How To Determine & Calculate the Value of a Beauty Salon Business

determine value of beauty salonIf you are looking to buy or sell a beauty Salon you will want to make sure you do a lot of due diligence and properly estimate the value before signing on the dotted line, otherwise you will end up paying too much or receiving too little.

What are the Main Valuation Drivers of Beauty Salons?

Revenue Streams – Obviously you need a solid revenue stream, or ideally multiple streams.  Beauty salons can't only survive on hair-styling so it's important to sell other services and products (e.g. massage, wax, nails, shampoo, hair gel, etc..).  Margins with the other services are sometimes higher.

Demographics – If a salon located in an older population, a young, hip salon might not work.

Taxes – If a beauty salon rents chairs to stylist the IRS may consider them an employee rather than a contractor.  This could trigger a FICO tax bill unexpectedly.

Existing Staff – Beauty salon success depends on the stylists reputations.  Expect to spend money on marketing  for new talent as the turnover rate of stylist is high.

Competition – It's easy for anyone to set up a beauty salon business.  The more saturated the market the less the salon may be worth.

How to Determine the Value of a Beauty Salon

Let's assume a Beauty salon is 1500 sf, located in a retail strip center, and has a ton of foot traffic.  There are 10 stations and waxing and facial rooms.  It's the only salon within a 3 mile radius and there is 6 months remaining on the initial lease.  To generate additional sales the salon also sells hair, face, and nail products.

The financials are as below

2014 2015 2016
Service Revenue $300,000 $350,000 $400,000
Product Revenue $100,000 $120,000 $130,000
Total Revenue $400,000 $470,000 $530,000
Payroll $250,000 $300,000 $350,000
Pre-tax Income $74,000 $81,000 $90,000
Inventory $30,000 $30,000 $30,000

The Two Common Business Valuation Methods are:

  1. Total revenue multiplied by 25% to 35% + fair market value of inventory
  2. Two to Three times the pretax income + fair market value of inventory

Steps to Calculating the Value of a Beauty Salon

  1. Estimate the fair market value of all the inventory.  In the beauty salon business products can expire or go out of fashion so make sure to factor in some obsolescence.  It's not uncommon to factor in a discount of about 20% to 30%.  After using a 25% discount the inventory for 2016 would be valued at $22,500
  2. Determine the right multiple of pretax income.  A strong business will have a higher multiple.
  3. Determine the strengths and weaknesses of the business.  is the business is run well?  Does it have low operating expenses?Does it have a diverse mix of products and services?  What are the margins?  Is the owner taking the customers?  Does the place need improvements?  When does the lease expire?  Are rents going up or down?
  4.   Take all the factors into account and run both formulas.  For this example let's assume the middle of the road seems best.
    1. $530,000 X 30% = $159,000 + $22,500 (fair market value of inventory).  Total = $181,500
    2. 2.5 X $90,000 = $225,000 + $22,500 (fair market value of inventory).  Total = $247,500
  5. Splitting the two numbers above and taking all the other factors into account a good place to start is somewhere around $225,000

If you have any questions about this please don't hesitate to contact us.  We have successfully consulted many Austin retail businesses.

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