jeniferii_98

Can anyone tell me any information at all about TanAmerica beds. The current seller has these beds that are approx 3 years old. Give me the good information along with the bad. I can take it!

gripmarketing

jayjay65

Interesting discussion.

“Not true in the case of a strategic buyer that has the operational infrastructure and leverage to absorb and operate acquired salons at a lower incremental cost than the seller's. Translation - larger entities would already have the 'back-office' functions in-house and adding the workload of acquired salons would cost them less to handle than what the existing operator probably paid. In addition, larger entities would have more buying power from suppliers, landlords, etc. than smaller ones, thus further reducing their operational costs (as a % of gross revenues).”

Good definition of a chain operator or franchisor. This assumes that the business’s sales are flat, acquisition costs are lower and that back office functions are extremely costly. What if sales aren’t flat and go down? Fact: at least 10% of all retail chain stores are under performers (read: losers). What if back office functions are not extremely costly and have become, through automation and outsourcing, relatively cheap? I wouldn’t underestimate the power of economies of scale, having been the former owner of 150 retail stores, but I wouldn’t overestimate them either.

This also assumes that an increased buying power exists in an industry where landlords most likely aren’t giving discounts to chain salon operators over single-unit operators or to one chain more than another and suppliers may well sell everyone alike at their lowest costs.

However, let’s assume a chain salon could get lotions and equipment for a 20% discount over and above what a single-unit operator would pay, this equates to a small amount in the overall business model (assuming $30,000 retail lotions/yr/salon = $15,000 wholesale/yr/salon X 20% = $3,000 – this is statistically insignificant to the business model). Assuming the same discounts in equipment purchases yields a lower barrier to entry with a lower capitalization requirement perhaps a savings of $20,000 that could be used to muscle in and buy more marketing or used to lower prices. However, most chains aren’t doing that with the savings. They are just investing less. So the business gains no advantage over its competition – just the business owner gains an advantage – a lower barrier to entry.

I’d have to agree with your assessment that “This may not be an issue at this time in the industry”. It may not ever be. Who knows?

“Obviously, that makes a lot of sense but trying to factor that into a valuation, and have it be accepted as a SOURCE of a premium, would be hard to do unless you could benchmark a salon's results against industry averages.”

Not hard at all. It is accepted already as a valuation tool. It’s called Lifetime Value – the average cumulative amount of money a customer will spend with you over the lifetime of doing business together. LV takes into account whether someone tanned with you once or for 10 years. LV = Dividing the number of total customers into your sales volume. You can determine a 10 yr, 5 yr, 2 yr and 1 yr trailing LV. This will give you a projected long-term value of each new customer who comes in the door.

THE LV doesn’t need to benchmarked against industry averages to be valid and accepted as a source of a premium. The LV only needs to be compared against your salon(s) and the one(s) you are buying. Obviously, you’ll want to try to buy salons with an equal or better LV than you have. Obviously, if you are a buyer with no salons presently, it would be prudent to put out offers on more than one salon for comparison’s sake.

As far as benchmark stats, we can provide some. For purposes of knowing where a salon owner should concentrate their marketing efforts and give a salon owner a prescription for improvement the Grip doctor must know the LV to know where to begin. Therefore, we asked over 7,000 of Grip’s salon customers to figure their two yr and longer LV. Over 2,000 did and gave us the results.

Note* The reason we selected a minimum of two years is that we’ve tested how long a customer’s lifetime may be to the business – we estimate on average two years. This comes from mailing response rates for inactives from 1-12 months, 13-24 months, and 25-36 months. Because after two years of not buying from you - you will cut them from your mailing list (and are wise to) and a new salon will not have been in business long enough after the first year to get a true LV reading.

The averages we found:

$50-$93 Average Range
$94-$182 Above Average Range
$183-$200 Top 1%
Over $250 Top 50

Whether these benchmarks are accepted by a business buyer are of little consequence though, because all any savvy buyer must do when buying any business is to look at two comparable salon businesses and compare the LV’s.

Would you buy a salon grossing $250,000/yr with a $50 LV (churning the database of customers and costly to reacquire customers) or with a $150 LV (loyal database with inactives who are easier to reacquire). This is a no-brainer in the evaluation tool department.

suncoast

Quick way of verifying sales...look at the hour meter x $ per avg minute then if this all looks kosher dig dig dig into the books

Steve Underhill

Let’s make it easy, unless the salon is less than a year old it is worth 2 to 2.5 times the previous year net income. To pay more than that is a mistake. The equipment is excellent; it is the brand that I use in all of my clients salons. Buying existing salons are not a bad idea if the salon does not take an extreme amount of additional investment to fix the salon. Make no mistake there changes that will have to be made if you want to be successful.

jayjay65

Whoa - we've got valuation formulas all over the board.

