Of all business owners, salon owners perhaps have it good; the business of making people look pretty seems to be recession-proof, as the salon industry is expected to grow in leaps and bounds in the next few years.
According to statistics from the Small Business Development Center (SBDC), the combined annual revenue for around 86,000 establishments in the US in 2014 was about $20 billion. This revenue is expected to grow to $58.7 billion in 2019, thanks to increases in disposable income and declining unemployment. So if you’re planning to share in that multibillion revenue and you have the skills for it, now is the best time to open your own salon.
Even with the beauty industry’s positive five-year forecast, there’s no reason to go into the business blind. You need to know the fundamentals of opening a salon business, so your salon has a fighting chance. Here are the most important factors you have to consider before you establish your own salon.
- The legalities of owning a salon
As a small business owner, you have five possible legal structures to choose from when it comes to establishing your own salon: sole proprietorship, partnership, limited liability company (LLC), S corporation, or C corporation. Most small businesses are LLCs, so being an LLC is your best choice.
Setting up an LLC works best because they are flexible and are generally simpler. They are not required to be run by a board of directors, unlike corporations and nonprofits that must be governed by boards. Shareholder meetings and other managerial formalities are not needed in LLCs, either.
LLCs also keeps you safe from personal liability when things go awry. Your personal income and property is safe from risk, and the only money you risk losing is the money you invest in your salon. If you’re interested in opening a chain of salons, set up a separate LLC for each branch or location.
Another advantage LLCs offer is that they are highly flexible when it comes to tax treatments. As an LLC, your salon can be taxed as a corporate entity or a pass-through entity, so you can avoid paying taxes twice (once on corporate profits and another time on your personal income as salon owner). In some cases, LLCs with a C-corporation tax structure can funnel profits back into the business tax-free, saving money.
Plus, if you put up an LLC with a partner, you and he or she can divide profits however you want. For some, this is preferable to the shareholder setup, where profits are divided in proportion to the percentage ownership of each shareholder in the corporation.
Once you’ve decided which corporate structure to establish – you’ll most likely go for an LLC structure – you’ll need to file articles of incorporation or organization. When that’s done, you’ll be able to secure a federal tax identification number, which registers your salon with the federal government so the government can tax your business accordingly.
- Required permits for beauty salons
As opposed to the effort and money needed to get licensed as nail technicians or cosmetologists, a state license to operate a salon is relatively easy to get and affordable. Many salon owners say that getting an operating license is actually one of the easiest things to do as a newbie salon owner.
You’ll have to schedule an appointment with the state’s department of cosmetology, which should take no more than a few days. The actual license to operate a salon costs between $100 and $2,000; the costs depend partially on the length of the license.
Your salon will be expected to meet standards of the electrical, sanitation, and fire codes. You’ll also have to provide proof that you and your employees are all licensed to provide hair styling, cosmetology, or nail care services in the state your salon is in. Manicures, pedicures, and massages may also require additional licenses.
- Startup costs for a salon
Understandably, the startup costs for a salon depends on the salon’s size. Business experts and long-time salon owners recommend that new salon owners start out with at least five or six chairs and the same number of stylists.
Your salon must have at least 1,000 square feet of space to fit that many chairs. Depending on your preferred design, it can cost you anywhere from $75 to $125 per square foot to fit out that space from scratch. For instance, high-end salons in swanky areas can have startup costs of up to $300 per square foot.
Keep in mind that you’ll be spending on rent even if your salon isn’t fully operational yet. It will probably take you several months to set up the salon itself, while becoming fully operational with all the staff you need may take up six to nine months of your time. Plus, you’ll also have to spend money on supplies and software for accounting and inventory.
- Staffing expenses and ongoing expenses for your salon
Of course, one of your biggest expenses will be your staff. You can pay out your stylists in one of two ways, the first being commission. In the commission model, a stylist receives a percentage of the profits from the business he or she brings in. Commission rates can be anywhere from 35% to 60%, although many salon owners say that paying more than 50% in commissions will prevent you from making any money.
Some salons use a graduated commission scale to encourage stylists to bring in more business. In this setup, for instance, a stylist can keep 45% of the first $500 she brings in weekly, and 5% more for each additional $500.
The second way is through booth rental. In this setup, you’ll essentially be a landlord, and you’ll allow stylists to rent a chair in your salon in exchange for weekly rent.
Aside from your stylists and technicians, you’ll also need support staff, including hair washers, bookkeepers, appointment takers, and even stylists-in-training. Compensation for your support staff can take up as much as 10% of your salon’s total sales.
Aside from paying out everyone on your staff, you have to cough up for your stylists’ share of payroll taxes, rent and property taxes, supplies, marketing and advertising, maintenance, and insurance.
You also have to factor in the costs for training programs, whether for in-house training for younger staff or for outside classes for your current stylists. These training programs ensure that your staff is updated on the latest trends in nail design and hair styling.
- Must-have tech for your salon
New salon owners today perhaps have an advantage: they have software at their disposal for appointment management, inventory control, payroll, and financial report creation. Software makes expense tracking and client management easier, too.
You’ll be glad to know that you can take your pick from a wide variety of applications specifically geared towards the salon business. Most of these applications charge a monthly subscription fee, while others require a single, upfront purchase.
Programs like Elite Software’s Elite Salon and Spa management program makes it easier for you to handle commissions, manage payroll, and compute hourly wages, taking into consideration salary deductions such as federal and state withholding taxes. The same goes for Leprechaun Salon and Spa Software and Extended Technologies’ Salonbiz software. What’s great about these programs is that they provide online training and customer support, too, should you run into problems.
If you’d rather track your stylists, you can go for ProSolutions Software’s ‘Essential’ program. It lets you track one stylist for $399, with the prices going up with each additional chair. You’ll also have to pay a monthly subscription fee, with twice-yearly upgrades provided for free.
If you have a little room in your budget, you can go for bundled packages which can include software, a cash drawer, receipt printer, training, and a software manual.
- Choosing your suppliers
If you’re opening in the salon in the US, you’ll most likely get most of your salon’s heavy equipment – chairs, mirrors, and washing and drying stations – from one of two major national suppliers: Belvedere and Takara Belmont. Either supplier is great because they usually throw in complimentary consulting services to win your business. They’re also good at providing after-sales support, like when any of your equipment breaks.
Once all the heavy equipment is in place, you’ll need the smaller stuff, like shampoo, conditioner, brushes, bobby pins, capes, sprayers, clippers, and towels. You can directly approach a manufacturer like Aveda, Bumble and Bumble, or Paul Mitchell or find a local distributor that can provide you with several products. You can also find a local agent at a national distributor like Sally Beauty Holdings, so it will be easier to stock your salon with the supplies it needs.
Make sure you price-shop before you make any decision. After-sales support is also crucial. “It’s not just about dollars and cents,” a salon owner says. “It’s about what kind of support you get from the distributors.” Representatives from distributors and manufacturers should always be willing to give you advice on relevant topics, like the amount of product to order.