Acquisitions Anonymous - #1 for business buying, selling and operating - Salon Suite Franchise Review: Is This $2.5M Deal Worth It?

Episode Date: May 2, 2025

In this episode, the hosts dive into a salon suite franchise deal in the beauty industry — and why they ultimately gave it a thumbs down.Thank you to this episode's special guest Connor Groce. To connect with Connor head to: https://www.connorgroce.com/Business Listing - https://www.bizbuysell.com/business-opportunity/roi-immediately-3-salon-suite-franchises-in-the-ny-tri-state-area/2349645/Sponsors:🔹 Inzo Technologies - Get a complimentary IT audit for your acquisition with Nick Akers at Inzotechnologies.com.🔹 Capital Pad - The marketplace for buying small businesses and raising capital. Learn more at CapitalPad.com.Episode Description:In this episode, the Acquanon team reviews a deal for three salon suite franchises located across the New York Tri-State area. While the concept of a passive, real estate-light business in the beauty industry sounds appealing, the hosts dig deeper into the financials, occupancy risks, personal guarantees on leases, and the high asking price. They break down why the deal, despite some attractive aspects, ultimately didn't meet their investment criteria.Key Highlights:- Overview of the salon suite franchise model- Why occupancy is critical to profitability- Risks of relying on weekly-paying, potentially flaky tenants- The hidden dangers of personal guarantees on leases- Why the asking price relative to cash flow made the deal unattractive- Discussion about franchisor support (or lack thereof)- How fixed costs create revenue durability risksSubscribe to weekly our Newsletter and get curated deals in your inboxAdvertise with us by clicking here Do you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel. Do you enjoy our content? Rate our show! Follow us on Twitter @acquanon Learnings about small business acquisitions and operations. For inquiries or suggestions, email us at [e-mail]

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 Acquisition Anonymous. Hello, another episode of Acquisitions Anonymous. We don't have 100% beard anymore. And thumbs downing on just the plus endangorial.

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.

And I want to tell you about this week's sponsor, which is Nick Acres and Inzo Technologies. So Nick actually knows about all this firsthand. He is a former searcher himself and bought Inzo Technologies, which is an IT firm for small businesses. So Nick has seen the tech challenges that searchers face when acquiring businesses. He's seen him up close firsthand because he is a searcher. Now his team at Inzo regularly works with searchers on acquisitions, offers a complementary IT audit of your target so you can make a plan for what you're going to do on day one. Nick takes a personal interest in all of their searcher clients and draws on his own experience in the search base.

And his business, Inzo, 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 Inzo Technologies.com, I-N-Z-O-Technologies.com, or you can just email Nick directly, Nick at Inzo Technologies.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 to stay going? Better than yours, I think.

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 to 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? So anyway, Heather, so you've been out like rolling around, like looking at being a luminary in the space?

I've been at, 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 no, it was fun. We were at BYU. We were at UCLA, Harvard. That wasn't a conference. That was the classroom.

And there was, there was another one. Oh, S.M. Bash. There you go. Quite a few. Well, we are moving Hold Code Conference to February next year. Love it. 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 scared there's this guy. So, Connor, you got us a deal, huh? I do have us a deal. Let's, you want to dive into it?

I can read it if you want. 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, a 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 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 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. 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, you know, masseuses, that kind of thing. I 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. But yeah, it resembles more of a real estate play, honestly, than it does in operating.

business for a lot of reasons. So it's it's basically we work for hair. Correct. Is that the way is that the way to think? Yes. Do we think they do more than just, uh, just hair? There's probably, do they also do some, some med spa type stuff also or is it just straight up, you know, permanent makeup and stuff like that or is it just straight up hair, we think? It can be anything. There are franchises, you know, that I've seen that as a part of their ramp strategy, I think, to your, 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, a small space. But the key is utilization, you know, like they've got a, 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. 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 it like about this? So to 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 sub-leasing it to... Well, they have FF&E. They've got... They're saying $2.250. 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... It's kind of a blank space and they've got to turn it into these suite. They've got to put the walls in. 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, theory they've come in. They've built these out into, I guess they're enclosed, enclosed little salons, little suites. And there's, I guess, there's the kind of the 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. It 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 try it. I try to missus gurdly on going buzzcut 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 dry 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 leave it's, you give them the like the millennial like shit sandwich. You lead with the man, you know, 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 don't have to go to hell. It didn't work. So anyway, back to the back to the deal. So I think that 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 the safety and sanitary purposes. There's bathrooms. There's got to be front counters. Signage. It wouldn't surprise me if in permitting an 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. 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 2.2 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 $700,000 per unit to build out up to like close to 2 million. And I think a big variable there is the size of the location because some have more sweets than others. But it sounds like, you know, relatively speaking, these are all three units were on the lower end.

