The U.S. hair care services industry has more than 80,000 businesses. Approximately 77,000 beauty salons and 4,500 barbershops. This industry has a combined annual revenue of about $20 billion. Here is a quick summary of the trend of valuation multiples for a hair salon. Be sure to also check out our posts Valuing a Hair Salon, How to Value a Hair and Nail Salon, and Value Drivers for a Hair Salon.
Disclaimer: These multiples are for educational purposes only. As such, the information provided does not constitute valuation advice. One should not act on it as such. These multiples do not represent the valuation opinion of Peak Business Valuation or any of its valuation professionals. Instead, seek the guidance and advice of a qualified business valuation professional.
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Revenue Multiple
According to our data, in 2019 hair salon companies sold for an average 0.38x sales multiple. The term multiple is a valuation metric that refers to the implied value of a business. It is calculated by multiplying the amount of revenue or sales a business makes by the valuation multiple.
Revenue X Multiple = Value of the Business
For instance, if a hair salon generates $650,000 in revenue and transacts at a 0.38x multiple, then the business value is worth approximately $247,000.
A revenue multiple does not take into consideration the operations of a business. As such, this multiple is less frequently relied upon. Therefore, it is important to look at cash flow multiples. Cash flow multiples consider expenses that impact the cash flow. For instance, rent, COGS, and salaries.
Seller’s Discretionary Earnings (SDE) Multiple
In 2019, the SDE multiple was 2.14x for hair care companies. Apply this multiple to SDE to derive an implied value of the business. The calculation is as follows:
SDE X Multiple = Value of the Business
For example, if a barbershop has seller’s discretionary earnings of $350,000 and is estimated to sell at a 2.14x multiple, then the business is worth approximately $749,000.
Seller’s discretionary is a common cash flow multiple used in small business transactions. Derive SDE by starting with your company’s EBITDA and adding back potential expenses that a new owner would not otherwise incur. These expenses may include owner’s compensation, manager’s salary, other expenses such as auto, and nonrecurring items or events such as legal fees, or consulting.
This approach is most frequently used as a valuation method for small businesses with sales less than $3M.
EBITDA Multiple
The average EBITDA multiple for hair salons in 2019 was 2.82x. The following is the EBITDA multiple calculation.
For example, a hair salon has an EBITDA of $400,000 and an EBITDA multiple of 2.82x. Using the above metrics, the company is worth approximately $1.12M.
$400,000 X 2.82 = $1,128,000
The EBITDA multiple is a valuation ratio that measures a company’s return on investment (ROI). This multiple is preferred as it is normalized for differences in capital structure, taxation, and fixed assets.Normalized ratios allow for comparisons to similar businesses. Normalization is the process of removing non-recurring expenses or revenue from a financial metric like EBITDA, EBIT, or earnings. Once earnings have been normalized, the resulting number represents the future earnings capacity that a buyer would expect from the business.
The Trend of Average EBITDA Multiples
The following graphic shows how EBITDA multiples have trended over the last 4 years in the hair care services industry.
Impact of Size on the Valuation Multiple
The following graphic shows how business size impacted EBITDA multiples for a hair salon over the last few years.
For instance, if a hair salon generates $650,000 in revenue and transacts at a 0.38x multiple, then the business value is worth approximately $247,000.
Retail businesses: 1.5 to 3.0 (i.e., cash flow x 1.5-3.0 multiple) Service businesses: 1.5 to 3.0 (i.e., cash flow x 1.5-3.0 multiple) Food businesses: 1.5 to 3.0 (i.e., cash flow x 1.5-3.0 multiple) Manufacturing businesses: 3.0 to 5.0+ (i.e., cash flow x 3.0-5.0+ multiple)
A salon will usually sell for either: 2-4 times net income OR 35% of revenue plus inventory. If the salon doesn't have positive net income or substantial revenue, then look at the value of the location and furniture.
The average EBITDA multiples for a small business typically fall between 3.00x – 5.00x. Valuation experts apply the multiple to the company's EBITDA to determine its fair market value.
Salons can earn an average profit margin of 8.2%, which is actually higher than the general business average of 7.7%. Of course, salons that are well managed can earn well above this average. A 10% profit margin is usually the minimum aim, though the better you can manage your salon finances, the higher this can be.
The average annual profit for salon businesses in the US is $20,000. Understand profit margin as the money that is left after all operational costs, taxation, marketing, and your own salary. In other words, $20,000 is the final profit that you can make use of to add more services to your salon, take-home pay, etc.
The most common multiple used in the valuation of stocks is the price-to-earnings (P/E) multiple. Enterprise value (EV) is a popular performance metric used to calculate different types of multiples, such as the EV to earnings before interest and taxes (EBIT) multiple and the EV to sales multiple.
For example, if the industry standard is "three times sales" and your revenue for last year was $500,000, your revenue-based valuation would be $1.5 million. Multiplying your earnings, or how much your business makes after subtracting its costs, is another valuation method.
A venture that earns $1 million per year in revenue, for example, could have a multiple of 2 or 3 applied to it, resulting in a $2 or $3 million valuation. Another business might earn just $500,000 per year and earn a multiple of 0.5, yielding a valuation of $250,000.
Salon owners who also work as stylists have two income streams. They earn money from their clients as any stylist would. Plus, they receive profits from the overall salon operations, including services provided by other stylists, product sales, and chair rental fees if applicable.
To learn how to value a hair and nail salon, it is best to receive a business appraisal. As part of a business appraisal, a valuation analyst determines the fair market value of a hair and nail salon. In addition, an appraisal analyzes the strengths and weaknesses of your hair and nail salon.
In most cases, people can determine their online business value by multiplying their average monthly net profit by 36x – 60x. For example, If a business generates a rolling twelve-month average net profit of $35,000, then this business would be valued at $1.26M on the low end and $2.27M on the high end.
Average earnings multiples range from 2 to 3.5, with the average across all sectors at 2.46. Revenue multiples range from 0.4 to 1.2, with the average across all businesses at 0.63. (For small business valuation purposes, cash flow to the owner (earnings) is a more reliable indicator than revenue.)
And there is no single exact number that can be calculated. Rather, what is negotiated ultimately determines the fair market value of your business and the price at which you will sell your business. In general, private companies sell between 2X and 10X EBITDA, with the majority of transactions in the 4X to 6X range.
5 business valuation methods. There are five main ways to value your business: asset approach, income approach, market approach, return on investment (ROI) approach, and discounted cash flow approach.
As hair stylists, one of the most important ways to add value to your salon clientele is by making suitable recommendations. Doing so can increase your existing clients' loyalty and attract new customers to your salon. Making the proper recommendations starts with understanding your salon business and clients' needs.
Add-on services. Hair salons will often offer additional services to supplement their core services. These add-on services would include scalp massages, hair treatment services, hair extensions, and more. These add-ons can be great upselling opportunities to increase the average amount of money spent per client.
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