Considering getting a valuation for a beauty salon? Some thoughts on the industry sector.
Day spas are popular personal services businesses. Their number speaks for itself – classified under the SIC code 7231, there are over 325,000 such establishments in the US alone.
The industry employment of 907,250 people is quite large. Day spas and beauty salons contribute over $18B in total annual revenues to the economy. Yet an average business is quite small – employing just 3 staff with $100,000 in annual sales.
Typical valuation multiples for a beauty salon
If you need to estimate the market value of a spa, consult the recent spa selling price data. Valuation multiples derived from such business sales are the formulas that let you compare your spa to others – based on its revenues, profits, or asset base. Here are the valuation multiples commonly used to price a spa for sale:
- Business selling price to gross revenues. Inventory is extra.
- Price to seller’s discretionary cash flow, plus inventory.
The price to gross revenue valuation multiple is more accurate for valuing a privately owned spa or hair salon. In fact, the spread of business selling prices, from low to high, is about half that of the business value estimates you get using the discretionary cash flow as the basis.
For example, it is not unusual for a spa to sell for about 40% of its gross revenues. Even the top businesses rarely fetch a price that is more than 100% of their annual sales.
In contrast, we see some spas selling for more than 10 times their discretionary cash flow. That can be 4 – 5 times the average – a very considerable spread. One reason is that profitability of a spa can vary greatly for a given level of sales. This, of course, affects the discretionary cash flow the spa can throw off.
What this means is that the actual spa sales are more often priced based on the business revenues.
Other business valuation methods
No spa valuation is complete without an income-based analysis of your business value. If you are valuing a small owner-operator managed spa, consider using the Multiple of Discretionary Earnings method. You can consider both the earnings and a number of essential performance factors to determine what the business is worth.
For a well-established business, the value of goodwill can be a large part of the overall spa value. You can use the well-known Capitalized Excess Earnings method to determine what the business goodwill is worth.
This may be an important step when allocating the business purchase price, determining what to pay a departing business partner, or handling a business valuation in divorce.