Valuation Guide: Hair and Beauty Salons

Description of the Industry

The U.S hair and beauty salon industry (NAICS 812112, SIC 7231), includes approximately 250,000 shops nationwide and accumulates approximately $20 billion in revenues each year. The salon industry is dominated by small, single-owner establishments, although chains and franchises have become increasingly common.  The industry is highly fragmented, with the 50 largest companies capturing only 15 percent of the market..[1]

Most salons are marketed towards women and offer a wide variety of hair and beauty services.  In addition to hair styling services, most salons provide auxiliary services such as manicures, facials, and waxing.  Product sales provide an additional stream of revenue.  Chain salons typically offer only basic services at discounted prices and are often marketed towards families.  Client loyalty tends to be directed toward individual stylists rather than to salons.  If a stylist leaves a salon, his or her clients will frequently follow.

All fifty U.S. states require that barbers, hairdressers, and cosmetologists are licensed.  The licensing process typically involves attending cosmetology school and completing written and practical exams.  Cosmetologists may be required to attend additional classes to maintain their license.  According to the Bureau of Labor Statistics, over 700,000 people are employed as barbers, hairdressers, and cosmetologists in the U.S., and employment in the field is expected to grow 14 percent from 2010 to 2020.[2]

Demand for basic salon services tends to be steady during economic downturns.  People continue to pay for haircuts and basic grooming services despite unfavorable economic climates, cutting back on other discretionary purchases before reducing their personal grooming expenses.  However, higher end salons that provide luxury services tend to experience greater volatility.  Lower end salons may also experience some sales decline due to clients going longer between services.  During economic downturns, some salons provide their stylists with additional training and education and draw upon the personal relationships between stylists and their clients to avoid losing customers.

Industry Trends

Trends in the salon industry have changed over the past several years, especially in response to recent economic turmoil. A few of the most significant changes are:

1. Salons are switching from paying commissions to renting booths.  Many salons are switching from the traditional commission-based compensation model to a booth rental fee.  Under this system, individual stylists work as independent contractors.  Among other benefits, salon owners avoid paying taxes on stylist tips.  Salon owners are guaranteed the set rental fee from stylists who rent chairs at their salons.  On the other hand, it can be difficult for owners to find new stylists to fill open booths, as booth rental fees present a financial barrier for some prospective stylists.

2. Franchises and corporate-owned chains are increasingly common.  In recent decades, franchises and chain salons have become more common, and the influence of salon chains on the market has increased substantially.  These salons are often found in high-traffic areas such as strip malls. They generally offer only basic services, but gain market share through brand recognition and by having numerous locations in densely populated areas.  Smaller, privately owned salons have responded by focusing on specific niches in the market.

3. Greater price promotions and incentives aim to maintain sales levels.  In the wake of the recession, many salons have observed customers getting their hair cut less frequently, performing services on their own at home, and dropping luxuries like facials and massages.  In response, salons have increased price promotions and begun offering incentives on services and products.

4. Natural products and services are increasingly popular.  The demand for natural beauty treatment processes and natural or organic products is increasing.  Many salons are moving towards this niche in the market.  Often, these salons focus on promoting their products and services as part of a lifestyle.

5. Men are venturing beyond the haircut.  The number of men visiting salons is increasing.  Men are increasingly requesting services such as hair, skin, nail, and body treatments.  In particular, men’s hair coloring is the fastest growing segment of the hair coloring market, although this is unsurprising considering that the women’s hair coloring market has had more time to reach maturity.  Further, more than 40% of men claim to have purchased retail products at a salon.[3]

6. As baby boomers age and go gray, forecasters anticipate they will continue to spend disposable income on services that make them look and feel younger.

Key Salon Performance Metrics

The following are performance metrics that the hair and beauty salon industry use to benchmark their performance to others in the industry:

1. Sales per square foot
2. Client retention rates
3. Employee retention rates
4. Retail dollars per client

Summary of Valuation Approaches

There are four different types of valuation methods that can be used to value salons, as follows:

1. Asset-based valuation: This method calculates a business’s equity value as the fair market value of a company’s assets less the fair market value of its liabilities.  This approach is also sometimes referred to as a “cost based approach”; that is, the business value is equal to the cost of acquiring its physical assets.  This approach is seldom used for a salon that isn’t facing bankruptcy and liquidation because the value of a salon is more closely based on its client volume than its physical assets.

2. Income approach to value (capitalization of earnings): This method is most applicable for hair salon companies that have predictable and constant growth of earnings and a long history of operations. The business value under this method is equal to the cash flow projection for one year divided by a capitalization rate (i.e. the appropriate discount rate less the predicted growth rate).

