Intro: Do you feel like you were meant to have a kick-ass career as a hair stylist? Like you got into this industry to make big things happen?
Maybe you’re struggling to build a solid base and want some stability. Maybe you know social media is important, but it feels like a waste of time because you aren’t seeing any results. Maybe you’ve already had some amazing success but are craving more. Maybe you’re ready to truly enjoy the freedom and flexibility this industry has to offer.
Cutting and coloring skills will only get you so far, but to build a lifelong career as a wealthy stylist, it takes business skills and a serious marketing strategy. When you’re ready to quit just working in your business and start working on it, join us here where we share real success stories from real stylists.
I’m Britt Seva, social media and marketing strategist just for hair stylists, and this is the Thriving Stylist Podcast.
Britt Seva: What is up and welcome back to the Thriving Stylist Podcast. I’m your host, Britt Seva, and this week we’re talking about how to build a salon you can sell. Yes. Doesn’t that sound exciting?
You may or may not know that the average salon owner, when they decide they don’t want to be an owner anymore, more often than not the salon just closes its doors. Sometimes what happens is the salon owner will more or less transfer ownership to somebody else and basically walk away, like release the responsibility, but there’s usually not this massive financial payoff.
If you were to talk to like a big-time business coach and advisor, what they would say is if you’ve not built a business to sell, all you’ve simply created for yourself is a very high pressure, very high responsibility job, which is what honestly in our industry, most salon owners do, most stylists do, most industry educators do. They don’t build a business that could be sold.
Let’s take a look at if you are a salon owner, what it would look like to build a business that doesn’t have to just shut its doors at the end of its lifespan. Build a business that you could truly sell or that could potentially live on without you.
One of the dreams of the salon owner I worked for is he really wanted to transfer ownership to people who were willing to let him be a stockholder long-term. He wanted to still retain a portion of the overall dividends from the salon.
Now, if you set your salon up correctly as an owner, that could be possible for you. The challenge is that the owner of my salon and the owner of most salons don’t set themselves up to where that is even a viable option.
So I really want to get your wheels turning about what it would look like to own and operate a salon that could be sold.
Full disclosure, I’m not a lawyer, I’m not a banker, and I’m actually going to stay away from the advice of what happens when you decide to sell. I’m going to stay in the arena that I feel confident in, which is preparing your salon so that if you do choose to sell one day, you can bring in the experts, in the professionals who can help you to do that. Because if you wake up at one morning a year from now and you’re like, “You know what? I want to sell this thing,” and you’ve not done the things I’m going to talk about in this episode, you’re in for a rude awakening.
I don’t want you to have that rude awakening. I want you to be fully prepared and that’s what this episode is dedicated to.
When you’re trying to sell a business, particularly one that serves the people, like you’re not trying to sell a chocolate manufacturing business, right? You’re selling a business with a physical location, often known as a brick-and-mortar type of business, where there’s a physical location dependent on the clientele flow. There’s certain things that make a business viable or not viable for purchase.
Now we’re going to get into what the business could be valued at. We’ll get there, but let’s even talk about if the business is viable for purchase.
One, anytime a buyer invests or takes ownership of a physical business, they’re looking for one thing: cash flow. They’re not looking for opportunity, they’re not looking for responsibility, they’re not even looking at potential at time of sale.
Now, it’s one of the things that they take into consideration when they’re looking at a purchase price. But generally speaking, trying to sell a sinking ship is a really tough sell. Trying to sell a business that breaks even or does less than 10% profit, really tough sell. If anybody is looking to buy your salon, cash flow is of primary concern.
I want you to think about now, is your business cash flow positive? And where is that cash flow coming from? This is the reason why booth rental salons are a very tough sell. Usually the business is not necessarily cash flow positive based on the revenue generated by the customers. Often in a booth rental salon and/or when it’s set up legally and properly—as I’m saying this, I’m thinking about it—the revenue coming into that booth rental salon is lease payments made by the stylist to the landlord or salon owner. So the cash flow potential is fairly fixed, right? Versus if you were to buy a commission salon, the owner who comes in could look at payroll, could look at prices, could look at all these different levers, you know, bringing in retail, shifting all these different things, there’s a lot more opportunity to change profit margin versus if you’re investing in a booth rental salon, essentially having maximum stations rented is your profit potential period. There’s just not as many levers to pull.