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. What, why does this need to be a franchise? Yeah, it's a, you know, it's a good question because I think that, and they don't mention this here, but I know that some Salon Suite brands, like you have to keep in mind, too, that who you're working with here is somebody who's probably transitioning from working to some, 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, etc. 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, do 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. have, you know, marketing in place because I think it was mentioned earlier, but occupancy is 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. Like 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 CapitalPad. And it is the thing that I wish existed when I started my journey of operating and investing in small businesses. So CapitalPad 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 acquisition deals. So if you want to back somebody buying a small business, CapitalPad is a place to do it. And if you want to buy a business and need capital, you can go on CapitalPad to be introduced to investors. So the really great thing, too, from the investor side is that CapitalPad takes care of all of the details that can get hairy with small business acquisitions. They handle standardized terms, standardized governance, standardized distributions all up front in black and white. Basically, CapitalPad professionalizes investing in small businesses. And the returns can be really, really good. I'm so stoked they exist.

It's founded by my friend Travis, who is a phenomenal entrepreneur in his own right. 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. 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 whatever, however you financed the buildout. Yeah.

Right? Do they have any employees or are there zero employees to this? Usually they do have a limited, you know, amount of employees, which this would be like a front desk person or something. But, you know, just as an example, a friend of mine, he oversaw personally oversaw 12 of these units himself. He had a team like he had, you know, somebody else there. But you wouldn't see somebody personally as like an area manager overseeing 12 of, you know, 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? You know, haircuts are not getting offshoreed. Nobody's, though I have seen some robots cutting hair recently. Yeah, automated. Are we going to have automated haircuts? 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 little machines that do nail polish now, too. So the nails are already getting automated.

You just put your hand in this machine. 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. They do not. 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 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. Because that's really what drives, you know, the demand for something like this is just, are people going to

continue to be more and more motivated to own business? I think there are a lot of indications that is the case. I talked to the guy who does Mrs. Gurdley'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? Are there like? No, no.

This is a, but it can be. I mean, certainly we have places like that. This guy is pretty good. He has rules. Anyway, so you have to get like 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 we work, 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, I hear you that. 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 than 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. 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 break-even 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. which he just says that they've got, you know, positive cash flow. So didn't do us a lot of detail. I will bet 50 bucks 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. So you are in 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 averaging money and they can't. it because it's in a terrible location. And that's what he signed a lease where 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 can pursue them 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. Heather, I have that bad. Did you want to, though?

Sometimes you got to do it to get the deal back. 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 and, you know, 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, you know, 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, you know, 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 get second guess 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 on asking price. Like, I don't know. That's over six times. So I will say, I have seen these trade for ungodly multiples relative to other, you know, 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 Eva, 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 we work 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 back end 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, 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 can cut your cash flow 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 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 and 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, than that, I think that there's upside if they can get in and grow it. And presumably that there is, you know, capacity to do that. Okay. Well, let's wrap up here. I'm thumbs down. This, me know, likey.

Thumbs down too. This ain't no pizza boat. That's what I have to say to you guys. Right. Right. 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, you know, 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, 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, you know, maybe that changes things if I understood that better, but I would pass on this one. Yeah, and I'm thumbs down basically just because of the valuation.

I'm not in the real estate game and don't want to compete with those who are. All right. Well, good news. And sorry for Ken Stein, the listing broker. 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, it's pretty cool. Awesome. All right. See everybody next week.