.’ This simply means the true economic benefits that the owner derives from the business. Starting with the nail salon’s EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), one must include the salon’s unrecorded sales, the owner’s personal expenses that are expensed through the business, the owner’s salary, and any other adjustments in order to properly determine the true owner benefit.
Owner’s Involvement in Nail Salon
Before properly determining the true owner benefit of a nail salon, one must identify and understand the owner’s role. If the owner is active in the business as a nail technician, then those customer sales provided personally by the owner must be adjusted when calculating the owner benefit that a buyer would receive from the business. This is because those customers serviced personally by the owner may not stay with the salon after the sale, and because the owner has no expenses (other than supplies) when servicing personal clients. The buyer of the salon would have to pay the seller (or someone else presumably) to service those customers. Thus, at a minimum, any sales generated by the owner’s own clients must be adjusted to reflect the cost that a buyer would incur.
Role of Nail Technicians
Owners of nail salons typically pay their nail technicians 50% or more of generated sales. Nail technicians may be paid as either regular W2 payroll workers or as 1099 independent contractors. Of course, it is far more preferable for the owner to pay the nail technicians as 1099 independent contractors, thus saving significant payroll tax, workman’s compensation costs, or other insurance costs. It is possible for nail technicians to have ‘non-compete’ contractual relationships with the salons, but most nail technicians prefer not to do so. Loyal and hardworking nail technicians with a strong customer base are without doubt a nail salon’s most valuable asset.
Factors Affecting Valuation of Nail Salons
- The typical valuation range of a nail salon is about 2-3 x the annual owner benefit of the nail salon.
- Many factors are relevant when determining where on the valuation range a nail salon will fall.
- The most important factor is the customer base of the salon, and as noted, many customers are loyal to the nail technicians who ultimately provide the service.
- The nail technicians must be willing to work for the new buyer – under the same employment terms – in order for the customer base to be properly retained by the buyer.
- Sometimes customers also enjoy going to a particular nail salon because of its pleasant atmosphere, stylish decor, or convenient location.
- This why a nail salon’s leasehold rights are also a critical factor when determining its proper valuation.
- Leasehold rights refer to the right of a commercial tenant to occupy and use leased premises.
- The length and quality of the lease (with rent that is preferably 10% or less of sales), the location of the salon (preferably in a highly visible commercial plaza), and the build-out of the space itself all create valuable leasehold rights.
- Additionally, the equipment value of the nail salon (chairs, tables, reception area, mirrors, sound system, etc.) also affect a nail salon’s valuation.
- Lastly, well established nail salons with a strong social media presence (and good reviews) will receive premium valuations.
- An owner of a nail salon may improve its valuation is by ensuring that the employed nail technicians will agree to work for the buyer under similar employment terms.
Example of Selling South Florida Nail Salon
- Suzie – a nail technician – has owned and operated Suzie’s Nail Salon for over 20 years and wishes to sell her salon.
- Suzie employs 10 nail technicians on a W2 basis whereby Suzie pays the technicians 50% of their generated sales.
- Suzie also services customers herself in the salon, and generates about $100K/year in sales from these customers.
- Suzie’s business broker determines that without Suzie’s own customers, the salon generates $200K of owner benefit (based on $1M of total sales).
- This is after all the nail technicians are paid, the rent is paid (which is $100K/year), and all other supplies, utilities, payroll taxes, and insurance costs are paid.
- If one were to include Suzie’s own customers, then the salon’s annual owner benefit (to Suzie) is $300K.
- The business broker consults with Suzie, and Suzie agrees that in order to effectuate a smooth transition, she will work for the buyer of the salon after the sale whereby she is paid 50% of her generated sales.
- This will enable the buyer of the salon to keep the customer base after the sale, and retain some of the profit.
- While the buyer’s owner benefit from the salon will be less than Suzie’s, the buyer still will capture another $50K of annual profit from Suzie’s customers, translating into a total annual owner benefit (to the buyer) of $250K.
- The business broker determines that Suzie’s Nail Salon has a fair market long term lease with an excellent location, sales and profits have been growing the last few years, and that the salon’s nail technicians all are willing to stay and work for the buyer after the sale.
- Thus applying a premium multiple of 3 x the annual owner benefit, the business broker prices the nail salon at $450K (or 3 x the $250K of annual owner benefit that a buyer of the salon will derive).
Nail salons may make excellent investment opportunities for buyers who are nail technicians or for buyers with a passion and drive for the beauty salon industry. Those salons with a strong and growing customer base, valuable leasehold rights, and a a loyal and transferable staff of nail technicians will receive premium valuations.
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.