Part 1 in a Series on Buying a Salon
Interested in Buying and Existing Salon?
Here's What to Expect
Buying an existing salon instead of starting one up from scratch has definite advantages. There is already a base of clients and hopefully, profit. But if you don't understand the process, you could easily pay too much, or not understand what you are actually buying.
If the business is being offered by a business broker he or she will manage the transaction and explain the process. Remember, however, the broker works for the seller. You need experts on your side to protect your interests. Here are the basic steps, simplified.
Step 1 - Confidentiality AgreementThe first step in evaluating a business is the Non-disclosure Agreement. It customary to require an NDA prior to sharing confidential information about the business, including the name of the business. This is to protect the seller, whose business could be jeopardized if news of the sale got out. A business broker may also prequalify you financially prior to releasing information.
Step 2 - Basic Financial InformationThe broker will share basic financial information with you, usually based on the tax returns of the business for the past two or three years. You will want to see a minimum of three years of tax returns.
An important number in buying or selling a business is Owner's Discretionary Income. The asking price is probably based on this number (for example, a multiplier applied to Owner's Discretionary Income). This number will be discussed in detail in a later post.
Step 3 - Due DiligenceThis is your chance to get all your questions answered. You can review the lease, payroll records, sale figures etc. Remember that only you and your experts have your best interest in mind. Don't accept information at face value. You may meet the seller or everything may be coordinated through the broker. Sometimes before getting too far into due diligence, they will want a written offer.
Step 4 - Make Your OfferYou may need to do this before significant due diligence, but you can back out of the deal if your research uncovers something that makes you change your mind. Make sure your offer is contingent on financing and verification of earnings figures.
Step 5 - Negotiate
If your due diligence indicates your previously accepted offer is too high (the business is worth less than you thought at the time of the offer) now is your chance to renegotiate. What could affect the value of the business? Has there been turnover that will negatively impact the business's ability to generate cash flows? Was Owner's Discretionary Earnings not calculated accurately (see Part 2 coming soon)? Have you learned something else about the business that makes you doubt the profits are sustainable? Will you be taking on gift card liability by agreeing to redeem gift cards sold by the seller? The seller got the cash so you need an adjustment to the selling price to take on the liability.
Step 6 - Inventory
The selling price of the business usually does not include inventory (retail or professional) so just prior to closing on the sale, a complete inventory count needs to be done. You should be there for the inventory - don't let the seller just count and report to you. Watch for signs of obsolete inventory. Do they have 2 color lines in stock (the one they switched to 6 months ago and the old line they couldn't return)? If so, do not buy the old color. You only want to buy inventory that is relevant to the business today. Old color is their problem, not yours. Generally you will pay cost for the inventory. All pricing should be supported with an actual invoice showing it's purchase date. If retail products are more than six months old I would argue that they are obsolete and not included in the sale. You don't want to buy a bunch of stale inventory that the staff can't or won't sell.
Step 7 - The Closing
Congratulations, you're a business owner!
Have you purchased or sold a salon? What are some of the pitfalls you would warn others against? What do you wish you knew then?