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Management Practices

The Right Advice

Stacey Soble | July 10, 2011 | 12:31 PM

There was a time when the only people you needed on board were the butcher, the baker and the candlestick maker. Unfortunately, today’s world is a bit more complicated.

Unless you’re a Jack- or Jacqueline-of-all-trades, who can equally dish out legal counsel, financial guidance and marketing wisdom along with a great baliage service, you and your salon business need a little help from an assortment of professional friends.

Instead of groaning over the fees you’re likely to shell out, remember that each time you form a new relationship, you’re building your salon’s think tank. Each new professional views your business from a different perspective, and can help you explore new opportunities, avoid pitfalls, reduce costs, increase profitability and grow your business.

While the types of professional advice needed for each salon varies, there are five key contacts that every growing salon requires: an attorney, an accountant/financial advisor, a lender, an insurance agent and a marketing/public
relations representative. Taking them one by one, we’ll look at what each adds to your business, how to find the person who best fits your goals, and how to get the most for your money.

ATTORNEY

Most salon owners hire attorneys for a specific purpose, such as to negotiate a lease or draft a non-compete agreement. But when it comes to legal issues, it’s what you don’t know that can hurt you.

When Billy and Melissa Yamaguchi first explored the possibility of buying out Billy’s business partner 13 years ago, they consulted Melissa’s brother, an attorney. Doug Chambers was happy to assist, and all three initially believed that Chambers would simply help the Yamaguchis navigate the transaction.

“But it became clear early on that it was cheaper for them to find a new location and launch their own brand than to buy out the partner,” says Chambers, who now also owns the consulting firm Blu Spas, Inc. “That decision led to helping them find a new location and negotiate a lease. At that time, business issues were foreign to each of them, and we quickly went from spending 30 minutes a week together to hour-long nightly phone conversations.”

One of the first ways Chambers helped he Yamaguchis was by structuring sound compensation packages. “In a predominantly rental environment, we had to carefully design compensation to provide a good opportunity for staff while allowing the house to make some money,” says Chambers. “One of the ways we did that was by offering benefits that were rare at the time, such as paid vacation, educational opportunities and health care benefits.”

Even after the Yamuguchi Salon and Coastal Day Spa established its first location in
southern California, the Yamaguchis viewed Chambers as someone to approach with specific issues and not as an integral part of the day-to-day salon operations. That is, until they were shocked with a lawsuit by their employees.

“When we opened the business, Billy ran it the way he managed the former salon, and we didn’t establish set amounts of time for breaks and lunches,” says Melissa Yamaguchi. “Billy  saw 15 clients a day without stopping for lunch, so we thought that was the industry norm.”

Six disgruntled employees honed in on the no-break mistake and sued the Yamaguchis for a significant amount of money. “It was devastating, both emotionally and financially,” says Yamaguchi. “We learned that if Doug had
reviewed our policies beforehand, we could have saved ourselves a lot of heartache.”

Despite the hiccup, the Yamaguchis have gone on to build their business to a total of five salons, with three more to open soon. Along the way, Chambers became an integral part of the team and now directs the salon’s business development, negotiates all leases and helps lead marketing. “He’s strengthened us as a team by giving us confidence that someone cares about every decision we make,” says Yamaguchi. “In every aspect of business, he steps in and evaluates everything.”

Arsalan Hafezi, who with his wife Arezo co-owns Modern Salon and Spa in Charlotte, North Carolina, also found himself in a jam when he tried to go it alone. While in the process of adding one of his five current locations, he went solo to negotiate a deal with the president of a property development company. While it seemed pretty straightforward, Hafezi quickly learned he’d just signed away his rights to make any changes.

“In the end, it cost us a year in delays, and my attorney made me promise to show him every piece of paper before I signed,” says Hafezi. “Attorneys understand the fine print, and while I would have had to pay for his
time, in the long run I would have saved a lot of money.”

In a unique move, Jennifer Vaughn, owner of the Ginger Bay Salon Group in Kirkwood, Missouri, decided to take her attorney-client privilege to a new level—and now has an in-house general counsel.

