You Paid What?!?  
by Monte Zwang

If you’re reading this, you probably own a spa. But maybe you’re thinking of buying a second location, or maybe you’re thinking of selling your space to buy a bigger spot. Either way, buying or selling a spa — or any business, for that matter — is a lesson in “how to successfully give yourself a headache.” But fear not. I’m here to help you get over the hump and get your purchase or sale in order.

First off, why is the seller selling? 
The reason the seller is selling will influence the price, and will also point to issues that may arise after you the sale has closed. If the seller is tired of taking care of clients all day, her leaving could mean a lot of her clientele leaves with her and lowers future revenue. Conversely, if the business is for sale because the owner hasn’t made any money, what are you really buying? If the business is for sale because the lease is up and the business needs to move, you must negotiate a price that reflects the future cost of relocation and whether the move is worth the risk.

Next up, profitability. Is this spa making money? 
This is obviously important, but even more so if you plan on using a bank to borrow money to expand the business. No profits, no loans.

How to determine if a business is profitable? 
Simple math. Sales minus directs costs (such as labor, supplies, products) gives you your Gross Margin. Then, subtract your fixed costs (rent, insurance, etc.) from the Gross Margin to find the Net Income. When figuring out how much a business is worth, Net Income is the number we’re most concerned with. Bear in mind that when you are looking at the financial statements add back items such as interest, depreciation, amortization and one-time, non-recurring items such as major equipment repairs or purchases. Multipy this adjusted Net Income by four. Another way to do this is to multiply gross revenue by 37.5 percent. These two numbers will give you a simple range of value to work with.

Price is affected by the terms of the transaction.
A seller will ask a higher price if they are willing to take a lower down payment and carry a contract for the balance. If you present an all cash offer, you can usually lower your offer by 25 percent.

And while numbers are a wonderful tool, there are plenty of nuts and bolts issues you’ll want to consider so you don’t get stuck with someone else’s headache…
Length of time remaining on the lease is a biggie. It’s tough to generate any return on your investment if the remaining term on the lease is less than five years… When you buy the spa, have the seller sign a “Covenant Not to Compete.” This will insure that after your pay the seller all of your savings to buy the spa, the seller cannot open, own or operate a competitive business to the one you purchased for a defined period (5 years?) of time within a defined radius (10 miles?)… Physically inspect the premises and equipment. Make sure it is operational and satisfies all building codes necessary to operate. If major pieces of equipment need repair or replacement, negotiate a lower purchase price… Review three years of financial statements and tax returns. Be as familiar with the profitability and sales trends of the business as possible. Know what you are getting yourself involved with. You should know how much and where on the financial statements the seller has paid themselves during these three years. If they haven’t paid themselves anything, you may want to reconsider this purchase… Gift Certificate Liability needs to be discussed. What is the value of the unredeemed gift certificates? If you are going to be responsible for performing services for clients without receiving any money, you need to negotiate the future impact this will have on profitability into the purchase price… Ask the seller how they came up with the value they are asking… Don’t give up your leverage. If you run after the seller with your dreams and excitement you will lose your negotiating leverage and probably pay too much. Have your financial information ready to present including any financial pre-qualification letters from lenders. This will make you an able and qualified buyer for the business… Confidentiality is critical. The only time anyone should know that a business is being sold is after the sale closes. The more you talk, the more everyone else will too. Rumors of a sale create an energy that can be disruptive to the business and could cost your future employees, your customers, and the transaction…

And lastly, give and take.
Buying a business is in some ways like a game of tug of war. But handled properly, and with a little respect, the tug of war could just as easily turn into a great relationship where all sides get what they want in order to be successful in the future.

Monte Zwang is a principal of Wellness Capital Management, providing cash flow and financial strategies to businesses in the wellness industry including medical practices, wellness practitioners and day spas. Monte has been a consultant for more than 25 years, teaching business planning and cash flow management to entrepreneurs and company leaders in health care, spa, and hospitality industries. Zwang sources capital and negotiates sales and merger transactions. Working with the Day Spa Association, he has overseen research and studies prepared on industry trends. A graduate of Denver University Daniels School of Business, Zwang has been honored by Seattle Magazine as a Five Star Best in Client Satisfaction Wealth Manager.