Overall, I really like this industry because I think that it's, you know, it is very, you know, lean on the payroll side of things. It's not an operationally taxing business. So that's the challenge is you've got to really work hard to make sure you're at that certain level of utilization or occupancy, I guess. A lot of folks that end up in this industry are not the most, let's say, dependable. So Acquisitions Anonymous. Oh, another episode of Acquisitions Anonymous. We don't have 100% beard anymore. And thumbs down on just the plus inventory line.
Hey, Michael here. Welcome to Acquisitions Anonymous. Today's episode is in the beauty space. We did one around some salon suites. It was super interesting because we all hated the deal, but you can figure out why if you stick around and listen here. And here's the episode. Thanks for being here.
Okay, so everyone knows that one of the first levers you want to pull in an acquisition is updating their technology, updating their systems that might still be running on a spreadsheet or even on pen and paper. But tech is complicated. There's a lot of solutions out there. So choosing the right cloud platform, the right CRM, the right telephony, compliance, cybersecurity, not to mention implementing all that stuff, that's a job in itself.
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And his business, Enzo, actually dates back to 1989, even before he acquired it. So the company has deep expertise for managing the tech for hundreds and hundreds of small businesses over decades. So if this sounds like something that would be helpful to you, check out EnzoTechnologies.com, I-N-Z-O Technologies.com. Or you can just email Nick directly, Nick at EnzoTechnologies.com.
Hey guys, my day was going great and I'm sorry I'm late for the podcast, but a lawyer called. It's never good when a lawyer calls, but I'm done now. So how's everybody's day going?
Better than yours. So far, so good. Yeah. Yeah. I didn't get a lawyer calling me. That's good. That's a good day. We'll call it. I was raised by a lawyer. So a lawyer calls me pretty frequently that I can't be too disappointed about. That's okay. I had someone close to me ask if I wanted to work on my anger issues. I was like, no, I'm not going to work on my anger issues. How dare you? I'm mad. So anyway, Heather, so you've been out like rolling around, like looking at
being a luminary in the space. I've been at con yeah. All the conferences for some reason happened in the same like three week time span. I have no idea why that happened, but next year let's do better. Everybody let's not do that. But, uh, no, it was fun. We, we were at, uh, BYU, we were at UCLA, Harvard. That wasn't a conference. That was the classroom. And there was, uh,
There was another one. Oh, SM Bash. There you go. Quite a few. Well, we are moving Hold Code Conference to February next year. Love it. Thank you. Just in time for you both to buy your tickets. Good job. Good job. All right. They're full price right now. Oh, no. I'm just kidding. So, Connor, you got us a deal, huh? I do have us a deal. You want to dive into it? I can read it if you want. Yeah.
I love the headline, which is ROI immediately exclamation point. Three salon suite franchises in the NY tri-state area. So the asking price is $2.5 million. The cash flow, excuse me, revenue, gross revenue is $990,000. Cash flow is $430,000. And they list $2.25 million in FF&E.
So, looking down here in the description, this is an incredible opportunity to own three top-rated franchise locations in the salon suite space, strategically located in New York, New Jersey, and Connecticut.
These businesses are the most absentee and passive opportunities around you. You are essentially a landlord without the hassle of owning property. There are no employees and no inventory. The owner has successfully leased space to strong tenants who pay rent weekly, and the role of the owner is simply to fill spaces. The owner visits each store once a month, ensuring smooth operations across all locations. Buy three fully operational cash-flowing salon suites for the price of two.
A buyer will greatly benefit from the combination of growth opportunities in the newer stores and steady income from the mature location. There is a financing package available that allows a qualified purchaser to immediately have higher than a 20% ROI and much more when the new owner increases occupancy. If you are looking for a passive money-making business with excellent growth potential, inquire about listing blank.
So there were a lot of buzzwords in there that just my BS meter starts to go ding, ding, ding, ding, ding. So it'll be interesting to break this down. So Heather, what does this business do?
Well, I believe it's kind of like, I think of them like self-storage. I was telling Connor earlier, it's like you own the property or you lease probably the space where folks that come in and do cut hair will rent a chair from you basically for their business to run their business out of.
