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Ed Johnson
Ed Johnson, HR & Business Operations Consultant
Category: Finance
Satisfied Customers: 10760
Experience:  Central Michigan University, MSA Candidate; Global Compensation Operations Mngr; AA Degree Lib Arts
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My business partner wants to buy me out. The profit for our

Customer Question

My business partner wants to buy me out. The profit for our salon is 60,000. a year. Is there a certain calculation that I should use when determining a price. The furniture & equipment, rental of my station , profit , ect ?
Submitted: 8 years ago.
Category: Finance
Expert:  Ed Johnson replied 8 years ago.



The general rule for determining FMV of a business is 10 times annual net revenues. IN this case you would start with 600,000 and go from there.


However that is the value of your salon. So you have to use the same kind of thing for the value of your chair or station. BUT not just that, but use what your profits are.


it is assumed that a person buying the business can make up the cost in 7 to 10 years. Anything less would be a bargain. (5 X annual earnings for example).


So if your station was responsible for 35,000, then the low side would be 150,000 and the high side would be 350,000. (includes equipment and supplies, client list, etc).


Of course no business is worth more than someone is willing to pay. If you had a transferable license that went with that chair, it would be better.



Customer: replied 8 years ago.
I don't understand... We have a 50/50 partnership , and she said she is willing to pay me what my 1 year draw is from our business, which is 30,000. Your answere seemed really high and hers is really low. Help!!!!
Expert:  Ed Johnson replied 8 years ago.



I gave you the general rule in the business world. This is the difference a higher education means. Had you asked me this question befor my Master's degree, maybe I might agree. Small businesses do not always recognize the real world. People get taken advantage of because they are unware of the true value and worth of a business in terms of Fair Market Value.


One can value a business in terms of current net worth. current net worth may be the total of all assets plus owners equity, minus liabilities. So on that basis, being a 50/50 partner, 30,000 may be ok. But I disagree with that figure.


The value of a busiess when it is bieng sold is its net worth plus future value.


So the general rule is 10 times current or net revenues. So based on that rule the business is valued at 600,000 and you would be entitled to 50% or 300,000.


Now he is offering you only one years earnings based on your 50% of 60,000. that is very cheap.


You have to consider:


1. how much you have invested into the business interms of cash, good will, and time.

2. the certification for the chair

3. value of equipmetn and supplies,

4, current earnings, 60,000 (your share of that).

5. customer list. Customers have a life time earnings capacity. For example: At each customer can be expected to use you on average 4 times a year. each customer refers on average 1 person. so you can expect each cutomer to have a life time value of at leat 1250 dollars in your industry. (could be higher)

6. factor in that you have to now find a new job, and have to live for at least six months. Or, you have to start a new business, and rebuild client lists.

7. the value of the license and or certification for that chair or space.

8. FUTURE VALUE of the company.


At 30,000, your partner is taking advantage of you, most likely because they are also not savvy about the value of business.


Savvy busines people, oftent not even knowing anything about the industry buy out businesses like tihs every day on the cheap, and then developed it into a package that could be franchised or earn 6 figures a year within 1 to 3 years of making the purchase.


Trust me on this, my friend. You value a business, generally at 10 times annual earnings. If you need to get out for some reason, then you can accept waht ever you are comfortable with. But from my perspective, unless you have a burning need to divest and move on, I would not sell for less than 90,000. AND I consider that cheap.


However, let me offer you this. I see that in many areas of the country, small operation beauty salons are being advertised very cheap. As I read those ads, i realize that most persons are trying to relocate, or are tired and need to change jobs. Essentially, they are selling a job, and most do not have bsuiness training. so they are selling thier chairs between 35,000 and 85,000 dollars (franchise). They are not selling them based on thier true value. This is an easy market to etner. I am getting an Idea, that I can buy 3 of these businesses tomorrow, and be earning six figures in a year. These are grossly undervalued. In fact, thats what I am going to do.


Tell you what. If you give me your state and county, i will proivde you the average sell price for a beauty salon.


But remember, you asked for a formula, and that formula is, 10 times annual earnings. I can not help it if your industry tends to undervalue its business.


let me have your state and county.




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Customer: replied 8 years ago.
WOW, that was great insight ....see what higher education does give you ....understanding of basic business law principles! Okay , well I do want to leave as she is very difficult to work in a partnership any longer . We are making some changes that will result in more earning for her in the future. My business is in Orange County , California.
Customer: replied 8 years ago.
did you get my last reply ??
Expert:  Ed Johnson replied 8 years ago.

The average price of beauty salons in Orange County are 129,000.


the low was 59,000 and the high was 200,000 +


So if you are have of a two or four chair business, then based on demographics alone, you should not hold out for less than 60,000. I would aim a bit higher at around 96,000 and let her talk you down not less than 60,000.


I talked to some salon owners today when I got my hair cut. they agree that the typical salon owner is not aware of the higher business model for valuing their business. Some are however. the lady I talked to today said straight out...5 to 10 times earnings.


go for more. YOu should get it. but if you want to break free don't dig in your heels too much. I thank you should end up settling somewhere between 45,000 and 75,000.







Customer: replied 8 years ago.
Thank You sooooo much for your help ! I appreciate your time !
Expert:  Ed Johnson replied 8 years ago.
you are welcome. Good luck with this.