Published on 28/03/2023 by Any Business.Com.Au

​No Shortcuts: Buying an Established Hair Salon

Buying an established business across any industry at any time requires plenty of research and due diligence - but once you make that decision, the results can not only be life changing but extremely rewarding.

One of those attractive business propositions is an established hair salon.

There are many factors to consider when taking on such a purchase that will ultimately dictate how successful your business is, as well and your image as a professional within the hair salon industry.

Of course, every business proposition is entirely unique and we highly recommend enlisting the help of an experienced business broker to assist in the finer details.

If you are wondering where to begin, award winning Business Broker and Salon Sales Specialist, John Kasapi of Benchmark Business Sales has plenty of knowledge to share on buying an established hair salon.

"It might go without saying but budget and finance is so important when you're considering buying an established hair salon business," Mr Kasapi explained.

"It's imperative to take into consideration purchase price, stock value, cash flow, rental bond expenses (generally 3-6 months rent up front), any necessary repairs and of course a location that is not only smart business wise but within your budget."

Mr Kasapi said leasing was a key to getting a deal completed when it comes to buying an established salon business.

"Leasing is where we find most applicants/buyers fall down. Have your asset and liabilities prepared and signed by your accountant, business plan, cash flow forecasts, a resume of your experience and 3 references for the landlord.

"Focusing on staff will also be key, you need to look after the current staff and make sure you have a few back up options before you settle on the business."

Mr Kasapi said reading an advertisement for buying an established salon could be very confusing and had this list of lingo explaining definitions to help clear the clutter.

1. Total Sales/Turnover/Revenue – this is the total amount of sales generated in a business and is an indicator of how big the business is. For example if a salon has 1 staff member the total sales for the year would be their service sales + retail sales + any other income generated. The bigger the turnover often means the bigger the profit you can get out of the business.

1. Cost of Goods (COGS) – this is what it costs to do the service, in industry it most commonly is the actual product used. A benchmark for cost of goods vs total sales is usually around 7-12% in hairdressing and a little higher in beauty. A good business will have a low cost of goods percentage.

1. Gross Profit (GP)/Gross Margin (GM) – this figure is a bit boring within our industry and all it relates to is the Total Sales minus the Cost Of Goods. Gross Profit varies from hair to beauty. In a barber shop where there is limited product used the GP would be very high at around 98%, in a ladies salon the GP would be around 90% and in a beauty salon the GP would come in at around 85% due to these salons using expensive products within their treatments.

1. Wage percentage – one of the most important figures you will see in business is the amount of wages spent vs the total sales of the business. In most salon enterprises it is difficult to get this down below 40% of total sales however it is a good indication of where you can improve the business. The lower the wage percentage the better.

1. Rent per square meter (sqm) – a key area in any business is rent vs the location of the business. It is essential to have a good location but make sure you are not paying too much for it. The easiest way to benchmark rent is to break it down into a dollar value per square meter.

1. Stock at Value (SAV) – this is often tacked on to the price of a business and suggests that you will be required to purchase the salon at a certain price plus you will be required to purchase the current stock in the business as well.

1. Walk In Walk Out (WIWO) – the other option when buying a business is to purchase it on a WIWO basis where all the stock is included in the sale price. This often happens if the business does not have a lot of stock (less than $5000) or the owner just wants to sweeten the deal.

1. Net Profit – once you have paid all your bills then hopefully at the end is a net profit. This is by far the most important figure when buying or selling a salon. Often the net profit may be small at around $15-$20K however the owner lives an extravagant lifestyle … trips to Paris each year, leases a Porsche, home office etc. This is done to lower the net profit and avoid paying too much tax - all very legally.

1. Earnings Before Income Tax (EBIT) – this very important term relates to net profit and how it is displayed. An EBIT net profit means that the owner has taken a wage and there is still profit at the end of the day. This is often referenced to managed salons where the owner does not work in them.

1. Proprietors Earnings Before Income Tax (PEBIT) – this type of profit has the owners wage added back into the net profit which means it is not as appealing as an EBIT profit.

1. Addbacks – when calculating the real net profit of a business it is a common practice to add back into the net profit certain expenses to give a true indication of the actual money you will earn out of the business. Justifiable addbacks are depreciation, one off expenses like getting sued, interest on a loan, often business coaches, leasing of motor vehicles, overseas trips, excess wages or superannuation.

1. Return on Investment (ROI) – this figure is very important as it lets you know how quickly you will get your money back on your investment. For example if a salon had an EBIT net profit of $100K and you purchased the salon for $200K then your ROI would be 50% which means you would make you money back in 2 years. That would be pretty good. In most cases the higher the ROI the better the investment.

Mr Kapasi added that preparation was the best way to negate the potential pitfalls of buying an established business.

"Now that you understand the basics of buying and selling all you need to do hunt around for a good deal and jump on it quickly.

"Make sure that you speak with a broker to determine what type of salon will suit you for example: managed, partly managed, owner operator, franchised etc. Once you know what you are looking for it is much easier to find it."

AnyBusiness.com.au

Curtis is a leading expert in the business-for-sale industry, serving as a senior content creator at anybusiness.com.au.

With a career spanning over fifteen years, Curtis has accumulated extensive knowledge in the domain of business sales, acquisitions, and valuations. His deep understanding of market dynamics and his ability to translate complex industry jargon into accessible insights make him a trusted resource for entrepreneurs and business owners looking to buy or sell businesses.

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​No Shortcuts: Buying an Established Hair Salon

28/03/2023 by AnyBusiness.com.au

Buying an established business across any industry at any time requires plenty of research and due diligence - but once you make that decision, the results can not only be life changing but extremely rewarding.One of those attractive business propositions is an established hair salon.There are many factors to consider when taking on such a purchase that will ultimately dictate how successful your business is, as well and yo...