You probably have to staff a front office person or at least some kind of technology to help kind of run the front office, you know, the check-ins and letting the folks know that their client is there. But basically you're getting paid by the beauticians that run their business out of your salon.
And some of them might rotate around through, you know, if they're, if they're newer and they're building up their book of business, they may not be in your salon full time. They may kind of rotate around based on where they can get clients. So that is, uh, that is what the business is. I think, is that right, Connor?
Yes, it is. It is effectively a real estate arbitrage play, which is where, yeah, you're the one that's putting your name on the lease in this space, breaking it out into suites, and then you're leasing the suites on a month-to-month basis typically to these self-employed professionals, whether it be hairdressers, nails, masseuses, that kind of thing. I don't
Overall, I really like this industry because I think that it is very lean on the payroll side of things. It's not an operationally taxing business. But yeah, it resembles more of a real estate play, honestly, than it does an operating business for a lot of reasons. So it's basically WeWork for hair, right?
Is that the way to think about it? Yes. Do we think they do more than just hair? Do they also do some med spa type stuff also? Or is it just straight up permanent makeup and stuff like that? Or is it just straight up hair, we think? It can be anything. There are franchises that I've seen that as a part of their ramp strategy, I think to your point, Heather, about how sometimes when people are ramping up to where they would lease their own space, they'll utilize one of these and
There are some in like the tanning space or the waxing space that as part of their ramp strategy will lease these salon suites to build up that recurring revenue as they're building out their main location. So it can be anything that any service that you can offer within a
you know, small space. But the key is utilization, you know, like they've got to, they've, you know, or occupancy, however, you know, I guess, however you want to frame it here, they've got to keep the salon at a certain level of occupancy at all times. And it's not like you have, you know, six month leases or anything like this. This is probably day to day, uh,
So that's the challenge is you've got to really work hard to make sure you're at that certain level of utilization or occupancy, I guess. Yeah. So what is there to like about this? So like about it, in theory, I don't have that much in terms of CapEx and invested capital because I'm leasing the property and then I'm subleasing it to...
Well, they have FF&E. They're saying $2,250,000. So does that mean they're building out these suites with chairs and tables and whatever else? I think that number is...
Not FF&E. I think that number is that is what it's cost them to build out. And they're putting all of that in that category. So I don't know. Kind of a blank space and they've got to turn it into these suite. They've got to put the walls in and the doors and the whatever else it's not equipment is what you're saying. That would be my guess. I don't know where $2.2 million of equipment would go in three salon suites, unless I'm completely off the mark.
Well, in theory, they've come in, they've built these out into, I guess they're enclosed little salons, little suites. And there's, I guess, there's the kind of that counter where they put all their clippers and stuff like that. Last time, I haven't been to have a haircut in a while, Heather, in case you haven't noticed. I do it at home. Yeah. Saves a lot of money. Once a month. Yeah. Make it happen.
I highly recommend it. If you go that direction, I can give you some tips. I am not going to try it. I'm not going to. I tried to pitch Mrs. Girdley on going buzz cut once because she's got kind of a pixie look to her and she told me to go to hell. No, no, she's not doing that. And then she spends two hours once a week blow drying her hair twice a week. Michael, I'm not married, but looking at your wife and saying, hey, you should shave your head is probably not the direction I would take that conversation personally. This is how it works.
You say you have to – you give them the millennial shit sandwich. You lead with the, man, you are so beautiful, such a gorgeous lady. I think this could be a look that would look great on you. I think it could even take your 10 and make you an 11, and then she'd open Good Hell. Yeah.
It didn't work. So anyway, back to the deal. So I think there's build out of all the framing. You have to have a sink there. There has to be water, I think, in each one of these individual suites for at least here in Texas for kind of the safety and sanitary purposes. There's bathrooms. There's got to be front counters, signage. It wouldn't surprise me if permitting and architecture and all that kind of stuff racked up to $700,000 per suite, depending on how big the suites are. I guess that's another question here. Are these...
you know are there are these 2 000 square foot suites are they 10 000 square foot suites if they're 10 000 i could definitely see how yeah 22.2 million got spit pretty quickly well it's interesting because i've seen you know in different salon suite franchises i've seen them share that you know anywhere from seven hundred thousand dollars uh per unit to build out up to like close to two million and i think a big variable there is the size of the
because some have more suites than others. But it sounds like, you know, relatively speaking, these are all three units were on the lower end of that spectrum in terms of how much they've sunk into building them out. And probably that means that they're on the smaller end as well.
