Hello to everyone, we hope your year is off to a good start!
The years are changing so quickly now that it’s becoming more difficult to remember what year it is, and the same goes for consumer habits.
Each new year brings a bevy of trend reports, which I always enjoy reading for their expert insights on particular sectors. Some of my favorites from this year include Retail trends from Shopify, Global Consumer trends from Euromonitor, and Skift’s Travel trends. The Global Wellness Institute always gives us detailed and relevant information on trends affecting the spa and wellness world in their global Wellness trends report. And this year, I found a really interesting piece on mindfulness trends in design:retail magazine, with examples that combine experiences and retailing. All of these are excellent reading on their own, and there are many ideas and concepts to glean and adapt to your own spa and wellness business needs. But after you read them all, you will probably see that there are really just a few macro trends that we need to adapt to.
Here are the big three that stood out to me.
The Culture of Me:
Probably a result of both the growing population and the explosion of technology attracting our time and attention, people just really want to stand out as an individual. Consumers don’t just want experiences, they want experiences that are tailored to THEM. You’ve no doubt seen the proliferation of DIY shops, where you can make artwork, or ceramics, or learn to cook. You can find myriad sources online where you can personally design clothes, sneakers, artwork, you name it, and have it delivered.
This concept certainly fits into what we deliver in spas – we just need to be hyper-focused on the personal aspect of personalized service. Greeting clients and establishing a real connection, using their name throughout their visit, and inviting them to return are no-brainers. But beyond that, how about simpler menus with swappable elements such as masking or hydrating steps? Perhaps a self-help mask or serum bar in the lounge or locker room? Customization options at retail, as pioneered by Bioelements many years ago, but possible in many iterations today. A beneficial side effect is that these options are not available online…
Community, in several versions:
- One; consumers today, especially millennials, like to share their experiences with others. Going into a room for a treatment, alone with the technician, which boomers have always enjoyed, is presenting new challenges for spas. Quiet, dark, library-like spa spaces are not an appealing destination for many consumers today. This is a sea change that has to be handled from the design of facility and menu through marketing and operations. But it clear that socializing and enjoying experiences with others needs to be woven into our spa fabric.
- Two; the sharing marketplace. The explosion of ride-sharing, co-living, co-working and material goods exchanging marketplaces is unprecedented. It has its roots in economic pressures, but once you get in the habit, it can feel wasteful to buy a new book when there are perfectly good “slightly used” options. Fortunately, spa experiences can’t be recycled! But what happens to slightly used or returned retail products, is there a women’s shelter that could use them? What about a “buy one, give one” promotion, a la Tom’s shoes? Just thinking out loud.
The Discount Mindset:
This is another concept that really took root during the recession, and has not gone away. Consumers have always been attracted to deals, and this holds true even in high-end and luxury markets. At Wynne Business, we have never been a fan of discounting spa services, but you do have to recognize the realities of your marketplace and adapt accordingly. If you are going to have to promote certain treatments in order to sell them, you will need to price them accordingly and preserve your margin.
Promotions that feature value-adds are always a good approach; a full-priced facial with a free mask or serum, or an 80-minute massage for the price of a 50-minute, still preserve your basic pricing but allow the consumer to feel they are getting a deal. How about a “bring a friend” promotion, that can also address the community aspect? It would appear that the search for a “deal” is here to stay, so your spa business has to participate while preserving profitability.
I’d love to hear your ideas and thoughts! Please visit our Facebook page and share your feedback.
Welcome to the new year!
The older I get, the more New Year’s Day reminds me of the movie Groundhog Day; I can’t believe it’s here again, already! The fact is, the more quickly the years tick by, the more urgency you may have as a business owner to avoid procrastinating in regards to your spa business.
New Year’s resolutions have actually been around since the ancient Babylonians marked the new year as a time to repay their debts and return borrowed objects, 4000 years ago. You know that list of changes you’d like to make, or new approaches you’ve been meaning to try? The time is now, no need to wait until another year, or two, or five, goes by. Select one activity from each of these four areas, and get to work! Read more
The recession may have battered the spa industry and shut down many facilities, but we’re finally seeing a resurgence in startups–many of whom aren’t even using the “S” word (that would be “spa”) to describe themselves. “Wellness” is a watchword for many of these next-generation businesses, but other trends inspiring spa entrepreneurs include co-working and organic lifestyles.
Few would-be spa owners understand just how much capital they’ll need to invest to get their new spa up and running–and to nurture it through its first 18 months, the critical make-or-break period. The pressure from competition is usually underestimated in new spa business plans, and these businesses can crash quickly if spa entrepreneurs are over-optimistic and under-funded.
At the high end of the market, spa guests are seeking a new approach to luxury that’s based on authentic experiences rather than over-the-top opulence. That doesn’t always translate into a strong demand for esoteric services, though. The services that guests say that they are interested in and the ones that they actually purchase (especially on a regular basis) can be very different. Creating an appealing but unique menu is a must. It’s expensive to educate the marketplace.
