If you’ve decided to sell your day spa, know that preparation is essential to reaping maximum value.
Day spas have been closing or selling at a record rate ever since the onset of the economic recession in late 2008. That phenomenon, combined with pricing pressure applied by the ever-burgeoning discount chains, has created a great deal of strain for day spa owners. “Treading water,” “flat” and “hanging on” are some of the dominant descriptions business consultants have been hearing from individual day spa business owners in recent years.
Since 2009, more than 1,200 day spas have either closed or been sold, according to the International Spa Association’s 2012 Spa Industry Report. Given the lack of spa acquisition announcements, it appears that a large number of individual spas have simply closed their doors, or gone bankrupt amidst this challenging economic cycle. “Everyone is working twice as hard for half the money,” says Dana Stallings, co-owner of Spa Velia in San Diego.
Some consultants forecast that there will continue to be a great deal of consolidation in the day spa industry. They base this assumption on the fact that many day spa owners who have weathered the recession have done so at great cost, both financially and personally. In addition, the demographics suggest that the majority of those who founded individual day spas some 20 years ago, when the industry was growing at a rate of 25% a year, are now more than ready to cash out—giving new, energized potential owners some ready-made opportunities.
With some modest economic improvement to help them along, day spas can now get back on their feet and plan for the future. For, rather than simply closing shop, spa owners can take advantage of the uptick in the economy to attractively position their businesses for sale—if they know how to prepare.
The Reality of Valuations
Day spa valuations vary dramatically, and are assessed according to the following indicators:
• Revenue growth
• Net income
• Size and stability of client list
• Extent of build-out
• Current assets’ quality and age
• Number of outstanding gift cards
• Brand equity (perhaps most important!)
The overall intrinsic assessment of your spa is a function of the value your entity holds to the potential buyer. Comparables of other spas that have sold are important, but such information only tells part of the value story. Spas (and even product companies) en- joying high valuations have achieved sustain- able brand equity as well as a highly stable, desirable client base.
If you’re thinking of selling, it is important to have a valuation analysis performed so you can be realistic about what your business could potentially generate in a sale—or determine if a winding-down is a better option. Unrealistic expectations, or judgment-clouding attachments, will end in an unsuccessful sale. For some day spas, it is more prudent to simply close the doors than to go through the process of selling. If your books are not in order or if you do not have the fortitude to undergo financial or personal scrutiny, closing the doors may be your best option. In this scenario, you may generate a modest return on the business by selling assets.
Preparing to Sell
Suppose you’ve determined that selling is worth your while. You will need to develop a unique selling proposition and embrace current trends. The day spa business is dramatically different now versus 10 years ago, and owners must adapt. This means cultivating unique services, stabilizing staff and entering higher growth sectors such as medical aesthetics, nutritional services or wellness counseling, all of which could provide growth and keep your spa current. The number of day spas offering basic massage and facials as their main services is staggering, but this is an old business model that for the most part is not providing the level of growth needed for a premium valuation.
Demand for medical aesthetics, in particular, is booming, as some medical spas will attest.
“We have never done ‘basic’ facials,” notes Stacey Yates, manager of Skin Spirit, which enjoys three bus- tling locations in Northern California. “Our facials have always been clinical, utilizing medical-grade products and equipment—everything is measurable.” Partnering with a health professional to perform medical-level services at your day spa could be a promising option for achieving growth that could ultimately bolster your ability to sell.
Current owners have other suggestions. “I think the individual day spa market needs to embrace member- ships just as some of the successful chains have done, to bring in a fixed stream of revenue and increase guests’ appointment frequency,” says Blanca Caballero of AvantGard Spa in San Carlos, California. Caballero also advises owners to develop a strong makeup and brow bar department where the focus is on retail makeup sales—which “will bring higher than normal revenue per square foot.”
Time is Everything
Sell when you have something to sell. Sell at the top of your cycle, not the bottom—fire sales never end in a favorable valuation. Prepare your company for sale several years before you intend to sell, so you can realize equity from all of your hard work. Whenever you start a business, you should have an exit strategy on paper. Many spas have waited until sales are declining, their staff is unstable and their energy for the business is waning, to make this transition. Not wise.
To entice a buyer, your spa needs to be firing on all cylinders and communicating a sense of prosperity and promise to the new buyer. To make sure you’re ready, heed the following tips:
Take an honest look at your spa. Potential buyers will not offer top dollar if your facility looks stale or uninspired. Now is the time to eliminate that worn pillow or faded throw!
Polish up your website. Your site should reflect your brand with professional photography, and accommodate online scheduling. Potential buyers will not offer top dollar if your spa seems dated and uninspired. They will pay for growth, so attempt to achieve a minimum revenue growth rate of 10% to 15% each year, and bring a healthy profit to the bottom line.
Have your financials in order. Once a qualified buyer is nailed down and a letter of intent is signed, he due diligence process begins. You must have solid data to maintain a strong bargaining position. For starters, you will need the previous three years’ worth of income and balance sheet information. “Make sure your books are accurate when it comes to client information, various asset classes, and profit- and-loss statements,” advises Vince Sevely, a Palo Alto, California-based attorney. “There are also issues of liability if the information given to the buyer subsequently turns out to be inaccurate.”
Ensure that you have accurate client base data. See if you can answer the following questions: What is your churn of clients? How much was brought in through social media “deals”? What is your discretionary spending number?
Clean up your gift certificate (GC) liability. Interestingly, this mea- sure seems to scare off many potential spa sellers because it isn’t unusual to have a large number of old, out- standing GCs. Potential buyers of- ten want to make the entire dollar amount of outstanding GCs part of the purchase price. In reality, a large percentage of this outstanding liability will never be redeemed. For this reason, some experts recommend removing from your books all GCs that are five years and older and carry a balance of less than $30. (Save the list for future reference; you can still honor these certificates if necessary.)
All GCs that are three years or older should not be part of your spa’s purchase price; it is in the seller’s best interest to establish a fund for these certificates, as a large percentage of these also will not be redeemed. The value of current GCs is completely negotiable in the sale (most likely, less than 60% will be redeemed, so negotiate the price based on this realistic premise).
Seek professional help. At- tempting to sell any business is a confusing process, but this is especially true when it’s your own business. Bill Cesano, owner of Destino Spa in Palo Alto, California, enlisted a professional consultant after a major life change made selling necessary. “We needed help to get our arms around the selling process and find the right buyer,” says Cesano. “Being clear on the valuation and what chains or type of owner might have an interest in Destino Spa made the process go much more smoothly.”
–By Laura Peck Fennema