If you’re serious about buying a business, it’s essential that you provide useful feedback to brokers when they take the time to present listings they feel are relevant to you. I’m often surprised by the reasons people make in rejecting a business for sale.
Here are my “Top 3” terrible reasons for not buying a business:
1. “It’s too expensive.”
Derivatives of this reason include “sales are too low”, “cost of goods are too high”, “profit is too low”, etc., which all factor into the price of the business (unless it’s a plant & equipment sale).
But if you think long and hard about it, price is the easiest figure to adjust in the sale of a business. And given that everything else is postitive (e.g. good income, highly visible location, motivated staff, modern equipment, etc.), why not make an offer based on a fair price?
As a broker, I usually reply with “Why don’t you make an offer as to what you feel it’s worth?” The response I usually get is somewhere along the lines of “Oh, I’m just not interested.” which usually indicates to me that the buyer feels that I’m not entitled to the real reason.
2. “Cost of goods or wages is too high.”
COGS and wages are perhaps the next most easy-to-fix figures in a business. If someone felt that those were too high, then why not buy the business at a fair price and then optimise the costs? In a year or so, the business will be worth much more than before.
3. “Rent is too high.”
This is a very interesting reason, as I feel this comes more out of fear and ignorance rather than anything else. This is especially relevant to retail rents in shopping centres.
In my personal experience, I haven’t seen too many cases of rent being significantly above the market rate. In any case, if a rent was obviously too high, it can be negotiated at the next market review… OK, I admit I may be pushing it a bit there 
Conclusion
Have you noticed a pattern yet in the reasons I stated above? They all directly impact the profitability of the business. And profitability directly affects the price of the business. And compared to all other things (e.g. long lease, strong brand, well-protected intellectual property, etc.), price is by far the easiest figure to adjust for the sale of any business.
So moral of the story is, if you like everything about a business but its price, then make an offer based on the price you feel is fair.
By Kym Krey
Even if the thought of selling your salon has not crossed your mind yet, one day it might. The steps you take to make it ready for sale will make your salon much more valuable to keep, so the effort is always worth it.
However, most salon owners leave this far too late. In fact, most advisors will tell you that you should be preparing for the day you sell from the moment you actually start your business! Begin with the end in mind.
It can take several years to put the necessary steps in place to attract a great price and this is the very reason so many salon owners are disappointed, if not devastated, when they leave it to the last minute. They have a dollar figure in mind and when they find out what it’s really worth, they get a very rude shock. They either hang on to the salon far longer than they wanted, or sell for much less than they expected.
The trick is to look at your salon from a buyer’s perspective.
When it comes to buying a salon, there is one general rule:
- You either pay big bucks for one that’s already built; (all the hard work is done – you’ve paid for someone else to build it for you), or
- you pay a smaller amount for a less successful business (or start from scratch) and have to do the hard yards yourself.
The more attractive your salon is to a buyer, the more they are likely to pay for it.
What makes a salon attractive to a buyer?
The factor that will mostly influence your sale price is gross profit. Even if your salon looks great, has a great reputation and seems busy, if it’s not making money, a buyer won’t pay big dollars for it. Without a healthy profit, you are relying on selling your shop-fit. Remember, clients are fickle; if they’re not comfortable with the sale of the salon or a new owner coming in, they can leave in droves and crush your turnover. Your buyers are very aware of this. They’re looking for a guarantee of income.
A general rule of thumb when valuing a salon is between 1-3 times its gross profit. What determines whether it’s closer to 1 or to 3 times is what else is included in the sale:
- Cost and quality of the fit-out. If it’s beautifully presented, modern, computerized, in a great location etc., it will command a higher price. If the fit-out is in need of repair or refurbishment, the buyer needs to spend money and usually wants to pay less to allow for this.
- Does it rely on YOU (and therefore your buyer) working constantly in the salon to be profitable or does it run smoothly without you? Do you have written policies, procedures and systems which your staff are completely familiar with? This is so if you were not there, the salon would continue to run well and maintain quality and turnover. How well trained are your team? Will it all fall over without YOU?
- Is there a manager or competent person to run the salon if the buyer chooses not to work in it? This is more attractive to an investor or non-hairdressing buyer.
- The size and accuracy of your database. Do you have the full contact details of your clients on a database & are they up to date? A new owner needs to market strongly to secure as many of your clients as possible, and with no database, your salon becomes more of a risk and therefore, less valuable. Your database is GOLD.
Buyers willing to pay higher amounts generally require a salon where all the structure is in place & the hard work is done. They’ll value your business skills & acumen.
What should I focus on?
- Gross profit – increase turnover and manage costs well.
- Does your fit-out need an update?
- Is your database up to date and accurate?
- Are your systems in place and monitored constantly?
- Are each of your staff well skilled, productive and working well under management?
- Do you need to get an independent valuation of your salon to show the current market value, so you know what to expect? Then you’ll know what you need to do to get the price you want.
