Hair salons can be significantly profitable — stylist Ted Gibson charged a cool $1,200 for a cut in his now-closed New York City salon. Few salon owners reach celebrity status and command such rates, but the nation’s 1 million-plus salons and spas do enjoy annual sales of $46 billion, according to the Bureau of Labor Statistics. Without proper financial and legal planning, however, even the trendiest shops can crash and burn.
“There are a lot of pieces and parts that really need to be thought through and organized before you open your doors,” says Elizabeth Fantetti of the Professional Beauty Association.
Like with any new venture, there are some steps you should follow. Here are a few to get you started:
1. Pick a business model
Different salon types have vastly different business models. Will you open a salon from scratch, buy an established salon or purchase a franchise?
Celebrity stylist Janine Jarman was 24 and fresh out of beauty school when she purchased a failing salon in Los Angeles in 2006. The owner had fallen on hard times, but the salon had a solid location with proper equipment. Jarman scored such a great deal, she didn’t need outside financing. She rebranded it with a memorable name, Hairroin, and her shop became a major success.
Will you operate on commission or chair-rental model? With chair rentals, stylists are independent contractors who carry their own insurance. Jarman says that’s ideal if you’re teaming up with a few friends to run a small operation. But if you want to grow your salon, Jarman advises, do commission. The downside: You pay employee-related expenses such as workers’ compensation insurance. Some salons operate as hybrids, though Jarman warns against starting with one model and later switching, since stylists are likely to leave.
2. Explore partnerships
Seek strong business partners, whether it’s an investor or simply a strong mentor group, Fantetti says. “The most successful salons are those that have somebody who focuses on the day-to-day business,” she says, “and then another person who focuses more on the creative end of it.”
Consider partnering with a product company or line. Jarman works with Sebastian, which has sent her to various business academies for salon professionals. But, she adds, “make sure they support you in your business and continue to be an ally to push you to the next level.”
3. Create a business plan
A shocking number of potential salon owners launch without a business plan, says Kevin Ruane, president and CEO of Castleton Capital. His company owns Quest Resources, which specializes in equipment financing for salons.
“Your success will be predicated on the fact that you come with a plan,” he says.
Outline not just business needs, but also your brand identity and marketing strategy. A business plan estimates costs so you know your financing needs.
Your success will be predicated on the fact that you come with a plan.KEVIN RUANE, PRESIDENT AND CEO OF CASTLETON CAPITAL
“You can always pay debt down, but you can’t have $20,000 magically appear if you didn’t forecast and plan properly,” Ruane says. He recommends creating a plan under the guidance of an accountant and attorney.
4. Obtain financing
Minus significant cash, you’ll need outside financing. Since business is seasonal and it takes time to get established, Fantetti recommends at least six months of capital in the bank in the beginning. It’s virtually impossible for startups to qualify for business loans, however, so entrepreneurs usually rely on family, friends and personal loans. Here is our list of startup financing options.
Once you’ve been in business at least a year, you can try banks and credit unions, but standards are strict, and application and funding can take weeks or months. If you’re not succeeding with traditional lenders, consider online alternatives, where requirements are looser and funding is quicker.
Remember you can smart small, Ruane says: Just because your space has room for eight workstations doesn’t mean you have to put them all in now. “You can always come back as you’ve paid down debt and borrow more,” he says.
5. Select space carefully
Ruane says location and space greatly determine costs. The average salon in America has six operators and is 1,200 square feet, Fantetti says, but this can vary.
Carefully read leases for potential spaces to understand what is and isn’t included by the landlord. For example, Ruane says, will they provide tenant improvements or offer an allowance if you sign a five- or 10-year lease? Is it a raw space requiring electric wiring and HVAC installation? That adds considerable expense. Before signing, have a general contractor review the lease and space to estimate needs and costs.
6. Consider equipment financing
Many new salon owners struggle to find financing to cover equipment, Ruane says. A bank may offer $50,000 for building out space but not the $30,000 needed for equipment. If so, you can turn to an equipment financing company such as Quest Resources. Make all your payments, and you own the equipment when the lease ends.
You’ll need outdoor signage, phones, sound systems, desks, workstations, chairs, wash stations, cabinetry, mirrors, display cases, washers and dryers, and furniture for the office and backroom.
Ruane says equipment costs vary significantly, so comparison shop. Your equipment financing company creates a financing plan based on your budget and can work in cooperation with your other lender.
7. Tackle legal requirements
Numerous permits are required before opening a salon. Fantetti says this includes a business operation license, a certificate of occupancy, a license to sell retail, a building permit, a fire department permit and a state cosmetology license. She recommends visiting websites of your state and local municipality to see what’s required. Most accept applications online. Confused? Consult a local lawyer.
Additionally, you must choose a business structure for your salon, such as a partnership or incorporation. Decide with an attorney, who can explain tax and legal ramifications.
Here’s some info on money-saving online legal services for small-business owners.
8. Hire wisely
A common struggle for salon owners is finding a competent team, Fantetti says. It’s key to consider how you’ll find stylists. You could develop relationships with local beauty schools for a steady stream of candidates. When pursuing new graduates, Fantetti says, an educational plan and mentor training program are crucial.
9. Budget and create goals
A budget ensures costs don’t exceed revenue. “Do the math and really know what it takes for your company to flourish,” Jarman says — even down to cost of toilet paper. Jarman, her manager and business accountant review the books monthly. Her accountant helps create an annual budget with weekly goals.
If you stick to the numbers, it really helps you understand what to do for your business without just taking shots in the dark. -JANINE JARMAN, OWNER OF HAIRROIN
With set financial goals, she says, you can find creative ways to meet them, such as promoting stylists to a higher pricing tier, offering new treatments or experimenting with opening hours. “If you stick to the numbers, it really helps you understand what to do for your business without just taking shots in the dark,” she says.
10. Join trade organizations
Trade and professional organizations, such as the Professional Beauty Association, provide industry content that Jarman finds helpful. Fantetti says the organization has myriad “business blueprints” for salon owners — non-compete forms, HR manuals, marketing ideas, etc. There’s also an email listserv of salon owners and managers for peer advice.
Other trade groups to explore: Association of Cosmetology Salon Professionals, Salon & Spa Professional Association, International SalonSpa Business Network, Associated Hair Professionals and Hair Artist Association.
About the author
Emily is a personal finance writer at NerdWallet. Her work has been featured by USA Today and MarketWatch. Read more
This article originally appeared at NERDWALLET