Valuation Multiples for a Hair Salon
The U.S. hair care services industry is made up of more than 80,000 businesses. Approximately 77,000 beauty salons and 4,500 barbershops. This industry has combined annual revenue of about $20 billion. Here’s is a quick summary of the trend of valuation multiples for a hair salon. Be sure to also check out our post on Valuing a Hair Salon.
According to our data, in 2019 hair salon companies sold for an average 0.38x sales multiple. The term multiple is a valuation metric that refers to the implied value of a business. It is calculated by multiplying the amount of revenue or sales a business makes by the valuation multiple.
Revenue X Multiple = Value of the Business
For instance, if a hair salon generates $650,000 in revenue and transacts at a 0.38x multiple, then the business value is worth approximately $247,000.
$650,000 X 0.46x = $247,000
A revenue multiple does not take into consideration the operations of a business. As such, this multiple is less frequently relied upon. Therefore, it is important to look at cash flow multiples. Cash flow multiples consider expenses that impact the cash flow. For instance, rent, COGS, and salaries.
Seller’s Discretionary Earnings (SDE) Multiple
In 2019, the SDE multiple was 2.14x for hair care companies. This multiple is applied to SDE to derive an implied value of the business. The calculation is as follows:
SDE X Multiple = Value of the Business
For example, if a barbershop has seller’s discretionary earnings of $350,000 and is estimated to sell at a 2.14x multiple, then the business is worth approximately $749,000.
$350,000 X 2.14x = $749,000
Seller’s discretionary is a common cash flow multiple used in small business transactions. SDE is derived by starting with your company’s EBITDA and adding back potential expenses that would not otherwise be incurred by a new owner. These expenses may include owner’s compensation, manager’s salary, other expenses such as auto, and nonrecurring items or events such as legal fees, consulting.
This approach is most frequently used as a valuation method for small businesses with sales less than $3M.
The average EBITDA multiple for hair salons in 2019 was 2.82x. The following is the EBITDA multiple calculation.
EBITDA X Multiple = Value of the Business
*EBITDA = Earnings Before Tax + Interest + Depreciation + Amortization
For example, a hair salon has an EBITDA of $400,000 and an EBITDA multiple of 2.82x. Using the above metrics, the company is worth approximately $1.12M.
$400,000 X 2.82 = $1,128,000
The EBITDA multiple is a valuation ratio that measures a company’s return on investment (ROI). This multiple is preferred as it is normalized for differences in capital structure, taxation, and fixed assets. Normalized ratios allow for comparisons to similar businesses. Normalization is the process of removing non-recurring expenses or revenue from a financial metric like EBITDA, EBIT or earnings. Once earnings have been normalized, the resulting number represents the future earnings capacity that a buyer would expect from the business.
The Trend of Average EBITDA Multiples
The following graphic shows how EBITDA multiples have trended over the last 4 years in the hair care services industry.
Impact of Size on the Valuation Multiple
The following graphic shows how business size impacted EBITDA multiples for a hair salon over the last few years.
Peak Business Valuation enjoys working with small business owners to help maximize their hair salon value. We focus on providing valuable information to help you grow, buy, or sell a hair salon. We have worked with several salon owners to provide a business valuation. Questions are always welcome! Please reach out via email or phone call.Schedule Your Free Consultation Today!