Answer: There’s a Boom/Bust
cycle to this business that franchisors don’t want you to know about.
Want to make a six
figure income working a few hours a week?
This is the pitch that numerous new “salon suite” franchisors are
suddenly offering. So, is this a dream business or a scam? If
history repeats itself, then it will most likely end up a scam.
What’s the Salon
Suite franchise concept? In the last
couple of years, there has been an explosion of franchisors offering to show
you how to open your own “salon suite” franchise, which they claim is the
latest innovation in the beauty salon industry (even though it’s not new at
all). They offer to help you build a
“salon mall” which will allow you to rent 30 or so small salon suites to
hairstylists, and then work part-time collecting fat rent checks for years to
come.
So, what’s the catch? The big catch is that you have to invest
around a half a million dollars or more into tenant improvements and equipment
that has ZERO residual value if the business doesn’t work. Each location is expected to throw off around
$100k/year in profits after it becomes fully leased, so it will take at least 5
years to pay back your investment before you actually start earning any money.
Your pay-back time is much longer than 5 years if you count interest, lease-up
time, or cost of capital on your investment.
You’ll also probably be expected to personally guarantee over $1 million
dollars in lease payments over a ten year period, so your total personal exposure
is at least $1.5 million dollars.
So what’s the problem
with waiting five years to pay back your investment and personally guaranteeing
a lease? There’s no problem if it’s
a sound investment with assured profits for years to come, and residual value
if it doesn’t work out. The problem is
this: you may have high occupancy during your initial few years, but
within a few years, you will almost certainly have competitors. Even if your salon is bigger and better,
these competitors will peel off a few of
your tenants who like the competitor because it’s newer, or is closer to their home, or is decorated more
to their taste, or any number of other reasons.
And these competitors don’t need to take much of your market share
before you start to become much less profitable or even unprofitable. You only have to lose about 10 tenants before
you become unprofitable in this business.
AND, with competitors nearby, you will always have a price war
going. After all, there are only a
certain number of hairstylists who want to have their own salon and have the
wherewithal to do it in any given locality.
You’re going to have to share this group with your new competitors who will
definitely pop up when they see what a great business model you appear to have.
The Franchisors won’t
tell you this, but this boom/bust cycle has happened before. These new franchisors say on their websites
that they have a “new concept” in salons that is revolutionizing the industry. That statement is utterly false. The salon suite concept is not new. There have been many, many salon suite salons
that went through the boom/bust cycle in Dallas, Arizona, and other places as
early as the 1980’s. You don’t know
about them because they’re no longer in business. They didn’t go bankrupt because they didn’t
have nice salons. They had beautiful
salons. They went out of business
because people saw the concept, thought it looked like an easy goldmine, and
opened competitors, small and large, a few years later.
The Dallas example: Ask anybody who was in the beauty business in
Dallas in the 1990’s. A company called Salons
in the Park introduced the salon suite concept salons throughout the Dallas
area – all their 10 so locations were beautiful, well-located, and fully
leased. Where are they now? All closed because within 5 years, there were
competitors in every strip mall, most of which are also out of business now. Now, new companies like Phenix Salon Suites
are opening in the Dallas area with nice, new, fully-leased salons that look
very similar to the Salons in the Park salons 2 decades ago. How long will it take before history repeats
itself, and these new franchisees are out of business and lose their life
savings in the process?
The salon suite
concept isn’t new – it’s only new to the new Franchisors. Why aren’t the franchisors telling people the
truth that this concept has been tried before and ultimately failed to be
profitable long term? The charitable explanation is they don’t even know. Most, if not all, of the companies that are
franchising salons haven been in the salon suite business for less than 10
years and some for less than 5 years.
Phenix Salon Suites started their first salon suite salon in 2007, Sola Salon
Studios started in 2004, My Salon Suites started even later. The list goes on. Maybe they know about the former tragic
endings for this concept, maybe they don’t.
They probably all think that competition, if it comes, won’t hurt them,
because they have a superior salon offering.
Somebody always builds a better mousetrap, though, and if tastes change,
and you’re stuck with an expensive salon build-out that is expensive or
impossible to change, you’re out of luck and your life savings are gone.
Why are the Salon
Suite companies Franchising? It’s
much better to put the financial risk for this boom/bust cycle onto franchisees
than to take it on themselves. They make
money selling franchises, not running successful salons. If the franchisee doesn’t ever make their
investment back, that’s unfortunate, but they have all the franchise fees in
the bank, so it won’t hurt them. Sure,
they’d like ever y one of their franchisees to be successful too, but if they aren’t they’ll still be sitting pretty.
