5 things every purchaser and vendor needs to know.
By Vivienne O’Keeffe A.A.D., P.E.A., C.I.B.T.A.C.
Thinking of buying or selling a spa this year?
Your timing is spot-on. A 2019 study of the US spa industry by the International Spa Association reports year-over-year growth (2018 vs. 2017) in five key categories: revenues (up 4.7%), number of locations (up 1.8%), visits (1.6%), revenue per visit (3%) and although slight, a 0.4% increase in employment.
The biggest improvement was profitability – up a whopping 20% or more, reported by 60% of the resort/hotel sector respondents, and an impressive 10% or more, reported by 75% of respondents in other spa categories, such as day and medical spas.
Dealing in a growing industry makes planning your purchase or sale all the more important.
Compared to starting from scratch, buying an existing spa makes sense for a lot of reasons – including not needing to suffer through the development, building permit and construction stages. You’re buying a known entity, ideally with a good reputation, established clientele and records that substantiate its value. One negative might be that you’re inheriting someone else’s vision rather than forging ahead with your own. But even that can be a plus if you lack industry expertise. And you can always renovate your acquisition to more closely reflect your preferences and current market conditions.
That said, here are five important recommendations.
Be clear about what you’re getting into. A typical day spa requires intensive labour to deliver a consistently high-quality customer journey – one which culminates in a memorable experience for the guest or client and therefore builds retention. Never underestimate the amount of work, discipline and commitment to following standards that it takes to get there. And if you’re contemplating a hands-off role for yourself – i.e., hiring staff to run it on your behalf – be aware of the impact that will have on your profitability.
Do your due diligence. Operate under the caveat emptor “buyer beware” principle of contract law: placing the onus on the buyer to perform due diligence before making a purchase. I’ve seen starry-eyed spa shoppers, consumed by desire to own a spa, gloss over some very important aspects of the buying process and allow themselves to be fooled by the owner’s sales pitch. Don’t be. And if there’s more than one owner (i.e., a partnership), talk to them all.
Use a spa consultant. Full disclosure, it’s what I do for a career. But many smart buyers make engaging a consultant (like me) a must before they sign any cheques. Would you buy a house without getting it inspected? Probably not. Similarly, an experienced consultant will know very quickly where the weaknesses and opportunities lie for a new owner. And besides offering common sense advice based on having been part of many transactions already, he or she can compile an assessment report – which may also, in fact, be one of the subjects required for financing.
Get the numbers. Financial statements will tell you what you need to know and can expect from the spa’s revenue streams and expenses. It’s a good idea to bring in the help of a professional accountant, preferably one familiar with the world of spas.
Engage a lawyer. Both parties will need their own legal counsel. A good lawyer will have your best interests in mind while mitigating risk exposure and looking out for unforeseen details. Bear in mind the legal costs will be over and above the purchase price. A purchase agreement will outline all the assets and liabilities of the business and all the details of the transaction. Be warned that this part of the process will take time as the lawyers go back and forth.
If you do decide to purchase, be sure to craft a transition plan before you break the news to the staff. Thoughtful communication and a good, step-by-step transition strategy will build the credibility and trust that you will be needing from your staff as their new boss, particularly in the exceedingly personal spa business, where staff play such an essential role.
What do you need to do as a seller?
Have clear objectives and an exit strategy. Where do you want to end up? Small operators may need a shift in mindset. Consult with your accountant regarding the business structure and tax implications of a potential sale.
Get your business shipshape. If you’ve let things at your spa slide, your apathy will be evident, making your operation less attractive and obviously less valuable. Potential buyers who sense a lack of interest by the owner may move on to greener pastures, deeming it too much work to get a staggering business like yours back on its feet.
Get your papers in order. Showing an absence of proper financial stewardship will lower the perceived value of your business. Organize your financial statements and reports to make them easily accessible and understood by potential buyers. Proof of profitability will put you in a far better negotiating position. Work with your accountant, or an accountant who specializes in the spa industry.
Have good quality management systems. Make sure you’re using a documented management system to monitor and maintain quality levels and mitigate your business risks. As part of their due diligence, savvy buyers will want to review your operating and quality control systems. Make sure your systems are humming along nicely.
Know the legal formalities. Start by asking potential buyers to sign a confidentiality/non-disclosure agreement (aka NDA). A customary component of business sales, an NDA prevents prospective buyers from disclosing sensitive information they’re learning about your operation before they buy (including the news of a potentially impending transfer of ownership) while also protecting you and your staff from the uncertainty and anxiety that can arise if your staff find out your spa is up for grabs. An NDA allows a buyer access to the detailed business information he or she needs to make an informed purchase decision. And it’s a two-way street; sellers need to be disciplined and patient with the various requests for information, however time-consuming and labourious they may be. Even more patience will be required if the buyer needs outside financing.
Once the potential buyer has determined that he or she wants to proceed, draw up a letter of intent, which should include an agreed-upon price and have all subjects in place (financing, landlord consent, etc.). One of the parties will need to decide who will draft the purchase sale agreement. As I’ve mentioned, it is essential that both parties engage their own lawyer for this step.
Happy selling (or shopping)!