Experts provide insights on the must-have records, how to list your salon, what outside professionals to hire, and more.
If you want to be a successful seller, then you should actually think like a potential buyer. In other words, why should a buyer spend $80,000 on your existing nail salon — with its used equipment and its pre-negotiated lease terms — when she could choose her own location, buy brand new equipment, and post a “now open” sign out front, seemingly for less money?
If you’ve built a strong brand name and clientele, then there are likely lots of reasons why your salon provides a real value to a budding business owner. It might come as a surprise to you that it’s not the equipment or even the location that usually gives most of the value to a business. The value mostly lies in what’s called the “good will.” In the world of business buyers and sellers, good will refers to the intangible assets of your nail salon. These include things such as the salon’s loyal clientele, existing workforce, and well-known logo. “The more of these assets you include, the higher the sales prices will likely be. The more you can show buyers that your salon name and logo are bringing in customers, the more money you can ask for,” says Bob House, general manager of Internet business marketplaces BizBuySell.com and BizQuest.com. “Client lists, customer satisfaction numbers, and vendor agreements will also give the new owners tools to succeed, raising your salon’s value.”
As you likely remember, it takes a lot of hard work (and cash) to get a nail salon up, running, and turning a profit. By selling an existing nail salon, you are handing the new owner a successful business on a silver platter.
Three’s the Magic Number
Of course, to convince the potential buyer (and her banker) that your salon is a good buy, your nail salon must be thriving financially, plus you need the records to prove it. Good financial records are often a sticking point for nail salon owners. At a minimum, you need to get your financial house in order three years before you put your business up for sale. The best way to ensure your books are in good shape is to hire an accountant for at least the three years prior to and through the sale.
An accountant can help your business make its cash flow numbers as high as possible, says Larry Kopsa, a CPA at Kopsa Otte CPAs & Advisors who specializes in salons and spas. This is important, as “sophisticated buyers value a business based on its ability to generate cash,” Kopsa says.
A word of caution: If you’ve been lying on your tax returns in order to pay less, you have just lowered your salon’s value because you can’t prove the true numbers. “When I’m working for a buyer, I take the numbers that I can see,” Kopsa says. “If the owner says ‘those aren’t the real numbers [on a tax return],’ then I’m not going to deal with them. I’m not going to sign off on anything that can’t be proven.”
So, what records do you need to be able to provide? Kopsa provides the following list to get you started:
> the last three years of tax returns
> the last three years of the salon’s accounting software records (such as QuickBooks or Sage 50)
> the last three years of sales tax reports (to verify your retail sales)
> the last three years to present day of your salon appointment records
> a list of all employees, including how long they’ve been with the salon
> the salon handbook (the new owner will likely need to carry over benefits, such as the number of vacation days, for employees who choose to stay with the salon)
> the lease (which must be assignable to the new buyer)
> the depreciation schedule
Who to Hire
In addition to hiring an accountant, there are some other professionals you may want on your side, especially a business broker. “Look for brokers who are accredited by the IBBA (International Business Brokers Association), as they have met certain professional standards,” House says. “Also try to find a broker who has experience selling salons, specifically in your area, as they will have a better idea of the market.”
House says that other help can be brought in based on need. “Attorneys are often helpful in the final negotiation and contract writing portion of the process. For deals that include the land or other property, a realtor can be useful as well,” he says. You may also want to hire an appraiser.
Valuing Your Business
Valuing your salon is best left to a professional, such as an accountant, a business broker, or an appraiser. However, there are some general rules of thumb that it is shrewd to be aware of.
“Most salon owners think their business is worth more than it is. They become emotionally attached,” says Scott Buchanan, owner of Scott J Salon & Spa in New York and chair of the Professional Beauty Association’s (PBA) Board of Directors. “Most people say 3%-4% net profit is a good starting point. An owner needs to take herself out of the equation (what she produces behind the chair), so if an owner is the main moneymaker, it is a challenge.”
House says a good starting point is to see what other local salons in the area are asking and selling for. “Owners can check local public records or online business marketplaces to see what similar salons are on the market,” he says, adding that BizBuySell.com’s quarterly Insight Reports provide useful statistics on recently sold businesses. In the “Beauty Salons/Barber Shops” category, for example, businesses sold in the third quarter of 2014 had an average revenue multiple of 0.5 and an average cash flow multiple of 1.85. Overall during this period, beauty salons and barber shops sold for a median price of $80,000 while the median asking price was $89,000.
