How to Value a Tanning Salon
Tanning salons provide UV tanning beds and booths as well as spray-on tanning services. According to IBIS World, the tanning industry has experienced a decline in revenue and profit over the past several years. This may be a result of poor economic conditions as well as health professionals advising against indoor tanning. Moving forward, the tanning industry will likely recover. We can expect tanning salons to generate approximately $1.9 billion in revenue over the next several years. This is ideal if you are buying, growing, or selling a tanning salon. Whether you are entering or exiting the tanning industry, it is important to understand how to value a tanning salon.
To learn how to value a tanning salon, it is best to receive a business appraisal. During a business appraisal, a valuation expert determines the fair market value of a tanning salon. Additionally, the expert can discuss the risks and opportunities of a tanning salon you are buying or selling. This is important if you are looking to increase the value of a tanning salon.
As a professional business appraiser, Peak Business Valuation works with tanning salons on a regular basis. We are happy to answer any questions you may have on how to value a tanning salon. In addition, we can provide you with a business appraisal for a tanning salon. Start by scheduling a free consultation with Peak below!
How to Value a Tanning Salon
When deciding how to value a tanning salon, business appraisers consider several business valuation approaches. The most common methods are the market approach and/or the income approach. Each of these methods uses a different basis of valuation. The business appraiser will determine the best valuation approach during a business appraisal for a tanning salon. This often includes using a combination of valuation methods.
Valuing a Tanning Salon Using the Market Approach
The market approach is similar to the real estate appraisal process. When valuing a property, real estate appraisers assess similar homes that recently sold in the area. This allows them to determine an accurate value of a property. When using the market approach to value a tanning salon, business appraisers assess similar salons that recently sold on the open market. If the tanning salon is a private company, the valuation expert gathers information from private transaction databases.
Multiples for a Tanning Salon
When using the market approach, valuation experts rely on valuation multiples. Valuation multiples are ratios that assess the value of a business in relation to a financial metric. Some common metrics are cash flow, earnings, and sales. To determine an appropriate valuation multiple, valuation analysts apply the proper NAICS or SIC code for the tanning industry.
SDE (Seller’s Discretionary Earnings) Multiple for a Tanning Salon
- The SDE multiple measures the value of a tanning salon in relation to its seller’s discretionary earnings. This multiple is common when valuing a tanning salon.
EBITDA Multiples for a Tanning Salon
- EBITDA multiples reflect a tanning salon’s earnings before interest, taxes, depreciation, and amortization. This indicates the return on investment a tanning salon can expect.
REVENUE or SALES Multiples for a Tanning Salon
- The REVENUE or SALES multiples represent the total amount of revenue a tanning salon generates.
To learn more about how to value a tanning salon using the market approach, see Valuation Multiples for a Tanning Salon.
Valuing a Tanning Salon Using the Income Approach
The income approach is another common valuation approach. This method determines the value of a tanning salon by calculating its future income potential. Additionally, the income approach assesses any risks that may prevent a tanning salon from meeting expected earnings. We highlight a few of these risks below.
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- Competition: The tanning industry is extremely competitive. To succeed, operators need to offer specialized tanning services or other revenue streams to differentiate from competitors.
- Financial Performance: Many tanning salons have struggled to generate profit in recent years. As such, it is vital to develop strong financial planning and budgeting skills in this industry.
- Regulatory Compliance: There are several regulations designed to protect tanning salon customers. To operate, it is vital to understand and comply with regulations.
- Location: The top market for tanning services is consumers between the ages of 20 and 64. As such, it is best for tanning salons to locate in areas with a high volume of consumers in this age group.
Methods to Value a Tanning Salon Using the Income Approach
There are several variations of the income approach to use when valuing a tanning salon. The most common methods are the capitalization of cash flow method and the discounted cash flow method. Below, we discuss how to value a tanning salon using these income approaches.
Capitalization of Cash Flow Method
- The capitalization of cash flow method is best for tanning salons with long and stable histories. When using the capitalization of cash flow method, business appraisers determine a reasonable amount of future earnings for one period. These earnings are then divided by a capitalization rate. The capitalization rate represents the rate of return an investor can expect to make from the salon. In addition, the capitalization of cash flow method considers the risks associated with buying or selling a tanning salon. We discuss a few of these risks above.
Discounted Cash Flow Method
- The discounted cash flow method is ideal for tanning salons with strong financial histories and reliable forecasts. This valuation method involves projecting future earnings over a 3-5 year period. The future earnings are then discounted using a discount rate rather than a capitalization rate. This method takes the time value of money into account. Keep in mind, the discounted cash flow method is less common since it relies on future earning estimates which can be subjective.
Summary
There are several common business valuation methods to consider when valuing a tanning salon. Each valuation method offers a different perspective on the value of a tanning salon. To understand which valuation method is best, receive a business valuation for a tanning salon. During a business valuation, a business appraiser looks at the strengths and weaknesses of your tanning salon. In addition, they will determine the fair market value of a tanning salon. This information is beneficial whether you are buying, growing, or selling a tanning salon.
Peak Business Valuation, business appraiser, works with many tanning salons across the country. We are happy to provide you with a business appraisal for a tanning salon. We can also answer any questions you may have on how to value a tanning salon. Schedule a free consultation with Peak Business Valuation to get started!
For more information See Valuing a Tanning Salon, Valuation Multiples for a Tanning Salon, and Value Drivers for a Tanning Salon.