Kym Krey is a salon business coach, supporting salon owners to develop real business skills and highly profitable salons. She is available for individual coaching and can be contacted on 0403 042 312; kym@yourcoach.net.au or at www.yourcoach.net.au or www.kymkrey.com.au.
About Kym Krey
Kym is a dynamic and passionate person with a wealth of business and management experience spanning over 24 years.
She has been involved in all facets of salon business management from individual salons to large multi-site operations and franchising; with a particular emphasis on building strong team culture and developing leadership.
She is an excellent business educator with a ‘knack’ for making the complicated sound simple.
She has held national roles with responsibility for over 60 outlets, educating franchisees and managers in effective business practice, financial management, goal setting and achievement and coaching their staff to peak performance.
Her systems have consistently achieved significant increases in not only areas of profitability but also in developing team spirit and accountability, building healthy business relationships and honest, effective communication.
She regularly presents workshops to guide managers and business owners through the often ‘sticky’ areas of managing team behaviour, setting boundaries and approaching those ‘difficult’ but critical conversations, inspiring them to reach beyond current perceived restrictions and achieve goals and results which were never previously possible.
A particular favourite of hers is working with young, emerging managers, assisting, developing and empowering them to become tomorrow’s leaders.
Kym is passionate about all aspects of business management and enjoys sharing her energy and enthusiasm for excellence. She was the winner of both the 2002 Australian Micro Business Awards; Qld /NT; ‘Woman in Business’ and ‘Established Businesses’ categories as well as an ABIA finalist. She is the current NSAA 2008 “Speaker Idol” winner 2008-Qld.
She is a vibrant coach, trainer and presenter with an infectious style that really gets the message across whether in one on one coaching or group training sessions.
Kym is available for business coaching and team strategy sessions, document creation, training, workshops and presentations.
Helping you build your dream business …… TODAY!
0403 042 312
Here at Business for Sale blog, I’m sometimes asked, “What is a trial?” in respect to business listings. If you’ve spent time looking at business listings online and offline, you’ll eventually see wording along the lines of “Will trial at $8,000 per week” (or any amount – it depends on how well the business is doing).
So what does this mean?
Well, it’s all about making sure you’re comfortable with what the business makes each week.
If you had read my post on multipliers, you’d know that a business can be valued based on a multiple of its sales or profits. And if you’re buying a business priced that way, you want to get what you paid for, right?
You’d want to make sure those sales or profits are reproducible, right?
But how do you know the seller is telling you the truth?
A trial allows you to be part of the business for a set period of time (usually two to four weeks), where you can be in the shop to see money flow through the cash registers. You’d also be able to check end-of-day reports to see totals and ensure that the sales are in line with what the trial says.
At the end of the trial period, if the average of all weekly sales equal or exceed the trial amount, the contract goes through and the business is yours. But if it falls short, the contract can still go through…
Huh? What’s the point of the trial then?
That is, unless you let the seller know that you want to terminate the contract, based on the grounds that the trial wasn’t met. You have to notify them in writing within two business days of the trial’s expiry date (as per the standard conditions of the REIQ business sale contract).
Finally, a trial is only really used in food & beverage businesses, like cafes, take aways or restaurants. Other types of retail businesses can also offer a trial, but it is not very common.
OK, I understand. But what if…
Now if you’re the skeptical type, you might say that sellers could bring in their friends to artificially boost sales during the trial period. And you could be right – I’ve heard stories of sellers going to great lengths to do exactly that. So the truth of the matter is, trials are not a solution in itself – you’ll still need to do your due diligence before and during the sale of the business to ensure you’re getting what you paid for.
If you liked what you read, leave a comment below!
Chris Khoo
Business Broker
If you had subscribed to my newsletter on the right, you’d have just gotten my free guide on “How to Maximise the Value of Your RetailBusiness”. Below is an excerpt on a controversial topic – skimming off the till.
5. Be Truthful
This is not a mini-guide on morals, but the fact is… being truthful usually means more profit and less frustration in the long run. What do I mean?
Take skimming off the till as an example. This is the practice of taking cash out of the cash register (i.e. not declaring all income on the tax return), which means less tax needs to be paid. And for most owners, it sounds good because they save money. But aside from being highly illegal, till skimming also affects the sale price dramatically.
How? As a simple example, let’s say you take $1,000 out of the cash register each week without declaring it. This equates to $52,000 a year. Taking it out of your BAS statements, you save about $4,727 in GST payments (= $52,000 divided by 11). That leaves $47,273 in post-GST income.
If you pay a flat company tax rate of 30%, you save $14,182 by not declaring it (= $47,273 times 0.3). So in total, you save $18,909 in taxes (= $14,182 + $4,727). Pretty good, huh?
Now let’s look at when you sell your business. Assuming the current earnings multiple for your industry is about 1.5x, your business could’ve been worth $78,000 more if that income had been declared (= $52,000 times 1.5).
So what’s the result? If you take the cash now, you’d be making a net loss of about $60,000 when you sell your business! Ouch!
If you enjoyed reading it, subscribe to the newsletter (on the right) for the full guide.
Chris Khoo
Business Broker
Credit: Cash register image by thiagofest