“From the first moment, Laura Ortmann was interested in my business—she took it seriously and asked a lot of questions,” says Vaughn.

Over time Ortmann learned Vaughn’s business and Vaughn learned the value of a good attorney. “We had several off-the-clock conversations about my business and she and her husband would come to dinners at my house where we’d brainstorm.”

Through her accountant, Vaughn learned that Ortmann was growing tired of her 70-hour workweeks with her firm and wanted to expand her family. “He told me I should offer her a job, she just might take it,” remembers Vaughn.

Vaughn calculated what she currently was spending in legal fees and figured in the future work on the employee handbook and the non-compete contracts she wanted written. “The paperwork side of the business has never been my favorite, and Laura accepted the role of general counsel and chief financial officer. In addition to legal
responsibilities, she sets the corporation’s financial goals, is responsible for strategic planning and oversees the human resources department,” says Vaughn.

Finding the Right Attorney

While hiring an attorney in-house is rare, finding one that best matches your needs is imperative. Most attorneys specialize in certain types of law, so find one with a specialty in the area you’re targeting.

When Hafezi was seeking legal counsel, he opted for a firm that employed specialists in many different disciplines. “It’s important to do your homework,” he says. “I knew nothing good would come cheap and I researched different firms and checked their backgrounds. I found one that handled pretty much everything with the exception of medical malpractice.”

To find the right attorney, start with your trusted professional contacts. For example, ask your accountant or financial advisor for references. Or, ask other business owners whom they use.

It’s a plus, adds Chambers, to find one that is familiar with the professional beauty industry. “The nuances of salon operation are distinct enough that if someone doesn’t have a familiarity, you’re going to spend money educating them.”

No matter what kind of professional advisor you seek, a good rule of thumb is to find one that is interested in you and your business. “When we consider hiring a professional advisor, expertise, knowledge, experience and competence are first and foremost,” says Ortmann. “Second, our professional advisor must be knowledgeable about our industry, and she must take an interest in our business. The attorney who worked for Jennifer before I was hired had never even taken the time to walk into her salon, and turned down her invitations to attend company celebrations.

“This behavior was completely contrary to the type of professional relationship that we are working so hard to establish with our own clients,” continues Ortmann. “After all, customer service is first and foremost in our business, so we expect it reciprocated from our professional advisors.”

 

Paying the Fees

Legal advice doesn’t come cheap, but there are ways to negotiate to get more for your money. It all boils down to how often you need legal counsel.

“If you have ongoing legal needs, it may make sense to explore a retainer agreement, which basically amounts to a volume discount,” says Chambers. “Instead of paying $400 an hour, you may pay only $300 an hour if you commit to 10 hours per month. Or you may pay a set monthly fee, with an opportunity to get a more favorable rate when you go beyond that.

“For a small salon that may have a lease negotiation every five years, a retainer situation doesn’t make sense,” continues Chambers. “But if you’re a salon with ongoing legal concerns, it is worth exploring. Figure out your needs before you open up the dialogue.”

In speaking with other salon owners, Ortmann discovered that most salons don’t budget for their professional advisors and often are shocked at the expense. “At Ginger Bay we project and actually spend approximately 0.5 percent per month of our total budget for our legal and accounting fees.

“A start-up business or an established business going through a significant change, such as high employee turnover, an insurance claim or lawsuit, or opening a new location, can expect to spend as much as 3 percent of the budget per month. But, this should be a temporary expense and one that is worth spending to proactively protect your business.”

Forming a long-term relationship with your lawyer can also earn you the opportunity to use him or her as a sounding board off the books. “For example, a physician approached us about doing a joint venture in laser hair removal, so I took my lawyer and his wife to dinner to discuss the pros and cons,” says Hafezi. “I’ve done that maybe five or six times, and while we’ll keep the conversation on a professional level, he doesn’t charge me.”

 

ACCOUNTANT/FINANCIAL ADVISOR

In the average salon, either the owner or a designated employee assumes bookkeeping and payroll responsibilities, leaving the tax matters in the hands of an accountant. But owners with an eye on the growth of their businesses find an accountant that also offers financial advice invaluable.