3. Income approach to value (discounted cash flow): The value of equity utilizing this method is equal to the present value of free cash flows available to equity holders over the life of the business. This method works well for both established salons with low growth rates as well as new salons with higher rates of growth, but requires predicting changes in future cash flows.

4. Market approach to value: This method utilizes market indications of value such as publicly traded comparable hair salon companies’ company stock and acquisitions of privately held salons.  The financial metrics of public companies or those of private transactions can be used to create valuation multiples that are then used to calculate business value.

Benchmark Statistics

The following performance metrics are based on a study of U.S. beauty salons:[4]

	2007	2008	2009	2010	2011
Operating Profit (% of Net Sales)	5.2	4.0	7.3	8.4	7.7
Sales/Net Fixed Assets	9.9	9.3	10.1	10.9	9.4
Current Ratio	1.0	0.8	0.9	1.1	1.0
Quick Ratio	0.5	0.4	0.4	0.7	0.6

Before using this data for a specific valuation it should be evaluated for appropriateness.

Industry Organizations and Publications

Some organizations and publications that publish helpful information include:

1. Professional Beauty Association, www.probeauty.org, “the largest organization of salon professionals with members representing salons and spas, distributors, manufacturers and beauty professionals”[5]
2. American Salon Magazine, www.americansalonmag.com, “a publication serving professional hairdressers and beauty salon owners”[6]
3. Modern Salon, www.modernsalon.com, a beauty industry news magazine
4. The Salon Association, www.salonassociation.com, a professional salon and spa association

Availability of Publicly Traded Comparable Companies

Most salons are not publicly traded.  Those that are public generally hold a diversified portfolio that includes other types of beauty products and services.

Several publicly traded companies that own hair and beauty salons, in order of market capitalization, are:

1. Ulta Salon, Cosmetics & Fragrance, Inc. ($5.8 billion)
2. TAYA Co., Ltd. ($3.5 billion)
3. Regis Corporation ($956.1 million)
4. Modern Beauty Salon Holdings Co. ($909.0 million)
5. Essanelle Hair Group AG ($47.9 million)

Ulta Salon, Cosmetics & Fragrance, Inc. is a beauty retailer that provides prestige, mass and salon products and salon services in the U.S.  Ulta stores are typically about 10,000 square feet, with 950 square feet dedicated to salon space.  As of the time of this report, Ulta had a forward price to earnings multiple of 26.3 and a market capitalization of $5.5 billion.  The company’s beta (a measure of how the stock price moves relative to the rest of the market) is 0.84, indicating lower-than-average volatility.

TAYA Co., Ltd is a Japan based company traded on the Tokyo Stock Exchange that operates about 150 salons worldwide.  At the time of this report, TAYA had a forward price to earnings multiple of 1,006.43 and a market capitalization of $3.5 billion.

Regis Corporation is a Minneapolis based company that owns, operates, and franchises hair and retail product salons. Regis salons include the chains Regis Salons, MasterCuts, SmartStyle, Supercuts, Cost Cutters, and Sassoon.  As of the time of this report, Regis Corp. had a forward price to earnings multiple of 19.7 and a market capitalization of $913.6 million. Regis’ beta is 0.71.

The appropriateness of using these measures when valuing a hair or beauty salon requires careful assessment of the subject practice and additional scrutiny of the relevance and comparability of each business.

Private Transaction Data

Many privately held salons are bought and sold, which permits the potential for comparable valuation multiples from privately held companies.  One database records 155 salon transactions over the five year period from July 1, 2007 through June 30, 2012. [7]  The size of private salon companies that were bought and sold recently varies greatly, both in terms of their sales, and the purchase price paid for the companies. The transactions show the following ranges and averages:

1. Total deal values ranged from $8,000 to $1,600,000.

2. Market value of invested capital (MVIC) to net sales ranged from 0.1 to 2.5 times with a median of .3.

3. MVIC to earnings before interest, taxes and depreciation (EBITDA) ranged from 0.2 to 625 times with a median of 2.2.

This range of market multiples is too variant to be useful without further analysis. These deal values and market multiples may not be informative for valuing any particular salon.  Care should be given to select private transactions that share similarities with the subject company.  The financial metrics of a potential guideline transaction should be compared with those of the subject.  Industry economic conditions also vary at different times, which affect hair and beauty salons as investment opportunities.  Specific factors that are unique for each salon must be considered.  Some of these factors include the:

1. Duration of the lease and landlord/tenant relations
2. Proximity of the facility to highly populated areas
3. Median household incomes of the neighborhoods within close proximity to the salon
4. Condition of salon equipment
5. History of the salon
6. Competitive environment of the local area
7. Established client list and demographics

Fulcrum Inquiry performs business appraisals for salons and other businesses.