So whomever is considering the buy is going to be looking at positive cash flow.
The other thing that needs to be there is the business needs to be on the incline. If a business is stable, it makes for a very tough sell. If the business is on the decline, meaning it’s been losing money, you’re having a hard time sustaining renters, very tough sell. And in situations like that, it’s where you see a salon having to either close its stores or simply walk away. The owner’s like, “Just get this beast off my back and I’m happy.”
The reason why that happens is it’s really difficult to get any kind of financial contribution towards your sinking ship. It’s a really tough sell.
The other thing is called single channel dependence. If there is essentially one way or two ways that clients are finding themselves coming into your business, makes for a very risky sell. For example, and we’ll get into this on a future episode, most of our major social media platforms are very much at risk. At the time of this recording, Instagram is incredibly unstable. I’ve said very publicly, I started saying this two years ago in 2021, I thought Instagram had a five year lifespan. We’re now two years in, so maybe three more years left, and, based on recent developments, I’m not even sure if it’ll last that long.
Let’s say you were trying to sell your salon and all of your clients come from Instagram. That at this time would be a little scary. You would want to have additional sources of clientele other than one platform or one system, or all of our clients come from the spa next door, or something like that. If somebody was buying your business, that’s a very scary setup. Single channel dependence is seen as a risk, not an asset.
Then clientele flow. They would look at things like retention. Let’s say you are a booth rental salon retention of your staff. How long do people usually stay on their leases? And we’ll talk about leases. If you don’t have strong leases, it’s going to be really difficult to sell. But how often does staff stay? How long do clients stay in your business for? What is your volume of new guests that you’re getting month over month? Where are those clients coming from? What are you doing to sustain those channels? These are all questions that would be brought up if your salon was coming up for sale. These are things to think about.
Now, the biggest thing that stops salon sales dead in their tracks and likely the thing that would hold you back the most is called the key man risk. Most of us are the key man in our business. For those of you who are salon owners who are still behind the chair, your key man risk is very high. Even if you only take clients one day a week, at the time when your business was being evaluated, which we’re going to talk about in a moment, there would be a key man risk element. The question would become, “If we pull Britt out of this salon, does it still function right?Or is she the glue holding it all together?”
Most salon owners at this time are the glue holding it all together, whether it’s you’re taking clients and that revenue still supports the bottom line, whether it’s you are the main champion and cheerleader for your space, all of those. If your team is loyal to you as a person, all of those things are key man risk and makes it very not viable to sell the business because those who are making the purchase will know if Britt’s the secret sauce, when she walks, they know that staff will leave, clients will leave. It becomes a very risky sale.
When we’re looking at is this business viable, here are the things that somebody who is a purchaser would be looking for. No key man risk.
Having a strong leadership team or operations person at the very least who is running the ship, happy to be there, that’s what they’re looking for. If everyone is simply loyal to the owner, the owner is making all of the decisions, the owner is running all of the day to day, the owner is still serving guests, the owner is responsible for a lot of the magic that’s happening in the salon, that’s going to make for a very tough sell.
Often in that situation, strong offers would come with, “I’ll buy your salon, but you need to continue being an employee of it for two years, three years, five years,” at which point you’re selling your salon in exchange for being an employee of it and having a boss for several years.
For most people, that produces quite a bit of misery for quite a long time. I wouldn’t suggest it, but it’s something to really consider.
If you want to sell your salon, it’s time to say, “I want to be a leader, not an owner, and I need to put some people in place to keep the ship sailing. I’m simply noses in, hands out.”
Did you hear my podcast a while back where I talked about effective leadership? And effective leadership is nose in—you know what’s going on at a high level—but you’re hands out, like the day to day, all little parts and pieces and what’s happening here, you’re pulled back from all of that. That eliminates that key man risk.
If you sit in on a meeting with my team, they’re talking about stuff, I have no idea what’s going on ’cause I’m personally not in-depth at the ground level of my business. Not because I want to sell my business, but because the key man risk I mean almost ate me alive. I had built this business where if I wasn’t in it, things were getting rocky.
