Because they multiply different profit figures. The lower multiples, around one to two and a half times, apply to the profit left for a working owner before they pay themselves. The higher ones apply to profit after paying a manager, which is a smaller number.
Owner-run salons are valued on what is sometimes called seller’s discretionary earnings: net profit with the owner’s own salary, dividends and personal costs added back. It is the money a working owner actually lives on, and it is how almost every independent salon is priced.
Larger salons and groups are often valued on profit after a manager has been paid a market salary to do the owner’s job, which accountants call adjusted EBITDA (earnings before interest, tax, depreciation and amortisation). Because the manager’s pay has been taken off, the figure is smaller, and buyers apply a bigger multiple to it.
A worked example
A salon leaves its owner £60,000 a year. The owner works in it full time. To run it without them, a buyer would need a manager costing, say, £30,000.
- Valued on the owner’s profit: £60,000 at 1.5 times is £90,000.
- Valued on profit after a manager: £30,000 at 3 times is also £90,000.
It is the same salon at the same price, measured two different ways. The mistake to avoid is taking the higher multiple and applying it to the bigger profit figure, which would suggest £180,000 and leave the salon unsold.
Our Salon Price Index shows salons advertised at a median of around twice their stated profit, which is consistent with the lower measure.
Sources
- Anglo Swann Salon Price Index angloswann.com