Buying a tanning salon is a quick way to get started in the industry. Many salons aren’t profitable or are set up to succeed so be sure you aren’t buying someone else’s troubles. Here are a few suggestions when looking into buying a tanning salon.
With the intense competition in the tanning business these days, many salons are offered for sale. What can seem like a goldmine is sometimes a nightmare if you don’t do your due diligence. Typically buying an existing tanning salon will be cheaper than building one from the ground up and has an operating history but the downside is that the equipment is older.
But how do you know if the tanning salon you see for sale is a good deal or not?
Basically the value of any business is determined by the amount of cash flow that it provides. Cash flow is the most important indicator on the health of a business because cash is real. Profits are not and can be easily manipulated. An advantage an existing business has over a startup is that you have the opportunity to study how the business is operating and even find areas to improve. A startup on the other hand is a guess as to what the future holds.
Tax returns should be your starting point in evaluating the business along with customer databases, balance sheets, bank statements, etc. Even with this information you would be well advised to dig deeper. Financial statements can be manipulated given enough time. A bank is going to require the past three years and that should be your target as well but an owner who was planning their exit can prepare the books to look better than they are. This is an exception as most business owners don’t plan that far in advance but there are many instances where they don’t have all of the paperwork or even tell you that the numbers are wrong because they turned the cash register off on certain days of the week. It surprises me how many people openly admit to tax fraud to a stranger but this should set off alarm bells because who knows what else they are lying about. Aside from tax fraud, try telling the bank that they should loan you more money because the owners aren’t reporting all of the income. See what kind of response you get there.
Other things you should do to verify sales would be to count the number of customers who walk in the door during the day over several days from the parking lot and ask the owner how many customers they averaged to see how close the numbers are. If the numbers are way off this is another warning sign. Also try to reconcile customer counts with average prices of a session. For example if the average number of sessions is 15,000 and the average price is $8 per session you would expect to see at least $120,000 in revenue. Last look over the electric usage (which you can get from the electric company over the previous year) to see if revenues match up with the electric usage.
A tanning salon is worth only what a buyer will pay for it.
Getting a little more scientific and helping you to determine whether the salon you are looking at is priced reasonably, basing the selling price off of financial ratios such as EBITDA (Earnings Before Interest, Taxes and Depreciation) are in order. EBITDA in the tanning business should be in the 2-2.5 X range depending on the age and condition of the business. If the equipment is less than two years old the value should be close to new but over five and is fully depreciated and isn’t worth as much. This isn’t a rock solid number but an average and things like equipment, building (own vs. lease) and potential may not be accurately figured. If you have found a salon with an EBITDA of $40,000 the selling price should not be over $100,000.
Another number is from the book “Business Reference Guide” from Tom West, which is considered the business broker’s bible for valuing businesses. This book values tanning salons at 70-75% of annual sales.
Whatever you do, don’t pay more than what a new salon will cost as it is all too easy for a competitor to open up next door to you. Be sure to also factor in the costs of making this tanning salon profitable. If you are not able financially to make the upgrades you will end up buying a salon that will continue to struggle. In today’s market, old salons with old equipment require a complete renovation in order to just survive.
Why is the Owner Selling?
Ask the current owner lots of questions on why they are selling their business and research what might be happening in the market that might impact the current operations. Check with City Hall to be sure no new competitors have filed business licenses or building permits (or has one opened in the last year). Also look to upcoming changes in the lease arrangement, demographics or traffic patterns to determine longevity.
It’s also a good idea to talk with customers. If possible try working in the store for a few hours or as approach them as they leave the salon. Ask why they go to that particular salon and what they like and don’t like. Try to find from them any opportunities for growing the business.