Although the commission-based salon attracted some strong talent from the start, Shannon realized within 18 months that the current business wasn’t moving her closer to her hopes and goals. She attended a Strategies Incubator advanced management education session where, “I got excited about our potential and embraced the team-based business model and the business took off from there,” she remembers. Within a few years her husband Darryl came on board to help with the business. We grew and moved into a bigger location with eight stations, an area to add spa services and a bigger retail space.”
Within a few years, the business was doing well, showing a healthy profit. Shannon and Darryl had established all their management systems, Shannon stepped out from behind the chair, and the business no longer required all her attention. “We started thinking about what was next—should we launch a second location or do something entirely different? Should we keep the salon as a source of income, or should we sell it?” she remembers.
But as Darryl is fond of saying, “The definition of luck is where preparation and opportunity intersect.” A stylist, who had been with the salon for seven years and was serving as the manager, approached the couple and asked if they ever thought about selling the business. The stylist and her family were attracted by the appearance the salon ran itself, and Shannon entered into negotiations. In October 2006, Hair Xtreme had a new owner.
Creating Their Luck
According to Neil Ducoff, CEO of Strategies, the Jenkins’ case is a rare one, and by creating a financially solid, systems-based business, they did indeed make their own luck by establishing a business that was attractive to a buyer.
“Unfortunately, the more likely scenario is the stylist who opens a salon because he or she loves the technical side of the business and lives and breathes to do hair,” says Ducoff. “These owners can post some impressive numbers, but too often they don’t take the time to understand the numbers, pay attention to the balance sheet or the profit and loss statement. When it comes time to exit out of the business, the late realization hits that they really needed to have spent more time working on the business.”
No matter how wildly successful your salon business is, there will come a day when you’re ready to step away from it—hopefully either into a comfortable retirement or into another lucrative opportunity. The time to start planning for that transition—and boosting the sales value of your business—is now.
What’s it Worth?
One of the first steps in planning the eventual sale of your business is evaluating its current worth. This was one of the factors working in the Jenkins’ favor—before a buyer approached them they had asked their accountant to give them an evaluation. “She had all these different formulas for evaluating the worth of a business, and there were three that were applicable to a hair salon,” says Darryl. “She used all three to calculate and basically came up with the same number. Shannon had that number memorized when she was approached, and it made her confident to hold firm on the price.”
It’s important to get an evaluation of your business because too often what you think your salon is worth and it’s actual value can be two very different things. According to Ducoff, there are a few ways to evaluate worth. “The quick, down and dirty way is to take the businesses’ current annual earnings, or profit, and multiply it by three or four,” he says. “There’s also a formula to calculate it using gross sales revenues.”
Usually, those two formulations will give you a high number and a low number, and the business will sell for something in between. “It will boil down to your balance sheet,” says Ducoff. “A buyer wants to buy the business, not your debt. But if a buyer feels he can buy the company, service the debt, and still add to the bottom line, then the value of your businessrises.”
Finally, once you truly understand your salon’s worth, you can spend the next several years working to increase that value in the eyes of a future buyer.
According to Ducoff, all salon owners should begin thinking about how they could design their business as a franchise. “Think about how smoothly everything runs when you walk into a McDonald’s—everything has a system. The more you design your business like a franchise, the more it can run itself and the more appealing it is to a buyer.”
When Shannon and Darryl Jenkins sold their salon, the entire operation was turnkey. “We had manuals and handbooks and scripts for everything. Every employee knew what they were supposed to do each day. All a new owner had to do was take the key and open the door,” says Darryl.
As you develop your long-term plan, keep in mind that the more you are the business—if you work behind the chair and bring in a lion’s share of the business—then the less value your overall business will have. You aren’t selling yourself along with the business.
“If a salon has been accumulating debt and running up the credit cards to finance that beautiful build-out, then the owner may find himself in the position that he needs to borrow money just to get out,” says Ducoff. “A buyer wants a business that is creating equity, not one saddled with debt.”
Part of becoming financially accountable is understanding your salon’s numbers. Responsible owners have to learn to read a balance sheet and comprehend a profit and loss statement. “Develop a plan for working diligently on your financials over the next five to eight years,” says Ducoff. “Make sure you are running a legitimate business, that all the numbers are accounted for, and that you are working to drive a healthy bottom line.”
For Shannon and Darryl, financial accountability came through their own advanced business education. “We credit both Strategies and Harms Software for much of our success—we learned early on that we needed to understand what kind of company we wanted to create and how to go about doing that,” says Darryl. “Almost from the start we learned how to understand a balance sheet and build equity in the company. Numbers are a part of the deal, you have to embrace them and make them work for you.”
Build the Brand
Work now to solidify your salon’s brand, and make sure that you are not the brand. In too many salons, the brand is built around the presence of the owner.
“If you named your salon after yourself, then you need to make sure the brand name is big enough to outlast you,” advises Ducoff. “Eveline Charles [with nine locations in Western Canada] has done an excellent job of this—her operation is a well-run machine, she’s built it to the point that the Eveline Charles brand no longer requires Eveline, the person, to carry on.
Stepping away from the chair was one of the hardest decisions for Shannon Jenkins, but an important one, she says, for separating herself from her brand. “I had to create my own job and transition into the business owner,” she says.
Finding A Buyer
The most ideal place to find a buyer is within your own staff—someone who understands the value of the business. This proved true for Hair Xtreme, whose buyer emerged from their management team.
“Start by looking around to see if there is someone on your team who has the potential to be a leader and the access to the financial means to put a deal together,” says Ducoff.
If there’s no one internally, you have to seek a buyer externally. “I had a client who put together beautiful presentation folders and sent out invitations to doctors in her market who might be interested in expanding into medispas—to receive the full packet, the recipients had to sign a non-disclosure agreement,” says Ducoff. “But you should always tap your network, and try asking your accountant and attorney, who also work with other small business owners.”
The least efficient way to go is through a business broker, you might be hard-pressed to find one who has any experience in brokering a salon. You also want to make sure they don’t list the salon by name. Alerting employees to a possible sale can cause panic.
“Salons are cash cows, but if you really manage your business and are accountable to the financials, you can generate a nice profit. There are those fine occasions when the right buyer simply presents themselves,” says Ducoff.
Life After Salon
What happens when passionate salon owners sell their businesses? According to Shannon and Darryl Jenkins, they take a big break. Having always wanted to move out West, Shannon convinced Darryl to move to Phoenix, where she took off six months to decorate her new house. “Basically I did all the stuff I didn’t have time to do when I was managing a business 24/7,” she says.
But the couple quickly learned they couldn’t get the industry out of their blood—Darryl became a director of operations for Strategies and a Strategies coach and Shannon became a trainer and educator for Harms Software. “But I do miss that salon sometimes,” admits Shannon. “I miss the clients, I miss the marketing, I miss the retailing—I miss the girly part of it.”