Grip said:

Quote:Most salons would have an EBDIT (pronounced "eeb-dit": Earning Before Depreciation Interest and Taxes) and no "a" on the end as in EBDITA because there would most likely be no amortization (that's what the "a" stands for). Secondly, we've been hearing that the multiple in the tanning industry is only in the 2-3 range from salon owners and business brokers

Steve said:

Quote:Let’s make it easy, unless the salon is less than a year old it is worth 2 to 2.5 times the previous year net income.

Forgetting, for a moment, the salon owners who would not pay more than what it would cost to build a new salon, the differences (even between Grip's and Steve's) formulas are significant. Grip is stating that a fair valuation is 2-3 times EBDIT (earnings before depreciation,interest, and taxes). Steve is stating that, unless the salon is less than a year old the salon is worth 2 -2.5 times NET INCOME, which is even lower than EBDIT! How would that compare to the replacement cost of a similarly configured salon? Could you guys reconcile the differences between your valuation formulas for us?

I'll post more later on Grips comments (which make a lot of sense to me but I wonder the true utility of the LV exercise given the lack of differentiation opportunities - and sustainable competitive advantage opportunities - within the industry that serve as an imbedded ceiling to valuation multiples).

jayjay65

jeniferi:

I did a search on the site (near the top right of the page) and found some theads that talk about beds, including Tan America beds. I've attached some links of the ones I thought would be of interest to you (sorry - I don't currently own a salon). You may want to do the same and pick through the threads to see if there is any more useful information to you.

http://www.tantalk.com/viewtopic.php?topic=2335839&forum=1

http://www.tantalk.com/viewtopic.php?topic=2332586&forum=29

http://www.tantalk.com/viewtopic.php?topic=2331451&forum=1

jayjay65

Grip:

A couple of comments regarding your post (regarding scale opportunities/benefits and LV):

Quote:This also assumes that an increased buying power exists in an industry where landlords most likely aren’t giving discounts to chain salon operators over single-unit operators or to one chain more than another and suppliers may well sell everyone alike at their lowest costs.


I'm not suggesting that landlords would offer discounted rents to chains BUT the possibility of obtaining build-out allowances (which reduce upfront cash outlay) increases and, more importantly, landlords might prefer proven larger scale operators over smaller scale or single salon independents for their best centers. The the scale benefits that would be realized may not be financial but serve as a crowding out mechanism.

It would seem to me that there isn't currently a chain operator large enough to command the purchasing power discount that could be possible. I think the most recent studies have shown a North American salon count in the range of 20,000-25,000 (which does not include those personal service formats - hair/nail salons, health clubs, video stores, etc. - that offer tanning as well. Who currently is the largest 'chain' salon in the country? Executive Tans, Planet Beach, Darque Tan? What's the largest salon counts of each? 100-200? That's not even 1% of the salon only marketplace. Let's assume someone gets to a 10-15% marketshare in the salon only sector (which isn't out of the realm of possibility). I would think that purchasing power leverage would be much greater than what the current 'chains' are commanding.

Secondly, although the exercise where a larger chain would realize a $3,000 advantage in lotion discounts and possibly a $20,000 advantage in equipment purchasing indicates insignificant dollars for ONE store, what if that were for 20-30 stores in a larger market? The $3K turns into a $60-90K annual annuity and the $20K turns into a $400-600K one-time benefit (with further discounts when old beds are turned over). In a single market, these figures could represent significant opportunities with which to apply pressure on the competition. Not to mention co-op advertising opportunities, more cost/effective media buys, recruiting and training benefits, etc.

The LV concept is interesting but as I said earlier, it sounds like it's utility within this industry might be limited.

Although I agree with the concept of LV, when you boil it down to its impact on a business it differentiates those businesses that are more efficient at producing sales (and consequently cash flows) from each dollar invested in attempting to secure future revenues (e.g., those churning customers will incur higher marketing and operational costs than those that know their best customers, treat them well and sell more to them and attract more customers like them). The end result of that that the business' cash flows (as a % of gross revenues) will be much higher than a business doing similar gross revenues but are churning customers. Where the rub seems to come in (at least based upon what I'm hearing from current salon owners) is that there is an inherent ceiling to what someone would be willing to pay for an existing salon and that ceiling is the replacement cost of a similarly configured one. Thus if the salon with higher LVs produced higher cash flows (or EBDIT or Net income or whatever other metric you want to apply a multiple to) but the END RESULT (i.e. calculated 'value' of the business) was greater than the replacement cost, the seller would have few takers willing to pay that amount. Couple this with the fact that it is very difficult to sustain a competitive advantage (for the various reasons indicated in prior posts)AND your statement that you estimate a customer's 'lifetime' to be two years, what is the practical utility of applying a historical LV to future periods? The competitive landscape could change SO QUICKLY that any historical LV calculation would be meaningless.

