What are the first year risks associated with being a salon owner?
I am currently enrolled in a Business Administration program so that I can turn my talent of hair braiding and styling into my business and become a salon owner. I am unsure of all of risks associated with owning a business, let alone a hair salon. #beauty-industry #beauty #businessownership #smallbusiness #salonowner #entrepreneurship
Matthew L. Tuck, J.D., M.B.A.
Matthew L.’s Answer
One reason salons (and many small businesses) close is because the owners don't ask themselves these kinds of questions. As many as 8 of 10 new businesses fail within 18 months of opening. No matter what kind of business you have, the reasons are pretty much the same across industries. Here are some of the main reasons new businesses fail and how you can avoid it.
1. Poor Planning - Too many new businesses fail because they don't adequately plan before opening. You're in business school so that should prepare you for thinking about the needs of a new business. I suggest you create a business plan. Most people think a business plan is only necessary if you want to borrow money from a bank. Nothing could be farther from the truth. Every business should create a detailed business plan as a blue print for how the business will make money. Creating a business plan forces you to think long and hard about all aspects of the business, not just the ones that are fun to think about. You use the business plan a blueprint for your business. It should be a living document which you revisit a few times a year to keep it in line with your evolving salon business. Be sure to actually create sample financials based on realistic estimates of your costs and revenue. Eventually you can replace the financial "guesses" with actual numbers which will help you predict things like cash flow, sales, expenses and other money items. Above all, be sure you understand your business model. If you don't know where the money comes from and where it goes, you'll run out of it way too quickly. Emulate successful salons. Figure out in advance how much money you need to open and operate the business.
2. Insufficient Knowledge of what the Business Actually Does and How it Does It - Many salons are owned by investors who don't really understand the business they own. They often outsource the management of the salon to an onsite manager which can often be disastrous. Many managers are not very good and if they don't have skin in the game (i.e., a stake in the business) they don't treat the money being made and spent as their own. This leads to waste, losses and bankruptcy.
It sounds like you know something about the business of doing hair, but the more you know the better. Get a job (or even an unpaid internship) in a successful salon washing hair or sweeping up or answering phones. You'll get to see how it runs, what software they use, how they schedule people, how they hire and fire, what they do well, what don't do well, and (most importantly) how they get and keep customers. Salons are a service business and you need to know how to get and keep happy clients. Lots of them. There are lots of great books on how to start a salon which you should also read. The more industry knowledge you have the better. Keep in mind that most states also require you be licensed before you can legally do hair, cosmetology, nails, etc. These licenses generally require hundreds or even thousands of hours of study before you can qualify for the license. Even the owner of the business has to be licensed in most states if she is doing hair so don't neglect this element of the business. States will impose heavy fines if you hire unlicensed employees.
3. Comply with All Licenses and Permitting Requirements - The salon industry is pretty heavily regulated in most states. Nothing will close down a business more quickly than failing to comply with all dozens of rules and license requirements. Cities, counties and states all require licences to operate a salon. It's a good idea to check with a lawyer to make sure you have all the permits and licenses you need. A lawyer can also make sure your business is properly incorporated to protect you from personal liability. He/she can also help you register your salon name so no one steals it.
4. Maintain Proper Insurance - And don't forget insurance (workers comp, premises, fire, etc. ). If a worker gets injured or someone slips and falls in your store or a dye job goes bad and you're client's hair all falls out, you could get sued and that will close you down if you don't have the proper insurance. Insurance should be a covered in your business plan.
5. Understand All the Laws Regarding Employees and Taxes - If you have employees, you are required to pay employment taxes to the state and federal government and make regular withholdings. If you sell products, you are probably required to pay sales taxes to the state. If your business makes money, you likely will owe income taxes on the business. If you fail to pay any of these taxes, the state or feds will find out and close you down. Taxes should be addressed in your business plan. Get a bookkeeper to handle your books. It's cheap and they know the rules. There is also a ton of great software (Quickbooks, for example) to help you do the books. Understand how benefits (healthcare, 401k, paid time off, etc.) work and how much they cost.
6. Raise Enough Cash and Keep it Coming In - The main reason businesses close is because they run out of money. If you have enough money coming in, you can keep operating even if you have problems with the business. But when you run out of money, you close. It's that simple. Most entrepreneurs don't take a salary for the first year or two sometimes. All the profit goes back into the business. You should have money saved to live on for at least a year or 18 months. This should be reflected in your business plan.
7. Try a Franchise - One way to learn the business and get a turn-key business with a proven business model is to buy a franchise. This takes money but it would be worth exploring. Most franchises will help you figure out the stuff you don't know and solve some common problems for you.
8. Know your Customer and Sell, Sell, Sell - One problem many small businesses have is they don't really understand their customers and what they want OR they don't do enough sales and marketing. You cannot just open up a shop and expect people to show up. Doesn't work that way. Be sure you budget for sales and marketing. When you are starting out you can do it pretty cheap with social media these days, but it takes time and planning. Another major reason businesses fail is they don't have enough customers because they don't understand their customers. You have to have a "competitive advantage" over your competition. You have to be better, different, cheaper, something that appeals to your clients because as a new business you're stealing clients from other salons. You don't have to be a lot better (just 10%) but you have to be different and consistent. A great way to get insight into your customers is to read how customers complain (or praise) other salons on line. Find out what they love, what they hate, what makes them crazy. If you can solve that customer pain better than you competition does, you'll have a very profitable business. But keeping and retaining customers is absolutely critical to a service business. Never take customers for granted.
9. Poor Management of Employees - Employees are generally the single biggest expense of any business. Scheduling too many people for a shift wastes money. If you don't schedule enough people, customers have to wait and they get mad and don't come back. If you don't give employees enough hours, they quit. It's a balancing act. If you hire bad people, lazy people, untalented people, people who can't talk to customers, or people who steal from you, you're business will fail. Guaranteed. People are your most important asset. Employees are the face of your business. Find good ones, make them feel loved, and overpay them to keep them. If you lose a good stylist, she will likely take a lot of her clients with her. Losing one or two good stylists can close a salon too. Have good, written documentation of all policies and procedures. Enforce the rules equally and don't play favorites or ignore violations. Never tolerate theft, harassment, lying or intimidation.
Again, it's great that you're asking the right questions before you start your business. Create a plan with a good business model, follow the rules, delight your customers, hire good people and treat your people well. Your business will thrive and so will you. You can do this. Never tell yourself you can't and don't hang around people who tell you that you can't. Good luck.
That is a broad question and it all depends on how you go about starting this new business. Did you take out a loan of cash flow? If you took out a loan, how much is owed? If you owe money, its 100% a liability until you are in the clear and only then will it become an asset for you. The risk can be very great but that doesn't make it impossible to come out on top either. I would recommend cash flowing EVERYTHING. I personally wouldn't do it any other way. Have you considered pitching to investors? This would be a good way to pay for the start up as most people don't have enough cash lying around to start up themselves. Then you would share in the profits until they are paid off; or they would be paid royalties on the business; its however you set the deal up. Best wishes to you and your entrepreneurial endeavors!