Sharing the Stakes
Through the Salon Resource Group, Peter Mahoney owns 23 salons under five different brand names throughout Canada. Within that salon group, he’s groomed about 20 different employee-owners who each have a stake in the future success of the business. As the president of the Summit Salon Business Center LLC, and the author of the educational CD “Empower Your Profit,” he shows other salon owners how to do the same on a daily basis. “Essentially I started my succession plan in 1989 when I started getting key staff members involved in equity positions in my company,” he says.
Too many salon owners retire by simply closing their doors and walking away or they sell it the salon for much less that anticipated and they end up having to work in the salon as a disgruntled employee because they can’t afford to retire. “Or they get lucky and sell it to someone for more than it’s worth, but the successor goes out of business a few years later when everything goes sideways,” says Mahoney. “But if 10 years earlier that same salon owner sold an equity position to one to four employees, then coached them how to be good owners and manage they business, the salon would grow and succeed.”
So the first question owners should ask themselves, according to Mahoney, is are they looking for an exit strategy or a growth strategy? Mahoney coaches owners to look for the growth strategy first, because if you don’t have a profitable business, you have nothing to sell. “The minute you buy into the philosophy of building value in your salon, you realize you’re in the business of building good people, and RETAINING them,” he coaches. “And the best way to do that is to sell them small pieces of equity in your company and they’ll help you grow your company.”
The average salon is going to sell between 3 and 5 times its net positive cash flow—that is all the revenue from service and retail sales less all the expenses. It’s helpful to understand the value of your business—experts at Summit Salon Business Center help valuated salon businesses all the time.
Here’s some things Mahoney advises owners to watch out for if they are considering selling their business or a stake in their business:
You have to drive profitability. “That means growing your sales, controlling your expenses and locking down key employees so they continue to grow the business with you,” he says.
Make sure your lease is secure. “If you don’t own your building, your lease can be your biggest risk factor.,” says Mahoney. “It’s hard to sell your business if your lease is up in a year because there’s a risk the landlord won’t renew. When signing a lease you need to negotiate renewal options. Many commercial leases have a clause buried in it that the landlord has the right to renegotiate the lease if the business changes owners. That means he could up the rent to $5 a square foot to the new owner—he may as well reach into your pocket and steal some of the value of the business.” Professionals at Summit Salon Business Center read leases and point out risk factors to owners.
Who are you selling to? “If you are going to completely exit the business, you may not care,” says Mahoney. “But if you are going to sell to an equity owner, you don’t want to just sell to someone who has the money. Sell to people who you believe can play a future role in the growth and development of the company—they are the ones who will help the business grow people, not just sales.” Mahoney recommends looking for staff in different areas of the company with different areas of expertise to sell to—for example it’s better to give a stylist, an esthetician and a manager equity positions than it is to give it to three top stylists.
If you are considering selling your salon, Mahoney recommends asking yourself the following 10 questions:
- Am I looking to lock down key employees by selling them equity or am I looking for a complete exit strategy?
- What is your salon really worth?
- Why am I doing this?
- Who should I allow to buy in, and how do I decide eligibility?
- Why would an employee want to buy in?
- How will they buy in?
- How will their role change once they become an employee/owner?
- How many employee/owners should I have?.
- How much of the company should someone own?
- What happens if that person wants to leave?
Summit Salon Business Center is prepared to help owners answer those questions and coach them through the succession planning process. For more information, visit summitsalon.com or call 800-718-5949. Mahoney’s CD, “Empower Your Profit” is available on summitsalon.com or through ShopModernSalon.com.