A lot of salon owners reach out to me and they’re like, “Well, everybody’s on their best behavior, but if I go away for a week, things go sideways.” Okay, that’s a huge sign that you’re a key man. If people are very loyal to you, they come to you. When things go south, you’re a key man.
Thinking about what are the things that you can do, what structure you can put into place to eliminate yourself as the secret sauce that keeps the ship sailing. This is hard, especially for owners who are very invested in the vision because at first it feels like a loss of control. Hi, I’m Britt Seva, I’m a huge control freak, like huge, and so pulling back as the key man was really difficult for me.
It was the best business decision I ever could have made and I encourage you to do the same.
Thinking about things like clientele flow and single channel dependence, what are the ways that you need to improve your marketability holistically ao you’re not dependent on any channel, you’re not just dependent on word of mouth? What are the things that need to happen? And PS, there needs to be a channel.
You can’t just say, “Well, our reputation’s great.” That’s not viable. We need more. But how is it great? Where are they coming from? What’s the data on that? And “What’s the data?” is going to come up a lot, so great record keeping is huge for this too. And then cash flow and showing that there is progressive growth. These are the things that are important.
Let’s say you find somebody who’s like, “You know what? I think you’re checking all the boxes, everything’s great, I’m interested.” What’s next? What’s next is usually hiring a valuator. Not evaluator, valuator meaning valuation. We had this done in our salon, it was a really fascinating process.
There are professional valuators who come in and take a look at the value of any given business. They’ll charge anywhere from, I’ve seen ranges from three grand up to 10, depending on how complex your business is.
Likely a salon would be somewhere between like five grand or less. It is well worth the investment for both sides. The buyer and the seller need to know the actual valuation of the business.
What usually happens is the salon owner places a lot of emotional value on the business. You can’t do that. The other thing too is the buyer generally thinks the business is pretty much worth nothing and they’re going to come in and fix everything. Generally also not true. So the independent valuator comes in and looks at the real nuts and bolts and what a business is worth.
They look at everything from overall sales, debts, inventories, any of the physical pieces in the salon, so your stations, your shampoo bowls. Now remember these are depreciating assets, so it’s not like, “Why, I bought these stations for $5,000.” That’s great. It’s like buying a car. They depreciate as soon as you bring them into the building, right? It’s going to be on the depreciated value of anything: your inventories, meaning whatever retail you might have, sometimes back bar, but all that’s pretty used, so the value wanted is pretty low. Business threats, business opportunities, there’s a lot of pieces that are put into play.
Let’s talk about assets and some of the things that could be considered at time of sale at part of the valuation.
First, we have the tangible assets. That’s going to be things like inventory, equipment, furniture, if you own the building, all of those things are tangible assets, right? They’re physical items. Then we have the intangible assets. Your brand, your reputation, right? Like when you say things, “Oh, our word of mouth, our brand around town is X, Y, or Z,” that can be taken into account, but it is considered an intangible asset. Then there’s IP, intellectual property. If you have copyrights, patents, why in Scaling Stylist Method, I teach to creating a signature methodology. Hint, hint. All of the things that could be considered viable assets would go into that as well.
Lastly, customer lists. Now before you get excited, in our industry, client lists have a fairly low value. How come? Because there are so many key men and women in our industry, those who are looking at your business aren’t stupid and they realize that most of the clients are loyal to the stylist, not loyal to the brand.
Now let’s use a bigger brand for example. Think about Burke Williams Spa. I’m out here in California, I don’t know where you are. Burke Williams has a pretty large following. I don’t know if they’re across the entire country, but there’s lots and lots of locations. It’s a very high-end day spa. Massages I think start at 200 bucks or something like that. When you go in, you get access to a sauna and a relaxation room and beautiful amenities and all this stuff. You’re there for a very luxurious spa day. Burke Williams could have massage therapist leaves, facialists leave, nail techs leave, the business still carries on.
Burke Williams’ clientele list has a very high value because even though I’ve gone to Burke Williams before, people know I like that place, so a lot of times if people are buying me a gift certificate, they’ll get me one to Burke Williams. There are a couple therapists I like there. Even if they left, I would still like the spa. I’m loyal to the business.
