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How Much is Your Salon or Spa Worth?
April 2, 2018 | By Neil Ducoff | 7 Comments
There are many reasons for starting a salon/spa business. If you’re a hairstylist, esthetician, massage therapist or nail technician, the motivation is your passion for the work.
Of course being a service provider in your own company makes a ton of sense, but that’s about you creating a job for yourself.
The entrepreneurial reason to start a business is to create and grow something of value. Your salon/spa business is, first and foremost, an investment.
In many ways, it’s no different than buying a home. You want your home (an Asset) to appreciate in value and grow Equity (Asset – Liabilities = Equity).
The Challenge: Too many salon/spa owners focus the bulk of their energy on growing revenues, but revenues do not directly translate into value creation or equity.
To create value and grow equity, owners must understand the relationship between their Profit & Loss Statement and Balance Sheet.
More importantly, owners must understand why and how a Balance Sheet defines how healthy the salon/spa business is. Why? Because a business can be busy, broke and worthless.
- Healthy means higher equity and more value.
- Unhealthy means short on cash, excessive debt, negative equity and less value.
The Danger and Reality: Too many owners don’t work on growing the value of their salon/spa until it’s time to sell. At that point, it’s too late to turn the business into something capable of supporting a premium selling price.
Here are my top seven No-Compromise Leadership strategies to determine what your salon/spa business is worth:
- Profit rocks … but: Of course a consistently profitable business can fetch a better selling price. The problem is that profit can be subjective. For example, if the owner takes pay as a draw or distribution, the transaction happens on the Balance Sheet, not the Profit & Loss statement. Because the owner’s pay isn’t an expense on the Profit & Loss Statement, it can produce a higher net profit. But that “profit” isn’t truly Net Profit. It could be mostly “owner’s pay.” Another challenge is when expenses are created to reduce Net Profit to limit or avoid income tax. Reducing income tax by eliminated or minimizing Net Profit can come back to haunt you when it’s time to sell. FACT: Consistently profitable businesses command a higher selling price.
- Equity rocks more: Extended periods or years of negative net profit can create negative Retained Earnings under Equity on your Balance Sheet. It’s impossible to hide big ugly negative Retained Earnings from a potential buyer. Even worse is when Liabilities, in the form of debt, exceed Assets. This, on top of negative Retained Earnings, can result in negative Equity. It’s like being upside down on a car loan or home by oweing more than the car or home is worth. FACT 1: A potential buyer will pick your selling price apart by turning your Balance Sheet against you. FACT 2: Your financial reports tell the truth about the performance and health of your business. The only way they don’t tell the truth is if you’re playing games with cash and unreported income.
- Debt is drag: Just like a home that’s debt free, a salon/spa business that’s debt free, or near debt free, is a beautiful thing. Its Balance Sheet boldly communicates how healthy it is to a potential buyer. It also means that at closing, big chunks of the sale price aren’t sucked up to pay off debt rather than reward you for years of hard work. Likewise, a Balance Sheet that shows multiple credit cards with high balances and a list of loans and other debt, screams “trouble” to a potential buyer. It doesn’t matter how impressive the revenues are if the Balance Sheet says the business is on life support. FACT: It’s fine to borrow money to fund growth initiatives. But borrowing money and running up credit card debt to plug the company’s financial leaks give all the leverage to the buyer.
- Cash is strength: The previous three points all lead to positive cash flow and cash reserves. “Cash is strength” is not an understatement it’s the truth. Having a strong cash position in addition to consistent profits, impressive equity and limited or no debt, puts you, the seller, in the driver’s seat. Why? Because you’re under no stress to sell or to compromise your premium selling price. You can wait for the right buyer and sell at the right price. It’s playing the entrepreneurial game and winning big. Get items one through four dialed in. Got it? (Need help with this? We gotchu! A great place is to start is to have us help you build your cash-flow plan. Want more in-depth help? Check out our Coaching Memberships.)
- Company vs. YOU: If your hands generate a big chunk of your company’s revenue, and you want to get out, your selling price is going to take a hit. If you’re a devout micromanager that can’t give up control of anything, your selling price is going to take a hit. FACT: The more systematized your company, the more responsibility your leadership team has, and the less your two hands represent revenue, the more justified a higher selling price. You sell, the buyer takes over, you ride off into the sunset, and the business doesn’t skip a beat. Got it?
- The math: All of the above play a role in determining the value of your business. If you understand the previous five points, and you’re doing $1.2 million in revenue, I hope you understand that doesn’t mean your company is worth $1.2 million. So here’s the basic beginning math to assess the value.
Formula One: Three to four times annual Net Profit.
Formula Two: One time annual revenue.
- Reality-based value assessment: Now that you have the two very basic formulas, you have to factor in bullets one through five. The more bullets one through five work against you, the more you company’s value moves to the lower part of Formula One. And bullets one through five can drive the value below three times annual Net Profit. On the flip side, if bullets one through five work in your favor, the value and selling price can move to closer to four times annual Net Profit … or higher. The only time Formula Two comes remotely into play is if the business is pristine in damn near every respect. FACT: Your salon/spa is worth what a buyer is willing to pay. Your job is to lead your company in a way that pushes its value as close to Formula Two as possible. If you exceed Formula Two, I want to know so I can do a study of your company.
Here’s my challenge to you: Separate your “job” and your work from your thinking and responsibilities to grow value in your company. That means leading and decision making that make the seven bullets presented here work in your favor.
To work years in your own company only to have a fire sale when it’s time to sell is a sad story we see too often. Business is about leadership and discipline as much as it’s about creating value in your company.
Want some help figuring out where to start? Let’s talk! Schedule your free strategy session with a Certified Strategies Coach right now!
Categories: Financial Literacy