TanningGhost

We're currently evaluating a franchised salon that is 1 1/2 years old. I've read many posts here and have seen the plusses and minuses of getting involved with a franchise. I appreciate both perspectives. However, the purpose of my post here is focused on valuation.

The owner admits to a lack of advertising and sales skills and wants out. The beds are new, the store is clean, but he hasn't made a profit the entire time. I would need to factor in working capital into the equation since there is no positive cash flow. The demos are there for this area. It's a matter of reaching out to them. That being said, I want to determine what the right price is for this salon. He has FF&E valued at $95k and is asking $160,000. Sales in first year were $30k. I've read the posts noting that if the beds are less than 3 years old, then plan on 1/2 the price paid and build-out and furniture at 1/4 cost new. On that basis, the salon is only worth about $50,000. Is his $160k price way off? Is there anything to be said about the franchise name, support, training, etc. Do you put a price on this or do you base the valuation on the salon as though it were an independent salon?

Your thoughts are greatly appreciated.

MATT A

His first year sales 30k? Not even worth thinking about. RUN

Neon Beach

That would depend on where you are and what the local mentality is. It doesn't sound good at all, but if it is a franchise, your best bet is to contact them and see if they will offer any honest answers.

Ezliving_Jim

You are considering buying a business that does about $600 a week in sales for $160,000? And paying a percentage to the franchisor out of that? Are you smoking crack?

Which franchise? Potential investers need to be warned.

_________________
Jim

"Entrepreneur Extraordinaire Since 1953"

Read "Why Sunshine Is Good For You And Why Doctors Don't Want You To Know"[ This Message was edited by: Ezliving_Jim on 2005-07-22 22:10 ]

DWhite6872

Wow...if you really want to buy a franchise...look for a franchise that will match your goals...and one that will help you reach your markets goals and support your market.

I think it is great to invest in a franchise, but you have to make any franchise invest in your market.

I would not buy a franchise that is out to only "sell you" one franchise...you have to buy into a franchise that is willing to invest in your market!

TFranssen

Where are you located? I think you should PM DWhite, her salons are incredible and she will help you!

Why was the profit only $30k? Is it because they opened in December? That would be the only reason I could think of for a salon making that little on the first years tax returns.

Please enlighten us!!

Ezliving_Jim

TFranssen, he said that SALES were 30K, not PROFITS.

They have to be operating at a huge loss!

TFranssen

It depends on the open date - which wasn't indicated. Also, it depends on the accountability of the $30k and write-offs on the return. There are a lot of factors not mentioned, which could indicate that the write-offs were increased or "cash-in" not reported. And, I'd be the first to admit that I may be wrong about it - it would require a full review of the actual tax returns.

TFranssen

I also want to let you know that anything I post, Jim, is always debatable and I welcome the oposition, as all education on this site helps me to accomodate sufficient information to obtain adequate financing packages for the industry as a whole.

Moving on to the topic at hand - and reading into the first post, I see the location had to be opened in slow season - which effectively adds to the low revenue volume. As you all know, opening a salon in the last months of the year can be a little iffy. However, usually gives the newer owner a sufficient ability to have a good feel for the business without being overwhelmed. Therefore, I can't sway my own opinion to the effectiveness of opening in slow season without evaluating the pros and cons.

This sales volume is a prime example of a new location that hasn't established pre-sales in the preparation of opening. Pre-selling EFTs would effectively provide a good customer base in Grand-Opening phase II.

A good look at how the sales increased in peak season (first-second quarter)may give you a better indication of how this salon will produce with a better understanding of the traffic. If the salon owner did not establish a good marketing of EFTs within those quarters - then you'll see a third and forth quarter income - much like the past year.

Many owners will pocket much of the cash within the first year to recoup their losses, as well. Therefore, I'd request a full report from their software to give you a better number for the traffic that entered the salon.

Jim and others - jump in and tell me if this makes sense to you.........

MATT A

No

Sales in first year were $30k.

I see that sentence and it tells me that salon grossed 30k in sales in the first year if I'm wrong correct me TanningGhost. I would not put my name on it for a dollar even. I would not even be intersted in trying to turn it around.

Also why don't you expand and tell us how many units they have? How many sq ft the place is? Age of units? What is the demogrpahics of the salon? How many clients do they have etc..