How To Value A Beauty Salon

Whether you’re planning to sell your beauty salon, attract investors, or simply gain a clearer understanding of your business’s worth, knowing how to value a beauty salon properly is essential for any owner. The beauty industry is thriving, with services ranging from hair styling and skin treatments to cosmetic procedures and wellness therapies, and each salon has its own unique set of factors that influence its market value. For this reason, it can be difficult to know where to start when attempting to value a beauty salon yourself.

Key factors influencing beauty salon value

There are several important factors that can affect the market value of your beauty salon. Understanding these will not only help you determine your current position but also guide your efforts in growing your business’s value over time. We’ve detailed these below for your convenience:

Location and surrounding demographics

The location of your beauty salon plays an important role in determining its value. A salon located in a high-traffic area, such as a busy city centre or a popular shopping district, will typically be worth more than one in a remote or less desirable area. Also, the surrounding demographics, including average income, age groups, and lifestyle habits, might influence the demand for beauty services and, therefore, your salon’s profitability and market value.

Client base retention rate

A loyal and recurring client base will significantly boost your salon’s value. Regular customers make sure you earn consistent cash flow and reduce the need for costly marketing campaigns to bring new clients in. Salons with positive reviews and high customer retention rates will be considered lower risk for investors and potential buyers. High-value clients or corporate contracts (like bridal packages or spa parties) can also add to the business’s appeal and boost your valuation.

Product and service offerings

The range and quality of services your beauty salon offers directly affect its worth. If you offer in-demand, high-margin treatments, like skin rejuvenation, advanced hair treatments, or cosmetic injectables, you’ll often be able to achieve a higher valuation as buyers can see that your business will attract new customers easily – especially if your staff are already trained in the areas. Likewise, a salon that supplements its services with product sales, like professional skincare, haircare, or cosmetics, will get revenue from multiple channels and most likely be more profitable, making it a more attractive investment.

Strength of brand reputation

A well-regarded brand name, excellent online reviews, and strong local reputation can significantly boost your salon’s market value. Brand recognition contributes to client trust and loyalty, while a poor reputation can put off prospective buyers, no matter how impressive the financials might appear. Social media presence, professional website, and local partnerships are incredibly important to look after and nurture, as these can impact your salon’s overall brand strength.

Financial performance

At the core of any valuation are the salon’s financial records, and the more impressive you can get these, the better your valuation will be. Consistent, healthy profits, steady revenue growth, and strong gross margins increase a business’s market value. Buyers will look into these key financial indicators closely before making a decision on your business, so polish your annual turnover, profit margins, expenses, and cash flow patterns to wow investors.

Valuation methods specific to beauty salons

There are several recognised methods for valuing a beauty salon business. Each comes with its own set of benefits and drawbacks, and the choice of method often depends on the salon’s size, profitability, and stage of growth. Here are four possible options suitable for beauty salons:

Multiple of earnings (EBITDA) method

The EBITDA method is where you apply a multiple to the salon’s Earnings before Interest, Taxes, Depreciation, and Amortisation. This is one of the most widely used approaches for established beauty salons with consistent, positive earnings. The multiple applied typically ranges between 2x and 4x EBITDA, depending on factors like location, service offering, client retention, and financial performance.

This approach focuses on operational efficiency and profitability, and is suitable for established salons with a steady stream of revenue – so it’s widely accepted by most buyers and investors. However, it’s less effective for newer businesses without stable profit, and it can be sensitive to one-off expenses and accounting adjustments.

Revenue multiple approach

The revenue multiple method values a beauty salon based on a multiple of its annual gross revenue. While this approach is simpler and quicker than profit-based valuations, it’s often used when a business is rapidly growing or reinvesting profits, making EBITDA less reflective of its true value. Revenue multiples typically range from 0.5x to 1.5x annual revenue for beauty salons, depending on profitability, location, and market demand.

The revenue multiple approach is simple to calculate and useful for high-revenue, lower-profit businesses. However, it ignores a lot of other factors, such as profitability and operational costs, and it can overvalue a business with poor cost control. For these reasons, it’s not always accepted by buyers as a suitable valuation method.

Discounted Cash Flow (DCF) method

The DCF method projects the future cash flows the beauty salon is expected to generate and discounts them back to the present value using a chosen discount rate. This approach will work well for your salon if you have predictable earnings and growth plans. This is because it factors in future business performance rather than relying solely on historical data, leaving you with a more accurate valuation for the future.

This approach has the benefits of accounting for long-term earnings potential and being customisable based on your salon-specific forecasts. However, it requires reliable financial projections and assumptions and is more complex and data-intensive, making it unsuitable for some owners who are unsure how to use their current reports to generate future cash flows.

Net profit approach

The last method is generally considered easy and beginner-friendly, as it values a salon based on its adjusted net profit. Typically, you’ll apply a multiple to it to get your business’s valuation. Adjustments might be made for non-recurring expenses, owner’s drawings, and personal costs to determine true profitability, but this still leaves it rather simple compared to the other valuation methods we’ve outlined above.

