People selling and buying beauty salons usually set the fair market value through a financial model called a valuation. The valuation compares the financial performance of the beauty salon against certain industry standards, allowing for a quick estimation of the company's worth. Some valuations are modified to allow for other considerations, such as debts and liabilities, equipment, furniture and real estate. Overall the hair salon business is generally healthy, with the industry generating an estimated $40 billion annually as of 2008, according to Forbes.com.
Obtain tax returns and audited financial statements for the beauty salon over the past three years. The owners should provide this information if you are the prospective buyer. The most recent year's performance is used to set the valuation, but prospective buyers may suggest an adjustment if financial performance was uneven over the three years. For example really low profits in years one and two followed by superb sales in year three requires an adjustment.
View tax returns and audited financial statements to determine pre-tax income, gross revenue and the value of current current inventory, such as beauty products.
Use standard beauty salon valuation models to create two estimates of the fair market value. Forbes.com reports that beauty salons are valued by a multiple of up to three times pre-tax income plus inventory or up to 30 percent times gross revenue plus inventory. Examples: The beauty salon earned $80,000 in pretax income with $20,000 in inventory. That sets a valuation of $260,000 for the beauty salon after multiplying the pretax income by three and adding $20,000 in inventory. The second industry standard valuation shows a fair market value of $110,000 when multiplying the gross income by 30 percent and adding the inventory.
Use the two valuations -- $260,000 and $110,000 -- as high and low value estimates, with the selling price determined by negotiation.
Robert Lee has been an entrepreneur and writer with a background in starting small businesses since 1974. He has written for various websites and for several daily and community newspapers on a wide variety of topics, including business, the Internet economy and more. He studied English in college and earned a Bachelor of Arts in liberal arts from Governor's State University.