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[ This Message was edited by: jayjay65 on 2004-05-19 13:00 ][ This Message was edited by: jayjay65 on 2004-05-19 13:04 ]

gripmarketing

jayjay65:

“How would that compare to the replacement cost of a similarly configured salon? Could you guys reconcile the differences between your valuation formulas for us?”

A savvy buyer will weigh and adjust the multiple against the available cash flow to service the debt load or return on investment, the continued viability of the business (continuity, change in management effect, customer base, location, competition, and so on), and the glamour or lack thereof associated with owning a business in a particular industry (who wanted to own waste hauling before BFI? Who wanted to own a Walmart 30 years ago?).

Salons are equipment-intensive operations. There is little inventory and most salons operate with a skeleton crew of personnel. Therefore any valuation would obviously include a used value vs. new formulation. Outside of that, why buy an existing salon? To get the goodwill and being able to buy an ongoing business (cash flow), place money at risk in the hopes of getting a ROI weighed against known/unknown risks. You can get the equipment anywhere.

gripmarketing

jayjay65

“I'll post more later on Grips comments (which make a lot of sense to me but I wonder the true utility of the LV exercise given the lack of differentiation opportunities - and sustainable competitive advantage opportunities - within the industry that serve as an imbedded ceiling to valuation multiples)”

LV is a valuation tool. All of the other things mentioned above (and there are more than that of course) are things that will discount the valuation. I'd bet if you were a seller you wouldn't wonder the true value of using the LV to your advantage to increase the valuation. As a buyer you wouldn't wonder either, even if you discounted the LV entirely, as you'd feel a higher comfort level to complete the purchase when LV's are in the better ranges.

gripmarketing

“I'm not suggesting that landlords would offer discounted rents to chains BUT the possibility of obtaining build-out allowances (which reduce upfront cash outlay) increases and, more importantly, landlords might prefer proven larger scale operators over smaller scale or single salon independents for their best centers. The the scale benefits that would be realized may not be financial but serve as a crowding out mechanism.”

Agree. It is possible that landlords would give those same build-out allowances to negotiating-savvy single-unit operators, too. It is possible that the crowding out mechanism wouldn’t necessarily give chain operators any advantage over a single-unit operator as most landlords when weighing two tenants or two same-industry tenants are only interested in the one with the best balance sheet. What if the single unit operator had a better balance sheet than a debt-laden chain?

“It would seem to me that there isn't currently a chain operator large enough to command the purchasing power discount that could be possible.”

Agreed. But there are some who are trying it now. Palm Beach Tan.

“I think the most recent studies have shown a North American salon count in the range of 20,000-25,000”

Our call-verified counts peg it at 34,000+ salons in the US.

“Who currently is the largest 'chain' salon in the country?” Planet Beach (175), Hollywood Tans (125), Executive Tans (72). Note*this count changes quickly. Bear in mind though that these are not chains under a single ownership. A single franchisee of a 175-store franchise chain won’t have the same negotiating power with a landlord as a 175-store chain owner (under a single ownership).

“Secondly, although the exercise where a larger chain would realize a $3,000 advantage in lotion discounts and possibly a $20,000 advantage in equipment purchasing indicates insignificant dollars for ONE store, what if that were for 20-30 stores in a larger market? The $3K turns into a $60-90K annual annuity and the $20K turns into a $400-600K one-time benefit (with further discounts when old beds are turned over). In a single market, these figures could represent significant opportunities with which to apply pressure on the competition. Not to mention co-op advertising opportunities, more cost/effective media buys, recruiting and training benefits, etc.”

That’s where the big money is. However, most chains once they have moved out of their core city where this has been the case, have not capitalized on this theory as well elsewhere even though that is the goal.

“Thus if the salon with higher LVs produced higher cash flows (or EBDIT or Net income or whatever other metric you want to apply a multiple to) but the END RESULT (i.e. calculated 'value' of the business) was greater than the replacement cost, the seller would have few takers willing to pay that amount.”

You’re leaving something extremely important out. The cost of getting a customer database (goodwill and ongoing operations) MUST be included into the replacement cost. The cost of getting a customer base with high LV’s is even costlier. We estimate the standard cost to be between $10 and $15 per head depending upon the population density.

“Couple this with the fact that it is very difficult to sustain a competitive advantage (for the various reasons indicated in prior posts)AND your statement that you estimate a customer's 'lifetime' to be two years, what is the practical utility of applying a historical LV to future periods?”

To calculate whether the salon is gaining or losing LV in its efforts to better manage its operations and as a valuation tool.

“The competitive landscape could change SO QUICKLY that any historical LV calculation would be meaningless.”

Not meaningless to those salons with high LV. Tough competitors are still tough and for them, the landscape changes slowly as an intrusion and erosion process. But certainly to those salons with low LV – it could effect them very quickly.


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[ This Message was edited by: gripmarketing on 2004-05-19 15:51 ]