Why does this need to be a franchise? Yeah, it's a good question because I think that – and they don't mention this here, but I know that some salon suite brands – you have to keep in mind too that who you're working with here is somebody who's probably transitioning from working for someone else.
to working for themselves. And so some salon suite brands do a lot to support people in addition to just furnishing the space. They do a lot of support people in building their business. Some of them have like technology built out where they might have a proprietary CRM and app
That is for their own tenants. And that is their point of sale system. That's how they schedule, et cetera. Some of them support, you know, their professionals in managing inventory and things like that. So, you know, we don't know because we don't know which brand this is, but there are some that try to make the concept stickier from the consumer facing standpoint by investing in technology and investing in some of these other things system wide.
And I may have zoned out when you said it, but some of these folks also do centralized digital marketing as well, right? So they're running your Google My Business listing. They're getting all that set up correctly and make sure the photos are... Did you say that or did I just... You said a lot of stuff. Yeah, I mean, I don't think I said that, but you're correct. I mean, that's... Yeah, a lot of them do have marketing in place because I think it was mentioned earlier, but occupancy is the...
the holy grail here. This is probably a business, I don't know what the break-even point as far as the percentage of occupancy is, but it is a pretty clear cut. You're either hemorrhaging money up to X percent occupancy and then after that, that's when you're really making your money. And there are pros to that and cons to that either way. But I guarantee if you look at this P&L, it is going to be chock full of fixed costs. There's not a whole lot that's variable there.
Hey everyone, it's Bill. And I want to tell you about maybe the most exciting sponsor we've had in a long time on the pod. It's called Capital Pad. And it is the thing that I wish existed when I started my journey of operating and investing in small businesses. So Capital Pad is a marketplace for acquisition entrepreneurs. That is people who want to buy a business and need capital to list their deals and solicit capital from other people who want to invest in
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So if this sounds like something that's appealing to you, if you want to buy a small business and need capital, or if you want to invest in small businesses, go check out CapitalPad.com and tell them that Acquisitions Anonymous sent you. So 50% margin, does that seem about right? If your biggest expense is going to be the rent that you're paying for the facilities and however you financed the build-out?
Yeah. Right. Do they have any employees or are there zero employees to this? Usually they do have a limited amount of employees, which this would be like a front desk person or something. But just as an example, a friend of mine, he oversaw personally oversaw 12 of these units.
himself. He had a team, like he had somebody else there, but you wouldn't see somebody personally as like an area manager overseeing 12 of just about anything else usually without middle management in place. So yeah, limited payroll. Look, I think there's a lot of stuff to like about this, right? Haircuts are not getting offshored.
Nobody's though. I have seen some robots cutting hair recently. Are we going to have automated haircuts? There, there are starting to be some of those. So man, I can think of about 500 other places. I would put a robot before I would put it next to my face with scissors. They have, they have a little machines that do nail polish now too. So the nails are already getting automated. You just put your hand in this machine and it,
And you dial up the color and it will paint your nails. Do they speak to you with a Vietnamese accent when it operates? No, they don't. It is so cool when you go look at how many immigrants have made those nail salons as like a way to be successful in America. I think it's awesome.
Agreed. Yeah. And honestly, yeah. America moment. Honestly, Michael, like I don't even think about this as like the haircut industry, you know, growing. I think it's more of like, is the, the trend within that industry and within these other industries going to continue. And that being the trend of like democratization, if you will, of people going away from working for salons to going to working for themselves. Cause that's really what drives, um,
You know, the demand for something like this is just are people going to continue to be more and more motivated to own their own business? I think there are a lot of indications that is the case.
