Are Salon Suite Franchises a Scam?

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.