Lisa Cochran, owner of The Studio of Hair Designers in Laurel, Mississippi, knew she needed to make some drastic changes when her relatively new salon faced tough times following a walkout. “We had been using a small accounting firm, but we realized we now needed a business advisor more than a bookkeeper,” she remembers. “It was scary, because the new firm’s monthly fees were higher than what we’d been paying for an entire year, but in the long run, we wouldn’t be where we are today without making the change.”

The new firm helped Cochran truly understand her cash flow situation, and helped her identify the tough decisions she needed to make. “They also gave me lots of tidbits of advice that helped us save money and improve cash flow,” she says. “For example, we used to pay our employees on Tuesday with payroll taxes due on Thursday. They showed us if we moved payroll to Friday, taxes weren’t due until the following Wednesday.”

The firm also helped Cochran draft a vacation policy that required a month’s notice and prevented two senior producers from taking the same week off. “Cash flow was always hard in the summer, and this helped steady it,” she says.

For Matthew Fairfax, one of the owners of the James Alan Salon in Shoreline, Washington, a forward-thinking accountant advised the owners to purchase their salon property under a separate LLC (Limited Liability Company) instead of through the salon. “It’s something we hadn’t thought about, we would have simply had the salon buy it,” he says. “But by setting up a separate holding, we not only realized some tax advantages, but now if someone sues the salon, they can’t go after the property.”

Like the attorney, finding an accountant who takes an active interest in your business is important. “I’d invited our former accountant by to see the business, but to him we were just hairdressers,” says Melissa Yamaguchi. “On a referral from one of Billy’s clients, we hired Mark Englander about 14 months ago. He came into our salon and watched how our business worked, he identified which areas of the budget were out of whack, and he’s called us on a Sunday if he has a question. He’s also helped us with our personal and professional goals, such as setting aside money for our children. And if I have a simple question about something on the P&L, he doesn’t charge me for the few minutes it takes to answer.”

The Search

“Basically, there are two types of accountants—those who are simply historians and those who are prophets,” says Larry Kopsa, CPA and one of the founders of Kopsa Otte CPA, an accounting firm that specializes in salons, spas and beauty distributorships in York, Nebraska. “Our philosophy is that in order for us to be the type of advisor that a salon or spa needs, we need to be foreign language interpreters. We need to do more than just deliver financial statements, we need to look at benchmarks and interpret financial statements. We need to communicate our findings so the owner can make good, educated business decisions.”

In addition to the ordinary accounting services, Kopsa Otte also analyzes production software reports, offers continuing tax advice and conducts monthly phone consultations.

The sooner you bring an accountant into your business, the better off you are, claims Kopsa, because one of the most common mistakes happens before owners even open the doors. “Too many new owners panic while hiring staff and offer technicians commissions that are too high—50-plus percent is too high,” says Kopsa. “Early on you need a financial projection so you can go into the salon with your eyes wide open—you know what bottom line you need to reach, how many employees you need, what your retails sales need to be.”

Again, the best way to find an accountant is to ask other salon and business owners, as well as asking your other advisors. Then interview.

“Go to the interview with a list of questions,” says Kopsa. (See “Quiz the Pros,” on page 44.) Before preparing the list, it’s important for you to understand exactly what you are looking for—do you want an advisor or just someone to do year-end tax work?”

Be sure to ask upfront about fees. Is there a cost for the initial interview? “In my opinion, no one’s worth $100 an hour,” says Kopsa. “We work by assessing each client’s needs, then determining a fixed monthly fee.”

 

THE LENDER

When Cochran dreamed of launching her salon she didn’t think there was a bank in town that would deal with her. “But we went in with a firm vision, a business plan and a crumpled SALON TODAY in our hands and told our banker we’d make the SALON TODAY 200 list next year,” she remembers. “He smiled and said, ‘You’ve got to have dreams.’ But he thought we were nuts.”

Nevertheless, Cochran got her loan, and the following year she and her former partner chased the banker down in the parking lot, excitedly waving a copy of the SALON TODAY 200 with their entry. “He’s a big old bear of a guy, and he picked us both up and hugged us.”

