The current recession lingering in hearts and minds was caused primarily by a breakdown in the banks’ assessment of risk and loans. A lot of money was given out on credit through business loans, home mortgages, and credit cards, without a proper accounting of how likely that money was going to be repaid. A lot then went on through the back-end of Wall Street financing that further weakened credit accountability. To put it shortly, way too much money was being distributed way too freely, and when it came time for all these loans to be paid, there simply wasn’t enough money coming in to cover them, and the banks were thus bailed out by the government.
As a consequence, banks have become exceedingly tight on giving out any new loans for prospective businesses, which includes many in our industry — the neighborhood startup salon.
Monte Zwang is the owner of Wellness Capital, a company that does financial consulting for the salon and spa industry. Zwang is also a licensed real estate agent in Washington state and has worked in beauty finance for more than 25 years. “The main thing you need now is great personal credit, which is at or above 700 on the FICO chart,” he says.
And after that, it’s working capital.
Larry Kopsa is a certified public accountant (CPA) with an expertise in the beauty industry. He defines working capital as, “the money required to survive the first six to 18 months of doing business.” And working capital can also be applied to the amount of money that banks may require as a good faith deposit. Banks are requiring a much higher percentage of money down on loans they’re giving out, increasing from about 5%-10% before the recession, to today’s average of 25%, says Zwang.
Well now that you’ve been warned, what lies ahead?
The Official Business Plan
A business plan is essentially a written description of what kind of salon you intend to run, how much you think it will cost, how you will market your salon, how much you think you will make, and then what kind of payments you will make to repay any money loaned to you.
This is the heart of American business. Business plans are drawn up for the largest multi-national trading company venture, down to the smallest business startups, but the principle of needing some money to begin a money-earning operation remains the same. This is why Wall Street is as powerful as it is.
So what are the guidelines for a sound salon business plan?
The first thing is to factor in startup costs, and typically the most expensive cost is the rental space. Be sure to search hard for the space you intend to rent, as that will be a monthly payment you need to make every month to literally keep your doors open.
Then you need to look at furnishing the salon, décor, paint, and any electrical or plumbing work that needs to be done. These all need to be scrutinized and whittled down to the best possible price for what you’re looking for long before you approach any potential investors.
After that, consider your product costs.
How much will it cost for every service on your salon menu? This will require some math because you will need to buy in bulk to keep the price down. So find out exactly how much your expense will be to provide the materials for the service before you factor in labor expense.
Larry Kopsa advises that owners be very selective when choosing a location, and keep in mind the community when deciding service pricing. “I call it business Darwinism,” says Kopsa. “Don’t go in with an ego, but with flexibility. Who are the guests going to be? What is the location like? You look for an opportunity where you can ‘just add water’ as they say, because then you don’t bury yourself with startup costs.”
The Small Business Administration has a wealth of information for budding entrepreneurs, and has a loan and finance department. The SBA website, www.sba.gov, has walkthroughs for preparing for loans, finding lending sources, and information about government grants you might be eligible for.
Nancy Donatone McCoy (above), owner of McCoy Nail Salon in Walnut, Miss., gives some advice on negotiating rent with landowners.
“Every renter/leaser should know that landlords want to rent you their space and most of them are willing to pay to replace flooring and paint because they want to make the renter comfortable and stay in the place long term. If a landlord is not willing to make simple changes, try to negotiate a lower rent or find another space.
I was able to negotiate with my first landlord to pay for the costs of updating the space to meet my state board salon regulations, if I would sign a six-month lease. I did sign because I knew I could cover the expense and my business would grow. On my second location, I was able to get a cheaper rent without even a security deposit if I updated the space, which I chose to do by putting new paint on the walls.”
The goal of the business plan is to lay out clearly how this business will turn a profit, so any marketing information or local consumer research will help as well. Also include your personal finance statements, to show you are currently earning, as well as tax returns to show you are responsible.
Bankers want to deal with people who are business people. Bookstores are great resources and will have a business section with helpful literature for fledgling businesses.
Being prepared and knowledgeable shows the banks that you are serious and that you know your stuff. Have your numbers and be able to support how you arrived at those numbers.
Clearly identify your marketing plan, and be specific with details. How are you going to let customers know of your services and location?
The better you can support your claims, the better you will fare in the eyes of the bank clerk. Remember the clerk’s main concern is feasibility, so keep your expectations realistic to what you can do with your own efforts and leave out any assumptions of chance.
A powerful number to have is your “break even” number, which is how many dollars in sales you need to keep the doors open. You can divide this by your anticipated average service payment to determine how many customers you will need to keep the doors open.
Kopsa recalls a time when he was reviewing the numbers for a prospect and when he did this calculation, it figured that the salon would need to see every man, woman, and child in the entire county one time over a one month period just to break even. Needless to say they went back to the drawing board and slashed expenses.
The 401K Way: Melodie Little-Hand (above) of Tickled Pink salon in Clayton, N.C., withdrew money from her 401K to finance her startup costs. “We just withdrew it rather than take a loan,” she says. “I will begin repaying it by putting $150 a month into a savings account that we will then be able to have set aside as an emergency fund.”
The Contingency Well and Family
One of the things that is important to do with a startup budget is build in an amount for any little thing that might come up unexpectedly. This can be anything from a plumbing problem to a broken piece of equipment, but it’s good to have about 5% of the fixed expenses allocated toward unforeseen contingency issues. If it isn’t used, just think of it as more profit.
A lot of startups will also turn to family for help on initial investments. This should be done with caution, as mixing business and family can often damage relationships. Monte Zwang advises that if a salon owner does so, they should treat the family investor just as a bank or any other business partner, and produce a proper business plan with agreed upon details for repayment.
Think about other associations and organizations you might benefit from. There are a great deal of women business owners in the beauty industry, and there are organizations like the American Business Women’s Association (ABWA) (www.abwa.org), and the National Association of Women Business Owners (NAWBO) (www.nawbo.org), that have lots of resources available. There also may be some cultural associations out there that can help and are only a Google search away.
Cutting the Ribbon
Although venturing into your own business can be stressful and at times scary, it’s important to remember that every venture capitalist has had to take a risk at some point. The trick is to educate yourself as much as possible so you can take the most informed and thought-out risk you can, and have the conviction to carry it through. As Kopsa says, ownership is hard work.
“I always ask people who are planning to open a new business why they want to be an owner, and often I hear back, ‘Because we want to work less and make more money,’” he says. “Actually the opposite is true, especially in the early yars. You work harder and make less money. You become accountable for so much more than just your professional skill of doing nails. But on the other hand, it can be very rewarding.”
When you venture into salon ownership, you are essentially buying a job, as they say. But a vision and a strong desire to bring to it reality just may be compelling enough for the next startup to get going.