Yeah, I talked to the guy who does Mrs. Girdley's hair is like the most in demand colorist in San Antonio. And like you have to get like referred to him. I don't know. Is it the same way in the Orange County, Heather? No, no. This is a – it can be. I mean certainly we have places like that. This guy is pretty good. He has rules. Yeah.
Anyway, so you have to get referred to go see him. But he opened up his own salon, so he rented a building like this. And I asked him, I was like, hey, are you subleasing some of the other chairs, other people? And he said, no. I'm bringing on apprentices to teach them how to do color because color is an art.
And like he said, renting out spaces like this is just a nightmare because I think that kind of ties into the next thing we haven't really talked about. Unlike WeWork, a lot of these folks are nightmare tenants. Like you're running around trying to collect rent and they're showing up drunk or having parties at the office. Like it's,
A lot of folks that end up in this industry are not the most, let's say, dependable. Yeah, I hear you. So you've got a little bit of a flakier customer base, perhaps, and maybe a little more fly-by-night. Like they're in and they're out. They went to another salon or they went to another space or whatever it may be. So I feel like there might be a little more work involved.
Then what did it say? Scroll down completely passive. It was in all caps. What did it say? No employee. Oh, it did say no employees, no inventory and most absentee and passive, the most absentee and passive opportunity you'll ever see. So I don't disagree with that, honestly. Like I think grading on a curve here out of pretty much any small business you could acquire, this is probably as close as it gets. Now it's not, it's still not passive though.
Yeah. It's the most passive, but it's not passive. The surest sign in the listing that your tenants are a little non-credit tenants is they pay weekly. That's like the motel equivalent of paying hourly with cash. Right. That's a lot of work to keep the weekly tenants in and keep yourself at a certain breakeven level. And they didn't give us any information on how many suites...
And, you know, what the breakdown of numbers is, what kind of occupancy percentage they've achieved. He just says that they've got, you know, positive cash flow. So it didn't take us a lot of detail. I will bet $50 that at least one of these leases has a personal guarantee on it, if not all three. Oh, I bet all three. Yeah. Guarantee it's all three. Yeah.
So you are definitely in a situation. It would not surprise me, especially since the listing says that they are offering three fully operational for the price of two. I bet you one of those three is totally losing money. I bet it's emerging money and they can't fill it because it's in a terrible location. But he already signed the lease, or she did. Yep, the lease is signed. Exactly. The good old PG. Now, what happens when you sell a business like this?
To, you know, to those PGs on the, on the leases, do the landlords swap them out to the new buyer? You know? Okay. Okay. So typically what happens is the landlord tells you to go to hell.
You'll go to them and say, hey, I want to get out of the personal guarantee. I'm selling the business. And they say, too bad. You're screwed. Tough. But the one way you can deal with that is you basically when you sell the business, you can have the buyer personally guarantee you on that lease. Right. They indemnify you. So in theory, you're still you're still on the hook for it.
But you get a level of protection because the other side personally guarantees to you that the rent's going to get paid. But as a finance person, can I say that's pretty risky because now you have to pursue them. The landlord can pursue you legally. Now you've got to pursue this other buyer. And if your financial condition is better than theirs at the time that things go south, guess who they're going to collect from?
The one with more. So this is why when people ask me about SBA loans being assumable, I say, well, sure, they're assumable, but they don't let the first personal guarantor off the hook. Same as what you just described. And so you're both just personally guaranteeing it now. And I would never want to sell a situation where I'm still personally guaranteeing and someone else is running the risk situation under my PG. Scary. Yeah.
Heather, I've... Did you want to though? Sometimes you got to do it to get the deal done. But that's also why when you do a lease like this or any lease, you want to have your PG burn off over time. So like the landlord will ask you to have a permanent PG or a long-term PG. And what you can say is, okay, if we're doing a 20-year lease, like I want my PG to burn off after year three or year five or something like that.
And the less they have to spend on improvements, usually the faster burn off they'll allow you to have. Makes sense. I've had a couple of these that I've helped people get into and neither of whom were able to get an SBA loan for a salon suite. And the explanation that I got was that the SBA views this as more of a real estate play and not an operating business. So Heather, does that check out with you?