Whether they’re in an urban setting or a remote one, one of the biggest impediments to new spas’ growth is finding enough talented therapists. A solid in-house training program is critical to success in every market. Not only does it improve therapist quality, it aids in employee retention: spa workers value education very highly. Lower employee turnover pays off big in customer satisfaction and pure bottom-line profit.
While there are still spas for sale–a great way to fast track a startup and reduce project cost–many of them are not listed with business brokers and identifying them can take a special approach. Sometimes a would-be spa developer is too deeply in love with their particular vision to recognize a fabulous opportunity in a distressed business. Differentiating a “distressed” business from a “toxic” one is critical.
To help this wave of entrepreneurs avoid the pitfalls of developing a spa or wellness business, a new one-day Spa Startup Workshop is being offered on Saturday, October 3, immediately prior to the Wynne Business Spa Director’s Management Intensive (October 4-6) in Philadelphia’s Historic District.
For more information about the seminars, visit our management seminars page or call 610.368.6660.
Tuition details, including earlybird and multiple registrant discounts.
It’s a sign of the times. There are lots of distressed spas on the market right now. Many of these spas look like real bargains, selling for pennies on the dollar of their replacement cost. How is a potential buyer to know what the business is really worth?
Valuing a business is both a science and an art. The science includes the valuation formulas that are typically used. One valuation formula is “multiple of earnings.” Earnings include net profit, but it’s typically adjusted upward with “add backs,” things the business owner has written off that are primarily for their personal benefit, such as their salary, a car or business-with-pleasure travel expenses.
The art? That’s the value of the business relative to the buyer’s opportunities. Strategic value is just one of these considerations. For example, if you already own a spa and you’re considering the purchase of a second spa in a nearby town to expand your brand, and you can leverage an existing back office, that business may have more value to you than to the buyer who’s starting from scratch.
Is the seller using a business broker? If so, the “book,” or sales documents for the spa, should be filled with important data that will help you assess its real worth. There’s also a lot of fluff in there, but the numbers are the most important.
The financial statements should tell you much of what you need to know–that is, if they’re in good shape. A spa that’s for sale is probably losing money, so expect to see that reflected in the profit and loss statements. If things look too rosy, ask to see a P & L that has not been recast for the sales package, so you can understand what the add-backs are quickly. (The business broker should have this information at his or her fingertips anyhow.) We want to know what the spa has really been doing in the last year. Previous years were probably better–but that’s not terribly relevant these days.
Once the add backs have been calculated, you might see a small profit. Here’s the sad news for that seller, and for you as the future owner: spas generally sell for 2-3 times earnings (profits.) My brother-in-law, who’s in biotech, on the other hand, can sell his company for 18 times earnings. Spas and salons (and most personal services businesses) are at the low end of the scale when it comes to valuation.
That’s right; a salon with a net operating profit of $50,000 may sell for $100,000, but a biotech company with the same earnings could fetch $900,000.
It’s not just our low profit margins that dampens value, but the flighty nature of our workforce. Plenty of spas and salons that are sold lose a substantial number of their service providers. Spa and salon employees spook easily, often not waiting around to see if a new owner will actually improve things. As we know all too well, even the loss of one good employee with a strong following can mean a substantial drop in revenue, as clients follow them elsewhere.
Of course, it’s not just profit, but the balance sheet, that will determine the valuation of the business. The business is worth less if its assets are outweighed by its liabilities. One potential source of liability is unredeemed gift certificate/gift cards. You must be confident that the documentation of this liability is complete–and it often isn’t.
If you are simply purchasing the assets of the spa (an Asset Purchase), such as its lease and its equipment, and don’t plan to use the business name, you don’t have to assume its liabilities, including gift liability. Even so, it may be a good marketing idea to redeem gift liability in part or in full, on a voluntary basis and for a limited term. The value of the goodwill generated will probably exceed the hard cost of redemption.
You may be looking at a spa whose earnings with addbacks are $50,000 and using a multiple of 2x to give it a value of $100,000. But their gift certificate liability is $200,000. Here’s where “art” comes in, again–how do you determine the real liability there, since we know not all gifts will be redeemed? This is where a spa management consultant can help–looking at historic trends, aging of the gifts, etc., to produce a realistic number. Maybe that number is closer to $80,000, and you’ll only end up spending $40,000 in payroll and backbar supplies to service that $200,000 liability. If you want to use the spa’s trade name, you’ll pay for this. But an asset purchase, where you wipe the brand slate clean, can eliminate the liability. Will changing names and rebranding the business cost you more than $40,000, in hard costs and lost business?
As well, you need to know the laws about gift certificate expiration in your state. Some spas pay tax on their gift revenues as they come in (the most prudent and IRS-favored approach); others wait and pay taxes as those gift certificates are redeemed (setting a spa up for an ever-growing tax liability.) If you want to sell your business and you’re in the latter camp, a buyer will have to consider this.
In California, the value of unredeemed gift cards can be converted from a liability to income after three years of dormancy. By law, the gift cards don’t expire, and you still have to honor them, but at least you can get it off your balance sheet.
We’re even aware of spas being “sold” for the price of assuming gift liability and a lease–no money is being exchanged in some of these deals. Landlords who are desperate to avoid vacancies in their shopping center real estate (which depresses rents and makes any other space less desirable) are sometimes willing to provide free rent–we’ve seen periods up to one year.