Over time, Cochran has come to believe her lender is a true partner is the business. “For example, when we had a financial crisis, such as a walkout or suffering damage from Hurricane Katrina, he postponed our payments without charging penalties or additional interest,” she explains.

As Ginger Bay Salon Group has grown, Vaughn witnessed the value of developing relationships with multiple bankers. “Sometimes the best bank for a loan is not the best day-to-day transactional bank, or vice-versa. We’ve actually switched transactional banks because my staff found their employees rude,” says Vaughn. “And when we’re looking for a loan we’ll interview several lenders to see who can best work with us on what we’re trying to accomplish.”

The strength of those relationships served Vaughn well when dealing with others. “Recently, we were trying to buy a building and not getting as far as we wanted with the property developer. One of our bankers and her bank president came to one of our negotiation sessions with us. The developer took us more seriously and the entire dialogue changed,” she says.

Choosing the Right Loan

Before you go asking for money, know exactly what you want. There are basically three types of financing available to salon owners, according to Brian Bjella, president of Quest Resources, a company that specializes in
financing and lease financing for the salon and spa markets:

Small Business Administration Loan—A great starting point for new and existing salons, SBA loans are offered by SBA-certified banks. Because the federal government backs these loans, it lowers risk to the partnering lenders, allowing them to offer some of the most attractive rates. But getting approved for an SBA loan is tedious and time-consuming, since these lenders do the most thorough examinations.

Traditional Bank Loans—A middle-of-the- road option, traditional bank loans have rates that are a bit higher than the SBA loans, but the approval process isn’t quite as stringent. While these loans also offer you a chance to form a relationship with a community banker, some banks are hesitant to finance equipment.

Lease Financing—Because these lenders are willing to assume more risk, lease financing rates are a little higher than traditional loans. Used to finance equipment, these loans also have a faster and easier approval process.

“The reason many traditional banks refuse to finance equipment is because they don’t understand its purpose and it depreciates so quickly. A good rule of thumb is to buy what appreciates and lease what depreciates,” advises Bjella. “Most owners launch their businesses with a combination of cash capital, financing and lease financing.

“We’re in a very rate-conscious society, but I advise owners that more important than the rate is the monthly payment,” continues Bjella. “Know what you can afford, and get everything in writing.”

 

Strengthening the Ties

For a new owner, going to a bank and asking for a loan is a daunting task for good reason, says Bjella. For right or wrong, there’s a very real perception on the part of lenders that salons aren’t serious business. To sway things in your favor, go into the meeting armed with a detailed business plan, evidence of strong personal credit and sufficient cash reserves.

The asking gets easier as a salon builds a brand name, a strong business portfolio and solid relationship with their lenders. “When I went in for my first loan, it was a challenge. My accountant and I stayed up until 1 a.m. putting that first business plan together,” says Hafezi. “But now that we have a proven history, it’s much easier. Now we’re invited to special client meetings with our lenders where we get to network with the big dogs. They’ll pass out their business cards and tell me to call if I ever have a problem.”

Hafezi strengthens the relationships by frequently sending his lenders spa gift certificates. “When they come into our business, they really develop an understanding of it,” he points out.

 

MARKETING/PR EXPERT

In the timeline of salon ownership, the hiring of an accountant and a lawyer come fairly early. When it comes to marketing and publicizing their salons, many new owners attempt to save costs by doing it themselves. But they may be shortchanging themselves. A skilled marketing or public relations expert can not only help you grow your business, they can help you grow smart, by targeting the exact clientele you seek.

Two years ago, Michael Anthony, owner of three Michael Anthony Salons and Spas in the Chicago area, hired a marketing firm to conduct a focus group study of his clientele and his staff. “The research helped us identify services that clients liked and didn’t like, as well as what they’d like to see, and the firm helped us do some diversity training with our staff,” says Anthony.

During the process, the firm proposed some ways they could assist Anthony with marketing. “Relinquishing those responsibilities has allowed me to focus on my vision,” says Anthony. “Now the firm manages all the updates to the website, coordinates the imagery with our distributors, and prepares the concepts and graphic design for marketing pieces and ads. They do the initial layout, but I have the final approval.”