The net profit approach is simple and practical for small to medium-sized beauty salons, and it focuses on actual business earnings – which can be more valuable to buyers and investors. However, using just the net profit to value your business could overlook qualitative factors like brand value or client base. It’s also less suitable for salons with variable earnings.

Common mistakes when valuing beauty salons

Valuing a beauty salon is not always straightforward, and many owners make avoidable mistakes that can lead to inaccurate valuations. Below are some of the most common errors we see made by owners:

Overestimating your business’s value

While we don’t like to admit it, beauty salon owners can sometimes overvalue their business. This could be for a number of factors, such as their emotional attachment to the business, the years of hard work they have poured into the salon, or simply unrealistic expectations. However, valuations should always be objective, data-driven, and aligned with market trends and comparable sales, as this is the best way to attract serious buyers or investors.

Ignoring client metrics

Metrics such as client retention rates, average spend per client, and new customer acquisition rates are incredibly important when valuing a beauty salon. Owners often overlook these figures because they think poor metrics will lower the value of their business. While this might be true to an extent, not considering the metrics can distort the business’s true operational health and future earning potential. It’s best to utilise all of the metrics you have to get the truest valuation possible.

Neglecting lease terms and legal issues

Another common mistake we see beauty salon owners make is neglecting their lease terms or failing to understand the implications of legal issues. Unfavourable lease terms, unresolved staff disputes, or non-compliant operating licenses can negatively impact your salon’s value. Making sure all legal and contractual obligations are in order before valuing the business can improve saleability and the valuation outcome.

Underestimating dependence on the owner

Beauty salons that rely heavily on the owner’s personal brand, technical skills, or client relationships might struggle to retain clients post-sale. Furthermore, if you underestimate your importance to the salon, you might overvalue your business, which will lead to buyers and investors questioning your figures. To avoid this, train your staff to look after the business as well as you can as the owner, so when you sell the business, your skills will be transferable and therefore profitable.

Relying solely on revenue figures

High revenue numbers can be misleading if operational costs are poorly managed, so relying on them as the only financial metric can leave you with an inaccurate view of the valuation. A salon with substantial turnover but low net profit might be less appealing than a smaller, well-run business with higher profit margins. A balanced look at both revenue and profitability is the best way to achieve an accurate valuation of your beauty salon.

Enhancing your beauty salon’s valuation

If you’re aiming to increase your beauty salon’s value before a potential sale or valuation, here are some tried and true strategies to implement in the run-up:

• Automate your operations: Eliminating the need for appointment scheduling, stock control, customer communications, and more can remove dependencies and make your business appear more valuable.
• Increase revenue streams by diversifying products and services: Upsell services and retail product ranges wherever you can to boost your revenue and profits.
• Invest in your staff: Employees trained by the owner can appeal more to potential buyers as well as remove the dependency on just one person.
• Work on your reports: You can never improve your financial record-keeping and regular reporting too much, as the better your records are, the more appealing they’ll be for future investors.
• Put your customers first: Implement loyalty programs and client retention initiatives to keep them coming back, as this can help your future cash flow predictions.
• Make the business look stable: Negotiate favourable, long-term supplier and rental agreements to assure buyers that they won’t have to worry about this in the future.
• Build your brand online: Boost social media presence and online reviews for better brand visibility.

FAQs

How do I find out the market value of my beauty salon?

While it’s possible for you to work out the market value of your beauty salon as the owner, we highly recommend seeking the help of a professional business valuation expert if you’re unsure about where to start. A trusted broker will assess your financials, client base, market trends, operational setup, and more to provide an accurate, objective valuation. Bonus points if you use a broker with experience in the beauty industry!

What’s a typical profit multiple for valuing a beauty salon?

Profit multiples for beauty salons generally range from 2x to 4x EBITDA, although this will depend on several factors such as profitability, location, service offering, and market demand. For example, a beauty salon in a high-traffic area with a strong client base and waiting list might be able to apply a multiple higher than 4x, while salons just starting out with erratic numbers and single service offerings might have to settle for 2x or lower.

What documents will a valuation expert need?

Your business valuation expert will give you a list of requirements before working with you, of everything they’ll need to accurately value your business. Generally, you’ll need essential documents, including profit and loss statements, tax returns, staff rosters, lease agreements, supplier contracts, appointment records, and customer retention data. However, some brokers need more or fewer documents than this.

Get in touch with a business valuation expert near you

Valuing a business is a huge undertaking, and we understand that many business owners have enough on their plates already without adding another huge task to it. That’s where we come in, with our expertise in numerous niches – including the beauty industry – to help owners like you shoulder some of the burden. We can work with you to accurately value your business in a timely manner, so you can continue daily operations and boost the business to the best it can be.

We have business valuation experts across Australia, and you can get in touch with them by following the details below:

• Get in touch with our business valuation experts in Brisbane
• Get in touch with our business valuation experts in Sydney
• Get in touch with our business valuation experts in Melbourne
• Get in touch with our business valuation experts in Perth
• Get in touch with our business valuation experts in Adelaide
• Get in touch with our business valuation experts on the Gold Coast
• Get in touch with our business valuation experts on the Sunshine Coast