The decision to retain the spa’s existing name and branding is one to approach carefully. Look at online review sites to get a sense of how well the spa is managing its customer relations. It’s usually not possible to interview employees, but sometimes key management employees are privy to an owner’s decision to sell.
Reputations are on vivid display online, though you do have to take ratings with a grain of salt, since most review sites skew to the negative. Yelp, most notably, will “age out” positive reviews posted by people who write no other Yelp reviews, after just 90 days. Google aggregates reviews from different sites, providing a cross section. Some spas ignore online review sites, like Yelp–to their peril. If you think the spa’s name is “radioactive,” then don’t hesitate to rebrand. If the spa is established, with a reputation that’s slightly tarnished, an aggressive “under new ownership” marketing campaign, followed up with real improvements, may work the needed magic. Keep all of this in mind when thinking about how much you’re willing to spend on a spa.
This is merely an introduction to some important fundamentals of valuing a spa for sale, but it’s far from comprehensive. It’s essential to get help from a reputable business broker experienced in the sale of small businesses, and doubly so if the sellers are not using a broker themselves.
Owners are often emotional about selling, and probably under a lot of stress. It’s helpful to have a cool, collected third party between you and them. The first notion a seller needs to discard if they’re serious is the idea that they should be able to “get their money out of” a failing spa. It’s not going to happen–but you don’t want to be the one who gives them the reality check.
Next time: financing the purchase of a spa
I was doing a hardhat tour of a new spa in the wine country yesterday, one we did the space plan for at the soon-to-reopen Hotel Yountville. (Yes, the teeny Napa Valley town whose restaurants are famed for possessing more Michelin Stars than most major cities.) I remember being a bit challenged by the dimensions of the floor plate as I was working on the design a year ago. But as I walked through it yesterday, I was delighted by what I saw.
Interior architect Lisa Holt of DLS Hotels, our client, did an impressive job of creating a light-filled, airy and charming interior as she took my design from two to three dimensions. Lisa has been an enthusiastic spa visitor and has actually owned and operated a small luxury hotel and spa with her husband and DLS partner David Shapiro.
Fortunately, one direction we could go was up. Lofty ceilings and spectacular, tall treatment room doors create a slightly Alice-in-Wonderland feeling.
In the wine country, the last place I want to be is a cave (unless it’s filled with champagne.) Lisa brought the outside in with extensive use of tall windows, repeating the elegant rhythms of the doors, and we designed small private garden sitting areas off each treatment room. Bringing the outside in takes a small footprint and helps it to live large. The wet areas of the spa give onto a lounging pool, extending the spa experience effortlessly outside.
Being able to get outside while at the spa is a real luxury, and even a little bit of outdoor space can enhance the guest experience dramatically. I know that I’m willing to spend more time at a spa when I can be outside sometime during my visit. Resorts usually get this right and plan for it from the outset, though I’m often surprised at how catacomb-y spa designs can be and cut off from the outside.
Outdoor space is not always an option, especially for day spas in retail settings. But sometimes an opportunity is right under our nose, in the form of ugly-duckling outdoor space that has become invisible to us through its very familiarity. It’s hard to look objectively at your own space, especially if you’ve been in it a long time, so sometimes it’s worth consulting with a designer to see what they “see.” One of my favorite publications for inspiration for small outdoor spaces is Sunset. They have a long tradition of outdoor makeovers that are simple, clever and inexpensive.
A few years ago we turned some found space on a second floor balcony at Preston Wynne Spa and turned it into a cabana-curtained loggia replete with cushy furnishings, outdoor rugs, and a private pedicure area for al fresco treatments. Five feet wide and thirty feet long, it was not useful for much of anything and surfaced with a very unattractive waterproofing seal. We added decking panels that sat atop the surface to create a more attractive foundation, and a fountain to muffle outside noise, as well as lush planter boxes (these also helped create more privacy.) With some soft goods (which are easy to refresh each year) it has become one of the most popular features of our spa.
Bonnie Waters at Changes Spa and Salon in Walnut Creek, California, found an unloved easement between a parking lot and the side of her building, a plain little patch of tanbark and forlorn shrubs. She convinced the building owner to allow her to use the space, which had no other purpose, and developed it as a charming outdoor terrace for her spa’s newly expanded retail and party room, screening it from the parking lot with landscaping. Because she couldn’t make permanent changes to the easement, she used decomposed granite with pavers set into the soil, rather than mortar.
Probably the best example of enhancing the guest experience with “found” outdoor space is at Osmosis Spa Sanctuary in Freestone, California. After years of operation as a landmark day spa specializing in Japanese enzyme baths, Michael Stusser, the visionary owner of Osmosis, carved a spectacular and authentic Japanese garden from a patch of creekside brush. This work of art is now the highlight of any visit to the spa and has created a remarkable identity for Osmosis.
I’m looking forward to experiencing the new spa at Hotel Yountville, inside and out, after our opening during Harvest season. Spas at their best reconnect us to nature and a more natural way of being. Outdoor space is often more than a sum of the parts; it’s always a great value-add.