In most salons, clients are loyal to the person. Some salons have clients who are loyal to the business. It’s much fewer and further between.
The client list for a salon doesn’t carry the same weight or the same value as a client list from a place like Burke Williams where the clients are loyal to the big, big brand, not the individual practitioner when we look as a whole. These are things to think about.
Another reason why, often, not always, if you have an employee-based salon, it can be a more lucrative sell because there could potentially be more value there. Not always, totally depends on all of the inner workings of your business, but it’s possible.
Let’s say all of that looks good, somebody’s like, “This looks great,” the valuator comes in. Generally speaking, what would be the valuation of the business? It really depends on a gajillion different things. I’ve seen some salon valuations that are really sad where the valuation is truly like the depreciated value of the assets, like the physical, tangible assets in the space. We’re talking computers that are a few years old, stations, the retail inventory on the shelves, and it’s like the salon sale’s worth 20 grand.
Imagine you’ve built this business you’ve built for decades and all you can get for it is 20 grand. I mean, I laugh, but like when you calculate that out, if you would own the salon for 10 years, you’re getting two grand a year in the sale. It’s just not a great investment.
Will you take the 20 grand? Yeah. Will it be something that will allow you to retire comfortably? No. I mean it hardly even pays for a new car these days, right? So that’s certainly not what you’re shooting for, but a lot of valuations do end up looking like that, which is often why salon owners have to just walk away because if that’s the valuation and the value is really only 20 grand, a lot of times stylists or or potential buyers are looking at it and they’re like, “Honestly, I don’t even want to pay 20 grand for this.” That’s when the salon owner ends up just walking away.
You want a valuation that’s much higher.
When you have a salon that’s built well where there’s no or very low key man risk, when there are multiple channels that clients are coming in from, when the revenue is growing really strong year over year, where there’s maybe intellectual property at play, like all the boxes are checked, generally speaking, the offer that comes through is a look at the last 12 months of top line revenue, which is called trailing top line. I’m recording this podcast in February of 2023, so if we were looking at my trailing top line for the last 12 months, we would look at January 2022 to January 2023. Okay, that’s the trailing 12 months. You look at that revenue and usually you get an offer value somewhere between one and five times that amount. Usually.
Let’s say that your salon had done half a million dollars in trailing 12 months. The buyout would be somewhere between half a million dollars and 2.5 million.
Now, like anything else, perceived value is going to dictate the price. Anything is only ever worth what’s worth what somebody’s willing to pay for it. What would be the difference between somebody paying 500,000, 2.5 million or 20 grand? All these different things. It’s not any one thing, it’s all these different things.
If your business is growing so radically that it is very clear that paying 2.5 million for it is really going to pay off in the long haul ‘cause you’ve got really strong IP and all this trajectory and you’ve got multiple channels that people are coming to you for and the loyalty is there, that could be a great investment for somebody. The less desirable the offer is, the lower the amount will be.
All of these numbers are very subjective, but trailing 12 months times five is for the premier, whoa, multiple offers kind of physical business sell. That is best case scenario.
I’ll be candid, I’ve never seen a salon sale go like that, but that would be the very, very, very most if you’d done everything perfectly and found a well-qualified buyer who was really interested.
Let’s talk about the different kinds of sale that could happen. There’s two types. Most people don’t know this. There’s an asset sale and a stock sale. Two totally different types of business sales.
In an asset sale, the seller, so the original salon owner, retains possession of the legal entity, so their own LLC that they formed or LLC filing as an S corp or whatever it was, they sustained that. The buyer is simply in investing in the assets, right? The tangible, the intangible, all that kind of stuff, equipment, any leases that are held by the original legal entity, the goodwill, any IP, trade names, like anything that has been established under the salon’s name. The website URL, the social media handles, and that’s the thing too. You’ll lose your social media. That’s a part of the sell. And then any inventory that’s in there.
Please note that asset sales do not include the sale of employees. You cannot buy or sell people, but they do retain the rights to sustain the employment there.