That sounds about right, the way this one is being described. I think there are other salon businesses where you could argue that there is more of an actual business there and that could become SBA eligible. It's kind of in the gray area. What's interesting is the self-storage space used to be seen the same way.
for many years that I did SBA loans, self-storage was considered ineligible because it was considered real estate investment, not a business. And then over the years, they eventually kind of proved out that they do more than just, you know, there's more to it. So I think you could argue the same thing here potentially, but you're in a gray area and banks don't like to do an SBA loan where they're in the gray area on the rules because they'll still probably get second guessed by the SBA if there's a default. So that's why.
So we're coming up on kind of time for the episode here. Can we talk about the elephant in the room here? The price here is insane. $430,000 in cash flow, $2.5 million in asking price. Like, I don't know. That's over six times cash flow. So I will say I have seen these trade for ungodly multiples relative to other retail franchises. And I think the reason is because
you have people that are real estate centric people that are inclined to invest in something like this and they're weighing it against a real estate investment and not weighing it against any of the other businesses that we would go out there, which if you're, you know, if you're a small business centric person and not a real estate person that can make it challenging to compete with if that's the case. I agree this for this scale is too high, but I'm just saying I've seen them, you know, when they have seven figures of EBITDA, I've seen them trade for, you know, the upper single digits.
Yeah. Well, you're just, to me, these sound like they're kind of in a relatively small town area, you know, strategically located in New York, New Jersey and Connecticut. Sounds like they're in suburban kind of, you know, off-brand strip centers. You're just, you're just one moment away from some jackass, like,
Opening up one next door to you and taking half of your folks right over to the newer, more sparkly place nearby and suddenly having the WeWork problem, which is you've signed a long term personally guaranteed lease and you're expecting short term renters to keep coming in the door. And if they don't like you're screwed.
Yeah. Other than that, I love it. I mean, here's where I think this business gets interesting is that given what we talked about earlier about how like this is all fixed costs, basically, I think what that means on the backend and we don't know what their occupancy rate is, but if they still have room to grow and they still have room to add tenants, uh,
The contribution margin on each incremental dollar is pretty massive, you know, once they do that. And so there's big upside there, but the inverse is also true. Meaning is if this is, if you're talking about, you know, whatever percentage it is, that's, you know, fully fixed expenses. If you're not careful, like a 10% drop in revenue, right?
can cut your cashflow in half if that's how the expenses are structured. Meaning like you're going to pay the same amount in rent and utilities more or less and all of those things. If you have a slight like drop in revenue, there's just not a lot that you can do to get scrappy on the expense side of the equation that's going to mitigate, you know, how that hits the bottom line. So,
So I think whoever were to buy this thing, I think, like I said, I like the business, but they've got to have a lot of confidence in the durability of the revenue that's already there. And they have to have a line of sight on how to grow revenue at least enough to outrun any churn that they're going to incur. But, you know, other than that, I think that there's upside if they can get in and grow it and presumably that there is capacity to do that.
Okay. Well, let's wrap up here. I'm thumbs down. Me no likey. This ain't no pizza boat. That's what I have to say to you guys.
Heather, do you want to rant on this one too? I feel like I've been pooping out the whole time. Connor, please don't take it personally. I just don't like the deal. The price is too high. It feels like someone would be pricing on a cap rate and this is not the kind of rents that you should be doing that on. If you're competing with that, then no, you don't want to pay this kind of price for it. I also feel like I'm not sure what the franchisor is really providing here. Maybe that changes things if I understood that better, but
I would, I would pass on this one. Yeah. And I'm thumbs down basically just because of the, the valuation. Um, I, this is, I'm not in the real estate game and don't want to compete with those who are so. All right. Well, uh, good news and sorry for Ken Stein, the listing broker. We, you seem like a nice guy. We hate your deal.
So we'll see everybody next week. If you enjoyed this, please send it to a friend, especially if they're interested in buying a business. We would love to have them as a listener. And yeah, good find on this one, Connor. I think it's the first time we've done a Salon Suites. So after whatever, 400 episodes, pretty cool. Awesome. All right. See everybody next week.