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Resources & Development - Spa Value

How Much Is Your Spa Worth?

By Skip & Marc Williams

Spas have been around now for several years and are beginning to be purchased and sold as a commodity or business investment.  If you already own a Spa then you’ve probably wondered how much your Spa Business is worth, even if you are not ready to sell it.

As you have probably already learned, the Spa Business is tricky.  Each Spa has its own personality, varying in size, services, pricing, and most certainly it’s earning potential.  So how does one determine its value?

When assigning a value to your business you must remember that to a Buyer, your business must be a “worthwhile investment”, which means he/she must be able to recoup their investment and begin to make profit on that investment within a reasonable amount of time. 

For example; A Buyer would not want to invest $300,000 to $500,000 for a business that would make him/her the same amount of money they are presently making in their existing job, especially if that meant that they would need to leave their job to manage this new business. 

Historically there are three methods used when it comes to business valuation.  When placing a value on a business it usually assumes one or more of these methods.

The first method is the “Asset Value”.  This method takes the replacement value of all the Furniture, Fixtures, and Equipment (FF&E), minus depreciation, plus the Inventory value, adjusted for stale inventory, plus the depreciated value of the build out (or construction), and real estate value (if applicable).

When you add all of this up you have determined what the value of the assets are.  In the Spa business this would only be a good way of valuing your business if you have low or non existent levels of profit, because as a business, this may not be a good investment to a Buyer, however, purchasing someone else’s assets can be easier than starting a new Spa Business from scratch. 

The second method is the “Market Value”.  This method works much the same way as when you buy a home, your real estate professional, your appraiser, and your lender will usually “pull comps” which means they look at other similar homes in the same geographic area and look at what they have recently sold for.

Business Appraisers often do the same thing when determining the value of a business.  The problem with using this method for the valuation of Spas is two fold.  Firstly, there is rarely much data (especially recent or relevant data) available within a geographic region for Spas sold and how much they sold for.  Secondly, as stated earlier in this article, no two Spas are alike in size, service offering, etc.

This method is best used with businesses that are very similar from facility to facility, such as a gas station or convenience store, and NOT usually a good method for Spa Valuation unless the facility is part of a franchise that you could compare it to other VERY similar stores within the franchise chain.

The third and last method is the “Income Value”.  This method looks at the earning potential of a business and bases its valuation on a “reasonable return on investment”.  This assessment is best left to a professional, but will usually yield Sellers a higher value if they have been diligent at building a profitable enterprise, and will make sense to the Buyer as well because he/she will know what their return on their investment will likely be.

The Spa Business Valuation Professional will first determine what your Spa’s present adjusted earnings are.  He/she will adjust your net profit by backing out taxes, depreciation, owner’s auto leases, above/below average management salaries, and other expenses that cloud the picture of the “probable earnings”. 

Once the Professional has determined the “adjusted earnings” he/she must then determine the Income Capitalization Rate or “Cap Rate”.  The Cap Rate is a number used to multiply the adjusted earnings to determine a “reasonable value” of the business.  This rate is usually stated in the form of a percentage which you can convert into a multiplier by simply dividing the Cap Rate into the adjusted earnings.  For example a 33% cap rate would equal a 3X multiplier and a 5X multiplier would equal a 20% cap rate.

Each type of business has its own range of multipliers.  These multipliers are further refined based on a risk assessment of continued earnings.

This is the most commonly used method for the valuation of US based businesses.  It rewards Sellers for their ability to build a profitable business and reduces the risk to Buyers by giving them a predictable rate of return on their investment. 

If your Spa business is profitable, then this is probably the best method for cashing in on your hard work.  When we at Resources & Development are asked to perform a Spa Business Valuation we use both the Asset Valuation Method and the Income Valuation Method and compare them.  Whichever one yields the higher value becomes the most logical method to use in determining the value of your business (more information click here). 

When buying a Spa business here are a couple of words of caution. 

First, DO NOT buy the corporate stock, instead buy the assets of the business which can include trades secrets, business name, client lists, and other such items that may not be considered hard, tangible assets.  This will allow the Seller to retain the liability for any of the business they did prior to the closing of the sale.  This also means that the Seller assumes the repayment of any and all liabilities (debt) that the company has recorded on its books at the time of the sale. 

If the Buyer wishes to assume one or more of these liabilities the Seller should reduce the sale price accordingly.  This could be a creative way for the Buyer to finance a portion of the sale, without borrowing it all from a lending institution.  This leads me to the second caution which is somewhat unique to the Spa Business.

Second, if you purchase an existing Spa Business and plan to keep it open under the same name, then you will probably want to assume the liability of the outstanding Gift Certificates.  What you will need to do is determine the amount of outstanding Gift Certificates.  If the accounting was done correctly then this number is already on the Balance Sheet for the business, but beware that many Spas do NOT account for Gift Certificates properly and you may have to do some investigative work to determine what the outstanding balance is.

Once determined, you should not only reduce the sale price by this number but require the Seller to indemnify you against any “old” Gift Certificates that get redeemed over and above the agreed upon value that you have already determined. 

Whether you are a Buyer or a Seller, determining the Value of any business is not always easy, but with the variables in the Spa Business it is best to get the help from a professional, a professional that understands the Spa Business, to help you navigate these perilous waters.

Best Wishes & Healthy Profits

Skip & Marc Williams

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