How to Negotiate the Purchase of a Tanning Salon Business
Would be entrepreneurs looking at the salon industry as a way to begin business ownership are often confronted with two approaches to become an owner. They can either start a new tanning salon from the ground up or they can purchase an existing salon that is up for sale in their community. When the decision is made to attempt the purchase of an existing salon, it is important that entrepreneurs know the points of negotiation so the best possible price is achieved and a bad purchase is avoided.
The attraction to buying an already established tanning salon is evident when you consider the following benefits:
- Zero time and money invested in construction
- Immediate revenue stream
- Existing active client base
- Employee and/or management system is already in place
The Law Of Diminishing Returns
When faced with an opportunity to buy a tanning salon, careful consideration must be given to the economic feasibility to ensure that the goals of the entrepreneur can be accomplished with the available resources. For example, some existing tanning salons are in such disarray and the tanning beds are in such ill repair that it would be much less money to start a new tanning salon from scratch rather than purchase the existing salon, tear old walls out, build new ones, add new beds, hire new employees, and begin a new advertising campaign.
If too much money is spent on upgrading an existing salon, the new owner may end up with a greater financial encumbrance which diminishes ROI and may jeopardize future expansion capabilities. It is essential to calculate your total capital investment after upgrades to the business are factored then compare that to your budget and your income and expense projection.
Reconsider The Purchase Entirely when:
- All of the tanning beds should be completely replaced immediately.
- Substantially all of the rooms need to be rebuilt to accommodate new equipment.
- A substantial electrical upgrade is needed at the panel.
- The current owner is unwilling to allow full financial disclosure of the business before an offer is made.
- It has been in business less than 1 year.
What to Ask When Buying a Tanning Salon
The value of a tanning salon business is sometimes determined by multiplying its NET profit by 2.5, plus the depreciated value of its assets. So if a tanning salon earned $40,000 NET profit last year, and has $50,000 in depreciated assets, the estimated value of that business is $150,000.
This is a quick way to tell if a tanning salon business is priced appropriately but there are many more factors that affect value and can become leverage for negotiation. Here is a list of questions to ask and why it is important to obtain the answer:
What is the total yearly sales for the previous year and year to date?
Having this information will allow for proper assessment of the salons future performance as well as enabling the purchaser to identify upward and downward trends. If the salon has been steadily loosing sales for the last few years, it is important to know why and to address this issue at the negotiating table. If the value of a business is based on the revenue it creates and that business has been loosing sales, the purchaser will be buying a business that will loose value.
Were sales revenues properly documented and reported to the IRS?
If the current salon owner did not properly document sales revenue or report the proclaimed revenues to the IRS or cannot provide proof of income, it is safe and reasonable to disregard all undocumented or unreported profits and negotiate them out of the business value. Not only is this illegal, but anyone can artificially inflate the value of their business by exaggerating sales revenue We find that this is often the case when sales are not properly reported to the IRS. After all, why would they be honest to a buyer if they are not honest to the IRS? Proof of income must be provided to properly value a tanning salon business.
How many outstanding tans have yet to be delivered to both active and inactive clients?
This is probably the most overlooked element when negotiating the purchase of a tanning salon. If a decision is made to buy the salon and a large number of outstanding tans exist, the previous owner will have had the benefit of depositing the money of those sales into their account while the new owner will have the burden of delivering the service and paying for the overhead associated with it. The buyer should always negotiate the value of outstanding tans out of the purchase price of the salon.
What is the age and size of the client database?
Salon owners will often attach additional value to their client list or they may offer it as a separate purchasing option. The larger the client list, the higher the asking price. They may reason that by purchasing their client database, the new owner will have a list of tanners in the area they can market to, increasing revenue and recapturing inactive clientele.
This may be true but it's important to remember that according to the USPS, over 40 million people change their address every year. That's over 40% of the US population in a 3 year period. If the list is 3 years old and it has 5000 people in it, 2000 of those people in that list likely have different addresses. Even if you performed a national change of address on the list, there would be no guarantee that the client's new address is within your market area.
It is advisable not to fall into this trap. If these tanners sill exist in your market and you do a good job with marketing and operating your salon, you will get them as clients anyway without having to buy a list of names for thousands of dollars.
What is the age, make, model and condition of the tanning beds?
Most tanning salon owners have no way to properly value their used beds. Instead, they estimate the value and have a tendency to inflate this estimate to artificially increase the value of their salon business. Doing a little research will allow the purchaser to obtain an actual market value of the equipment which can bring the purchase price down significantly if the original estimate is found to be inflated. As a general rule, tanning beds that are 3 years old and are properly maintained will have a value of about $.15 to $.20 on the dollar. For example: if the purchase price of the bed was $10,000 new, then the value of that bed is around $1500, $2000 after 3 years provided it is in an average condition.
Has the equipment been fully depreciated?
A standard straight line depreciation method may be used on the tanning beds but accelerated depreciation methods are becoming a popular way to write-off tanning equipment that is usually replaced before the end of its useful life. Sometimes, tanning beds are fully depreciated after just 5 years. If this is the case and the equipment is fully depreciated, the purchaser may not be able to write-off the equipment depreciation as tax benefit in some cases. This should also be addressed at the negotiating table.
Asking the above questions will allow the purchaser to better understand what he or she is buying and enable a strong negotiating position when buying an existing tanning salon. This article is not exhaustive or inclusive so other considerations may not be mentioned but may be just as important to consider. Economic feasibility is paramount and it is never advisable to rush into a purchase or enter into a commitment that is beyond ones means. Please keep in mind that it is extremely rare to find a highly successful tanning salon for sale. Most people sell their salon because it is loosing money or is showing a downward trend in profits.