Recently, my hairstylist of three years inquired about how to value a hair salon. She along with a couple of co-workers were offered the opportunity to purchase an ownership interest in the hair salon they worked at. After expressing my excitement for her years of hard work, we discussed the different aspects of valuing the hair salon.
After discussing the growth outlook and profitability of the salon, I provided her with market multiples that she could use to determine whether or not the purchase price felt right.
Market Multiples for a Beauty Salon
- Revenue: 0.22x – 0.37x
- Seller’s Discretionary Earnings: 1.6x – 2.6x
- EBITDA: 1.6x – 3.3x
The valuation multiples provided, assured her that the price was fair. Following this conversation, I decided to look into current market trends and industry analyses. Based on her experience and her ability to assess the local market trends, I thought I needed to educate myself. My ultimate goal with operating a valuation company is to provide tools for small businesses to grow and increase their current valuation. Typically, a company’s valuation increases because revenue growth or profitability growth exceed expectations. Now with the opportunity as an owner in the business, she will be tasked with identifying ways to grow the hair salon.
During our next hair appointment, I provided some information and industry analysis on ways to grow the hair salon. I will touch on what we discussed, but I also want to point out that there are many factors to take into consideration.
As we discussed the salon, she shared with me her plans of purchasing the shop next door and expanding the salon. Expanding the salon would double the number of employees and present the opportunity to increase sales. However, such expansion requires capital expenditures. Moreover, additional employees equate to higher overhead costs.
Regardless, she brought to my attention the number of hairstylists that have been denied a booth since she began working there. This comment reflects that current employee retention is high and that the hair salon brand not only attracts customers but other hairstylists who desire to work there. The question to be answered was, what is the time frame on expanding. This question is in the works and discussions with the current property owner are positive.
The curb appeal of her current location is spectacular. The appearance and condition of the salon ensures customers that quality and ascetics are important. Appearances truly impact the price paid by customers and should be one of your highest priorities. Your curb appeal attracts and retains customers.
Another factor discussed was the physical location of the hair salon. The hair salon is not in a high traffic area and has a terrible parking lot. In addition, there are about five other hair salons within a quarter-mile. After discussing the concerns, we conversed about what the result would be if the hair salon were to expand next door. By expanding the location, the salon would acquire additional parking spaces. The abandon mechanic shop next door would also be purchased and could be turned into a parking lot. This would help solve the problem of parking, but it does not address foot traffic.
Population growth in the area is increasing rapidly and will create a high density of people to draw from, which makes the location more desirable. Regardless, she did not express any doubts about the location because she understood the current success of the hair salon because of its brand.
In today’s environment, a strong brand will not only help a business grow, it also helps maintain and drive higher multiples for the business. This hair salon has a great brand in the area due impart to quality employees and a strong marketing presence. The employees of the company each represent and build on that brand. Her goal is to continue to market and build that brand.
Following this discussion, I was even more excited. She spent time constructing and learning about how she could build the hair salon and prior to the transaction closing, a valuation was performed to ensure the fair price. The valuation was ordered to provide peace of mind and to have a third-party unrelated to the situation give an opinion.
In conclusion, understanding the value of your hair salon is important, regardless of any near future transactions. Even if you have not thought about selling your business, consider the future of your business; it is never too early to start planning. The first step in that process is a business valuation, which we are happy to provide you with.
Peak Business Valuation has worked with several partnership buy/sell arrangements including those of hairstylists and welcome any questions you may have. Feel free to reach out by email or through a phone call.