The buyer will do due diligence, Kopsa says, and a savvy buyer will focus on your “EBITDA” (earnings before interest, taxes, depreciation, and amortization). An accountant will help show your salon’s EBITDA in the best possible light. For instance, legitimate tax deductions from your business (like the expenses from a beauty tradeshow) may be added back in to show the buyer what the true cash flow would be.
How to List Your Salon
Counterintuitively, when you list your salon for sale in business marketplaces, don’t include the salon name or its location. You don’t want the salon’s clients to flee. “Wait to tell existing clients until after the deal has closed. If clients find out too early, they may start trying other local salons, reducing revenue and therefore, lowering the overall value of the business. Confidentiality is key during a business sale, as it ensures your salon continues running smoothly all the way up to the actual transition,” House says. “Use a blind ad on a business-for-sale website that does not reveal the location and name of the salon. Most of our listings include good detail about the business and its financials but simply leave the name out. This allows you to sell the benefits of your business without hurting the client base. If most of the value is in the real estate, location might have to be included, but oftentimes the name can still be left out.”
Of course, there are other ways to find a successor. The key to succession planning is to start early, Kopsa says. As you grow closer to retirement, you need to keep your eyes open for a potential buyer. Questions to ask yourself include: “Am I looking to sell internally to someone who works for me?” and “If I have someone who wants to own the nail salon later, do I bring her in and start to show her the management ropes now?”
PBA’s Buchanan says it’s also savvy to put the word out through your product company that you’re looking for a buyer.
Before advertising your salon for sale, be sure its curb appeal is strong, House says. “If you’ve been considering any renovations, new furniture purchases, or even just a fresh coat of paint, do so before any buyers step foot in the door,” he says.
Red Flag Alert
Once you’ve found a serious buyer, it’s easy to get caught up in the excitement of the moment. But you’d be better served by keeping your enthusiasm at bay until the potential buyer’s financing comes through. “A lot of times, someone will ask: ‘Will you sell this on an installment contract to me?’ But this is very dangerous,” Kopsa says.
If you’re going to approve someone to buy on an installment contract, then Kopsa’s first piece of advice is to refuse to accept less than 30% of the sale price up front. “If there’s a substantial down payment, it will make it harder for the buyer to walk away later,” Kopsa says.
Also, annual payments aren’t going to cut it. Monthly payments are the standard. If you put the new owner on a yearly payment schedule, then you learn six months in that the new owner is running your former salon into the ground and has no chance of making her next payment, you won’t be able to take any action until the new owner has officially missed a payment, which isn’t for another six months.
Also, ensure you get proof of insurance, a copy of the tax returns and other financial statements on an annual basis, a written contract that says the new owner can’t sell anything without your approval, and make sure an attorney looks over all of the above.
If you don’t take the proper precautions in this sort of situation, you’re running a huge risk that “a year and a half later, when you’ve moved on with your life, the buyer decides to dump the salon and give it back to you. And the new buyer has run it down, so it’s not even worth what she bought it for,” Kopsa says.
In short, Kopsa says, “If you’re going to be a bank, you need to act like a bank.”
The accountant you’ve hired can also help you figure out the tax consequences and cash flow consequsences post-close. (Ideally, you need to discuss these consequences up front, as the accountant’s advice after looking at your balance sheet may be that you need to hold the salon for a few more years before selling it.) “Sometimes people come to me later in the ballgame, and I have to explain to them that they are going to be upside down,” Kopsa says. The reasons for losing money on the sale can include not factoring in payments to the IRS for the sale or not factoring in paying off the salon’s existing debts.
The tax forms can get complicated. The sale amount generally needs to be allocated (i.e., separating out the equipment portion of the sale price from the goodwill portion of the sale price), so you’ll likely want to turn to a professional here.
If you’ve taken the above advice and that of the professionals you’ve hired, then you should be in the clear. You can take your profits from the sale and take a well-earned vacation — or invest them into your next nail salon venture.
Note: The information provided does not constitute legal, tax, accounting, or financial advice and is offered as an information service only. Those seeking specific advice should contact a professional advisor. No liability whatsoever is assumed in connection with the use of this information.