Tanning Salons: Should You Consider Buying One?

Statistics indicate there are roughly 20,000 professional indoor tanning salons and another 15,000 to 20,000 locations—such as health clubs, spas, video stores and beauty salons—that house one or two tanning units in keeping with tradition, the Midwest and Southeast have the highest number of tanning salons per capita, with Ohio, North Carolina, Michigan, South Carolina, Illinois, Indiana and Florida leading the charge.

"The majority of U.S. indoor tanning facilities are small businesses and more than 50 percent of them have female ownership, compared to 25 percent of businesses in other industries, according to the U.S. Census. Indoor tanning also provide jobs for approximately 160,000 employees annually."

"The majority of freestanding tanning salons have at least 10 rooms on average. of those, most have four to five levels of tanning and a sunless unit. In fact, 37 percent of salons surveyed for our 2008 Top 250 Salons issue reported having at least five levels of tanning services, while only 2 percent had one level of tanning. A typical 10-unit salon may feature one big bed, two mid-range or premium beds, a UV standup, five entry-level beds and a sunless unit. Survey statistics reveal that 63 percent of salons reported an average single-session price of $7 or more; only 3 percent charged $5 or less."

Source: 2008-09 Fact Book: "The State of the Industry Report" www.lookingfit.com
Government Regulations

Indoor tanning salons are now charging customers a 10 percent surcharge taxes that went in March 24, 2010. This is just one of the changes Americans are seeing as a result of the U.S. health-care signed into law by President Barack Obama.

The Patient Protection Care Act of 2010, sometimes derisively referred to as ObamaCare, has a lot of elements. There is a heated constitutional argument going on as to whether doing nothing (i.e. not buying health insurance) constitutes interstate commerce.

The law added Section 5000B to the Internal Revenue. 5000B is an excise tax on indoor tanning services. Whatever the charge is for your indoor tanning services 10% is added to it. I guess that is to help pay for all the bad health things that indoor tanning does to people. At the moment I’m sitting here with a literally crippling sun burn from the free outdoor tanning service provided by the universe. That’s one way to beat the excise tax. Another part of the bill went into effect May 2011 which requires that no one less than 18 years of age can go to an indoor tanning facility.

What does it take to succeed?

The industry is shifting to more modern high-end salons versus the traditional 'mom and pop' style locations. Gyms nail salons and beauty shops continue to add single tanning beds. This is perceived as a threat but novice entrants are rarely successful in tanning.

Location is everything: Best locations are near health clubs, gyms, massage faculties, hair salons, nail salons or day spas.  Even a busy supermarket can bring business.

Marketing is everything. I suggest you spend 14% of the gross income on promotional actions that go directly to your target market.  High quality presentation and service is the next key to success. There are a lot of competitors so you have to have something special. Cheap pricing is not the key. Perceived value is. Having state of the art stand up equipment is where the industry is going. Lay down beds are on their way out.

Due Diligence

This industry like many others can generate a lot of cash. It is very common in cash businesses for the seller to tell the buyers that the books are not accurate due to extra unreported income. This raises the need to have a due diligence expert or CPA with due diligence experience to review the books and records.  From 20 years of being a business broker and doing due diligence, I have learned the secrets of proving cash sales for the buyer and seller.  It cannot automatically be assumed there is or is not cash income.

Another area that can be confusing to both buyers and sellers is in regards to payroll. Some spas pay the staff as employees while others pay as independent contractors. Sometimes staff is paid bonuses that may or may not be shown on the books. I have run across situations where the payroll on the financials showed 40% of gross but the actual payroll records showed payroll to be 80% of gross. This is not necessarily due to seller fraud or that the seller was intending to misrepresent the information.  Since most people using quick books are not CPAs they do not understand accounting. It is common for bookkeepers to not understand how to make the necessary yearend adjustments to properly account for payroll taxes and bonuses. This many times explains why the tax returns have the correct payroll but the books do not. I find that I have to restructure most sets of books, to some degree, in order to properly reflect the net income of the business.

Due diligence usually costs less than 2% of the purchase price. Due diligence is only 50% looking at the books and records.  What is learned from having the books and records reviewed has historically been worth 10 to 20 times that amount in savings. More importantly, a full review of the operation of the business and an understanding of all the income sources and the different expense categories allows a buyer to determine if this business is really what he wants to invest in. It periodically happens that a buyer decides to pass on a business, after due diligence is complete, even though the expected profit is there.

About The Author:  Willard Michlin, CPA offers business buyers Due Diligence Services (Second Opinion, Offer Assistance, Final Due Diligence) when they are thinking of making an offer on a business or in the process of investigating a business purchase. He has written numerous articles on the due diligence process and can be reached direct at 805-428-2063 for more information and an appointment.

Categories: BizBen Blog Contributor, Business Valuation Issues, How To Buy A Business, How To Sell A Business