kjloehlein

Hello! I am considering buying an existing salon. One of the deals I am considering is this: Town: 25-30,000 people, great location in strip mall, busy street feeds the mall.

The salon details:
9 Ergoline Sundash beds (1997)
1 Ergoline 600 Medium pressure Bed (2003)
1 Mystic tan booth (2003)
The seller has given a value of all items FFE at $82,950
Asking Price $78,000
2004 info 2003 info
Gross Sales $116,741 121,144
Lease $3000/mo
Salaries $3000/mo
Depreciation $13,900 12,879
Has about 1400 clients that have tanned or are currently tanning there.
This owner has shown a loss every year of operation of at least $20,000. I know this doesn't matter but I am trying to figure an appropriate value for this biz. Any help?
Is this a fair price?
What would be some creative financing options?
We have about $25,000 cash to put towards and would need to finance the rest. By using the full 25K might get tight if not cash flowing right away to replenish the cash reserves. My wife will work 15-20 hours per week.

I am meeting with the owner next week and would like any help I can get.

Thanks-
Ken
kjloehlein@hotmail.com BBCode Start -->

candie

WOW! A yearly loss of $20,000! Turn around and don't look back! That's WAY to much to spend on small salon with such a HUGE loss per year! (if I'm reading that correctly?)

kjloehlein

This was what was shown on the tax return. I am meeting with the owner next week. Her husband is a CPA. I am trying to figure out how they took $120,000 in sales with roughly 35,ooo in salary and 30,000 in rent to a loss of 20,000+. That means somewhere 60,000 was eaten up? What tips can any of you give? I apprecaite all responses!

Thanks-
Ken

Thydes

The existing Owner probably paid themselves the 35 k that was reported. This means that the salon really made about 15k for the owner. That could very well be the case without doctoring the books at all.

BigLeo

kjloehlein,

What disturbs me is not so much the $78K that the previous owner is asking, but the limited amount of capital that you have to invest in the salon. How much working capital do you have? Don't make the mistake of being totally undercapitalized like so many newbies entering the tanning salon business. Going into heavy debt just to get into a business like tanning is not a very smart idea. This adds to your monthly fixed costs. If you are meeting the owners next week, ask as many questions as possible. Get detailed P&L and copy of tax returns if possible. How many customers do they have? Any other services or products sold? The other expenses that you didn't speak about include business insurance, maintenance & repairs, utilities, telephone, supplies, business taxes, payroll taxes, advertising & promotions. That's your missing $60K or a good chunk of it. I don't see anything that is too out of line. The location appears to be a good one with good traffic. Carefully study the size of the local market. Do an indepth demographic analysis. Who are the closest competitors. What does the salon offer that gives it some competitive advantages that can be exploited. What is the situation with the lease? The landlord difficult or easy to work with? Can you assume the lease? Renegotiate the lease? Those are the major items I would try to get answers to.

Good luck to you.


Leo

TheBeachStop

I agree with BigLeo. Say you buy this and put down $15,000 and finance the rest. If you have a house, boom 2nd mortgage for $60k+. Depending on when you purchase this (peak or slow season) could spell you making it or real disaster. Realistically, take his numbers, add to it all the items listed above plus the refi if you can swing that type of financing, take the revenue numbers (and BTW, ask to see them by month for cash flow purposes) and see if you could survive with a $10k reserve. To be honest, the worst feeling in the world is having something you have put almost all your money into, only to find you are short and have to give it up. Seen too many similar situations. If you have 100% focus, intent and a little backup plan for cash infusion if/when times get rough, you will probably make a good go of this venture. Good luck.

slowhand

Don't forget that they would have deducted depreciation on their tax return; also possibly other deductions that would have to be added back in to arrive at the true income figure.

sunsally

Generally expect about 10% of the population to tan. So at 1400 of 25-30K, there is certainly room to gain more customers. How much/what kind of competition?

Not sure how they are still showing so much depreciation from the 1997 beds unless they bought them used? Seems high to be just from the Mystic & 600, but maybe.

Good equipment. Even the 1997 beds, if kept up well, should still be running like champs, and will.

Again - like another post I just made - this salon is SET UP not to be very profitable!! Just can NOT make enough money on all low level beds. If I were to buy this salon, I would (after checking the numbers) seriously consider selling off at least 3-4 of the 1997 Sundash beds (assuming they are all 226 or 232's) and bring in something "between" those and the 600. I'd guess right now that the 600 is GREAT - but nobody uses it much because it hasn't been "promoted" like it should and they aren't "stepping up" to it. NOW - if some of those Sundash beds are acually 230's (or SS40's), then I stand corrected.

Above all though, I agree with BigLeo and TheBeachStop --- you don't have enough cash to swing this right now. Plan on losing money for next 6 months --- expect 6K/mo to come straight from your pocket! That's 36K before you ever start turning the corner back to the "busy season". And ABSOLUTELY it "matters" that they have shown a loss every year of at least 20K!!! How do you think it will be any different for you?? You would have to invest in advertising (to get those tanners in), upgrade equipment, etc. If your wife is going to work 15-20 hrs/week --- who are you going to trust to manage YOUR INVESTMENT the other 50 hrs/wk? Will they "care" enough to turn it around for you and make it profitable? Will they do this for $7/hr?

The equip is worth maybe 45K (what you could sell it for). It's losing 20K/yr. How much do you want to pay to (potentially? probably?) lose 20K/yr? That's the key question.

Feel free to PM me with more specifics if you want, but for now, I'd offer less, try to delay the purchase as long as possible (let her run the place during the upcoming slow months!), keep your cash for working capital, plan on working more hours than you expect, and be certain that you have significant things you can do, that she did not, that will have this salon finally be profitable.

Good luck!

ramcat

There are a lot of good things said here that you need to consider. The current owners have established the value. However, you need to do some research to get a true estimate of the value. The beds are 8 years old. They are only worth 1/2 or 1/3 of the original cost. Are there any outstanding leases that they want you to take over?

Salaries can be reduced if you decide to work the salon yourself. What is the stock like? Will you have to pay out for utility deposits? First and last month rent or security deposit?

Do your research first. Find out everything there is before signing on that dotted line.

Beach Club Tans

In your financing of the salon are you only looking at the cost of purchasing the salon or are you looking at increasing the loan for operating capital? With 25k to invest you could get as much as 150k thru SBA using their low doc loan. One page to fill out, easy paperwork. At about 9.5% (current rate +2% for SBA) you'd still have 72k for working capital. You'd probably have to bank the 25k as the SBA would use that as collateral for your loan. Then go out and sell some of the low end equipment and LEASE some mid grade equipment for upgrades. By leasing you won't have to put that on your SBA request keeping the SBA paperwork minimal. The equipment will be the collateral for the lease. The only drawback to this is it takes time for the approvals of the loan. The good part is you have 7-10 years to pay it back. Good luck!