When Anthony recently opened his third location, he took efforts one step further by hiring Ann Higby, owner of Hatch PR. Higby helped Anthony develop a public relations campaign with specific objectives, strategies and tactics. Then, she drafted all the materials for a press kit, arranged for professional photography of both the salon’s interior and a makeover session, developed a list of media targets, worked out an editorial calendar and distributed materials.

“We were able to get the word out and create some specific exciting opportunities for Michael Anthony,” says Higby. For example, the new location joined with a nearby Bloomingdale’s Home Furnishings store for a special promotion. When a shopper purchased $300 or more at Bloomingdale’s, she received a Michael Anthony’s gift card to enjoy $75 worth of services for $50.

In addition, the salon participated in KidzaPalooza, a special child-friendly section of the alternative rock festival Lollapalooza. “In a special tent, stylists offered temporary tattoos, rock-star styles and temporary hair color,” says Higby. “It was a fun way to get the salon’s name out, and while the kids aren’t our target, the parents definitely are. The event and our activities were covered by a local magazine.”

 

The Right Fit

Although it’s still early, Anthony has been pleased with the exposure. “We’ve gotten quite a bit of media attention, with several write-ups in regional magazines and mentions on internet sites,” he says. “But what’s been the most valuable are all the connections Ann brings to the table that lead to great marketing opportunities.”

Like with so many other professionals, it’s a plus to find a marketing and public relations expert with experience in the industry. “When I meet with new clients, I’ll talk about my industry experience, show them samples of industry and consumer projects, demonstrate my involvement in the beauty and fashion industry and present a list of my current clients,” says Higby.

Similar to other professionals, you can negotiate rates based on volume. Anthony has monthly retainer arrangements with both the marketing firm and public relations consultant. “I pay both $2,000 a month, and they deliver a set amount of hours’ worth of work,” he says.

 

INSURANCE

On a day-to-day basis, insurance—whether liability or property—is viewed as a necessary evil. But on the day you have a claim, the insurance company suddenly becomes your new best friend.

For Cochran, that was the day Hurricane Katrina hit. The hurricane ripped the roof off of one of Cochran’s locations and flooded it. “We were lucky the company took us seriously and initially responded fairly quickly. We also learned we had a loss of revenue clause in place that helped cover the cost of lost business.”

But Cochran was disappointed to learn that the policy treated revenue generated by commissioned employees differently from hourly staff, and the commissioned staff were not included in the equation. “Luckily, our flagship location suffered only minimal damage and we were able to open it after two weeks and move any staff from the other location who wanted to keep working.”

Surprises in insurance coverage aren’t a good thing. Although she hadn’t had a claim for it, Vaughn was shocked to learn her liability coverage excluded eyelash tinting. “We do so many of these and when we learned our carrier refused to cover it, I threw a big stink,” she says. “Most of the salons they covered didn’t know it was excluded, and I threatened to get on the phone to other owners and let them know. They relented.”

At this point, it’s a broken record, but choosing a broker and a carrier that specialize in the industry can be a big benefit. “Many carriers refuse to cover specific services, such as massage and waxing, limiting the services you can provide your clients,” says Donna Krumm, assistant account manager with Hairdressers Agency, a company that offers professional liability, premises liability and property insurance for salons, distributors and manufacturers. “We cover those services.”

While the company does not sell directlyto owners, they will sell policies through any licensed broker, says Krumm.

A successful business-insurance relationship starts with the broker. While a trusted broker should keep you informed of policy changes, that’s not always the case. Vaughn was surprised to learn that one of her former carriers received a negative rating three quarters in a row. “My broker didn’t let me know, so I got rid of the
broker,” she says.

Vaughn is pleased with her current broker. “She always finds us the best rates, and she’ll come in with these four-inch thick, color-coded binders and show us exactly what’s covered and what’s not,” says Vaughn.

Critically important is keeping the lines of communication open. Talk to your broker frequently and keep him or her posted on any changes in services, staff, equipment and property. And, plan ahead.

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