Thriving Stylist Podcast Episode #367: How To Calculate Your Salon's Worth

Host: Britt Seva
Release Date: January 6, 2025

Introduction

In Episode #367 of the Thriving Stylist Podcast, host Britt Seva delves into the intricate process of determining the value of a hair salon. Recognizing the unique challenges faced by salon owners in valuing their businesses, Britt provides a comprehensive guide to understanding salon worth, catering to both current owners contemplating a sale and stylists interested in the financial dynamics behind salon businesses.

Understanding the Importance of Valuing Your Salon

Britt begins by addressing salon owners who aspire to sell their businesses. She acknowledges the apprehensions surrounding such a decision but underscores the potential benefits of a well-executed sale for both the owner and the team. Britt emphasizes that "the success of a salon sale hinges on thorough preparation and understanding of valuation methods" (05:30).

Valuation Methods Explained

1. Income or Earnings Method

The Income Method, often employed outside the beauty industry, assesses a salon's ability to generate future profits and cash flow. However, Britt points out its limitations within the salon industry due to the "key man risk"—the reliance on the owner's personal relationships and skills (12:45).

Instead, she introduces the Seller's Discretionary Earnings (SDE) as a more fitting approach for salons. SDE calculates the business's profitability by considering various factors:

• Pre-Tax Income: Total gross revenue minus the salon owner's personal production.
• Adjustments: Includes owner's compensation, interest expenses, depreciation, discretionary expenses (like health insurance or personal travel), and non-recurring expenses.
• One-Time Revenues and Expenses: These are excluded to present a realistic and sustainable earnings picture.

Britt illustrates this with an example: "If a salon's gross revenue is $300,000 and after adjustments, the SDE is $358,000, this signifies strong profitability and potential for a favorable sale price" (22:10).

Multipliers are then applied to the SDE to estimate the salon's sale value. For instance, an SDE of $358,000 could attract a multiplier of 3 to 3.5x, potentially valuing the salon at around $1 million. However, Britt notes that achieving such valuations requires "consistent historical growth, desirable location, clean bookkeeping, and long-term employee retention" (35:50).

2. Asset Method

The Asset Method is the most common valuation approach in the salon industry. It focuses on tangible and intangible assets, as well as liabilities, without delving into future profitability or growth potential. Components include:

• Tangible Assets: Furniture, fixtures, equipment (FF&E), real estate (if owned), inventory, and cash on hand.
• Intangible Assets: Customer lists, brand recognition, and online reputation.
• Liabilities: Accounts payable, short-term debt, business loans, and accrued expenses.

Britt explains that the Asset Method is straightforward but often undervalues salons because it "doesn't account for the business's earning potential or the strength of customer relationships" (40:20). For example, a salon's assets might be valued at $25,000, which is significantly lower than what an Income Method might suggest.

3. Market Method

The Market Method, akin to real estate comparative analyses, involves "comparing your salon to similar businesses in the area that have recently sold" (45:15). While this method is prevalent in other industries, Britt highlights its challenge in the salon sector due to the "unique and varied nature of each salon". Few salons fit the exact criteria needed for accurate comparisons, making this method less reliable currently. However, Britt is optimistic that as the industry matures, the Market Method could gain traction (48:05).

Key Factors Influencing Salon Valuation

Britt outlines several critical elements that influence a salon's valuation across different methods:

• Consistent Growth and Profitability: Demonstrating a decade-long track record of growth makes a salon more attractive.
• Desirable Location: Salons in thriving or up-and-coming areas fetch higher values.
• Clean Bookkeeping: Accurate and transparent financial records are non-negotiable.
• Lease Terms: Favorable lease agreements or ownership of property add significant value.
• Employee Tenure: Long-term employees indicate stability and reduce operational risks.
• Maintenance Records: Up-to-date and thorough maintenance ensures the salon's infrastructure is sound.

Maximizing Your Salon's Value

For salon owners aiming to achieve a higher valuation, Britt advises:

1. Enhance Business Operations: Streamline processes, improve customer service, and invest in marketing strategies.
2. Strengthen Employee Relationships: Retain talented staff to reduce key man risk.
3. Maintain Financial Clarity: Keep impeccable financial records and minimize discretionary expenses.
4. Invest in the Salon's Infrastructure: Regular maintenance and upgrades can positively impact valuation.

Commission Salons vs. Booth Rentals

Towards the end of the episode, Britt addresses a listener's feedback regarding her apparent preference for commission-based salons. She clarifies that while commission structures can offer higher revenue and profit potential, she values both independent and employee-based models. Britt explains that "commission salons can be more lucrative and appealing to buyers, especially when structured properly", allowing for better financial outcomes during a sale (55:40). However, she also celebrates the rise of studio suites, which grant stylists independence while maintaining a professional structure.

Conclusion

Britt wraps up the episode by reiterating the significance of understanding salon valuation for long-term business success. She encourages salon owners to "evaluate their business comprehensively, ensuring all aspects that contribute to a higher valuation are addressed", paving the way for a lucrative and smooth transition if they choose to sell. Britt expresses her commitment to empowering stylists with the knowledge and strategies needed to thrive in the ever-evolving beauty industry.

Key Takeaways:

• Valuation Methods: Understanding the Income (SDE), Asset, and Market methods is crucial for accurately determining a salon's worth.
• Industry-Specific Challenges: The relationship-based nature of salons introduces unique valuation hurdles, such as key man risk.
• Maximizing Value: Consistent growth, strong financials, favorable location, and employee retention are pivotal in enhancing a salon's valuation.
• Future Trends: As the industry progresses, methods like the Market Method may become more feasible for salon valuations.

Notable Quotes:

• "Cutting and coloring skills will only get you so far, but to build a lifelong career as a wealthy stylist, it takes business skills and a serious marketing strategy." — Britt Seva (00:45)
• "Our industry is super different. So because of that, the monetary value is also incredibly different." — Britt Seva (17:30)
• "If you want to have things like health insurance, if you want to have things like retirement savings, you're not going to find that in an independent environment." — Britt Seva (58:10)

For salon owners contemplating a sale or stylists aiming to understand the financial landscapes of their businesses, Episode #367 serves as an invaluable resource, offering deep insights and actionable strategies to navigate the complexities of salon valuation.