Right now what’s interesting about an asset sale is what’s not included is any cash. If there is profit in the business, like let’s say there’s $200,000, wouldn’t that be great? $200,000 in the salon’s bank account, not a part of the sale. Also the asset sale doesn’t include any debts, so the buyer is not taking on the debts of the legal entity. Tere can be a nuances to that. There’s a loophole called networking capital. Well, that’s sometimes built into the deal, but it’s not to say that all cash that’s come through the business, things that are in a savings account, more than likely not included.
Then there’s a stock sale. In a stock sale, the buyer takes the seller’s shareholder’s stock. Essentially, they take over the legal entity.
Now an asset sale, the original owner keeps the LLC and the new owner forms a new one, but essentially just sits in the seat. With a stock sale, essentially the original owner is walking away.
Sometimes on the surface, people are like, “Well, I want the stock sale. I’d like the cash that’s in there, I want all the stuff, I just want the owner to walk away. I’ll step into the LLC.” The problem with that is, let’s say that somebody a year from now decides to sue the salon for whatever reason: the color burnt their head. Who the heck knows what happened? Well, you’re now the owner of the LLC, that’s your problem.
Versus in an asset sale, if you didn’t simply step into the old business entity and you allowed the original owner to keep that entity and you formed your own, well, now the old original owner who held the LLC at the time of their ownership is responsible for that client who’s now suing that original LLC, right? That’s who they have the beef with, not with you.
70% of transactions are done as asset sales, so more than likely that’s what it would look like for you.
Things that they’d be looking for. When I say “they”, I mean buyers, I mean brokers, I mean bankers. I mean anybody who’s supporting a loan to fund this. Really clean bookkeeping, they’ll be doing an audit. Quality of earnings. If you have any shady bookkeeping, it will come up.
I will say, I won’t say how, but I’ll say I was a part of looking at negotiating a salon buyout and shady bookkeeping was exactly what held it up. If there’s anything that just looks ambiguous, that seems off, that seems rough, that seems muddy, that seems shifty, things that could potentially be done to save on taxes or whatever, that will totally kill a sale. Make sure you have very clean, above board bookkeeping.
Illegal review. If are any illegal practices happening in your salon space, that will kill the deal.
Then employee contracts and paperwork. Like I talked about, if you have lease holders in the place and space who are not working under very clean one-year leases, you will have a problem. If any of your employees are not being paid properly, you will have a problem. If there’s anything off in your business, as soon as you go to sell, all the skeletons are going to fall right out of the closet and it’s going to be very obvious very quickly the things that are not right in your business.
Not only will you not make the sale, your team is going to know everything that’s gone wrong and you’re going to be stuck with the mess.
This is your reminder to, if you are looking to build a salon to sell, do it clean, do it above board.
The other thing is too, if you’re looking for a seller, please find somebody with relevant experience.
The day spa that was next door to the salon that I ran was run for 30 years. It was banging, like the woman who ran it made a small fortune. She did so well with this day spa. She sold it to two couples, two husband/wife teams who thought it was going to be this fun adventure. They were very wealthy. The two—I don’t remember if it was one of the husband/wives, or both of the wives, or both the husbands or what it was, but two of the people in the buyout, two of the four were very experienced business people. They had run businesses before, so they were like, “We know how to run businesses. We’re going to come into the spa. It’s already highly profitable. It’s got a great clientele list. We’ve got this.”
The salon closed within two years, right? The spa closed within two years. Could not sustain because they had never run a spa before. Deep pockets, very smart business people, not inside the industry, could not pull it off.
You want to make sure that you’re selling to people who can pull it off. That’s obviously what you’re looking for as well.
I hope this has been helpful. Even if you’re not a salon owner, if you’re thinking about being a salon owner, if you own any kind of business, really thinking about am I doing this as something that I could potentially sell and walk away from? Am I doing this just to fulfill my working career in life? Which, amen, there’s nothing wrong with that. That’s great, but if you are thinking that you’re building this empire and at the end, you’re going to get a paycheck for it, use this podcast as a really good crosscheck to what would need to be done in order to make that possible.
Y’all, as I always say, so much love, happy business building. I’ll see you on the next one.
