EP 449: What’s Your Exit Strategy? Planning a Profitable Spa Exit, Step by Step

Welcome to the Spa Marketing Made Easy Podcast. I am Daniela, and I am so happy that you are here today. All right, so I have a question for you. How are you planning to exit your business? Are you going to sell? Are you going to pass it down to one of your children? Are you going to just stop one day when you’re done and retired? Whenever I ask a spa owner this question, I just get like this, deer and headlights look, there is just a blank stare, because it’s not something that’s really on their radar, right? It’s something that is kind of an afterthought. When you start a business, you’re not thinking, how am I going to exit? You’re thinking about hitting your goals, hitting that million dollars, right? They’re so busy working in the business that the thought of like, how does this end? Just never crosses their mind. But my guess is that you started your spa to create freedom, both time freedom and financial freedom. And if you can’t step away from it, you’re just going to end up feeling more trapped and more overwhelmed, the exact opposite of what it is that we are trying to create.

Now you’ve probably heard about all of the private equity firms that are investing very heavily in our industry, and yes, they are, but they are typically investing in low seven figure companies. When I say low seven figures, I’m talking like two to 4 million on the low range up to the multi millions in revenue generation, if that’s you amazing, right? You’ve got some options to focus on, but there are so many incredible spa owners that don’t create that much revenue, that are not generating that much revenue, but they still have these very valuable businesses you have put your I want to say blood, sweat and tears, but I you’ve put so much of yourself into developing this business of doing the hardest part right start the from zero to 100,000 is the hardest part of a business. That’s where you have to do your proof of concept. But you’ve poured so much of yourself into getting this thing to work, getting this thing off the ground, and there’s so many that are not at a multi seven figure revenue, but that doesn’t mean that there’s not value there and that you won’t have an incredible exit.

So let me just give you an example. So if you have a spa that does 650 spa that does 650,000 in revenue, and that’s annual revenue, and then after your ad back so your ad backs are going to be considered like your owner’s distribution that you’re paying yourself. If you have specific like business travel that you’re putting on there, your CPA can help you figure out, like, what your add backs are, let’s say, after your add backs, you’re 120,000 net profit. That means that you could sell your company anywhere from 150,000 to 250,000 and perhaps even more, depending on how systemized it is and what your recurring revenue looks like. Now, I don’t know about you, but for me to walk away with a few $100,000 with a six figure bonus in my pocket as I’m transitioning into my next thing or stepping into retirement, I mean, that sounds pretty good, and that’s why today I want to cover exit strategies for every spa owner, regardless of size. So whether you’re doing 200,000 a year or 2 million a year, you’ve got to plan this appropriately.

Now, after nearly 20 years in this industry and working with over 1700 spas, I can tell you that the best time to plan is when you actually don’t need to, right? We want to. We want to get all of this planned out when we are not in a place where we’re having to be reactive about the decision. Okay, so do it when you don’t need to have that plan in place in advance. Now, there’s a few reasons why spa owners would avoid thinking about an exit. First, you might have emotional attachment, right? You pour so much of your heart and soul and your time and energy and your life savings into building this business. You might identify with this business as your baby, but it’s not your baby, right? You would never sell your child. The thought wouldn’t even cross your mind. But for the right price, I. Guarantee you would sell your business.

So we’ve got to disassociate the emotional attachment. And I don’t want to say like we we do pour so much of ourselves into our business, but it needs to be a healthy attachment, right? So that’s number one. So they’re never going to think about separating from the business, because they have poured so much of themselves into it. It’s a part of their identity. Second, they may not think about it because it doesn’t seem possible, right? You might be your spas top revenue generator, the thought of stepping away just doesn’t seem possible. You’re filling every single role. So what would someone even be buying if you weren’t there doing all of the work? And I’m going to get into that a little bit later in the episode. And third, you might identify with exiting as giving up. And I get that too. I am sure, like, you know, we all cause problems with our children. I’m sure that I’m creating some deep rooted beliefs in my children around quitting, because I say to them, at least on a weekly basis, Warners, don’t quit. And I’m like, Okay, how do I make sure that they understand this in a healthy way? That’s a whole different topic. But when it comes to quitting, here’s the deal, exiting your business so that you can focus your attention on something different, whether that’s your health, your family, or maybe even your next creation that’s not quitting, that’s just moving along in your path, not quitting. So if you want to sell though, this is going to be a three to five year process, so planning is going to be a big part of it. So like step number one, we have to get past the emotional attachment. Is it possible? Am I quitting? These are all things that we need to kind of find solution, find peace around so that we can start to plan. Because the cost of not planning is massive.

All right, you can leave hundreds of 1000s of dollars on the table if you wait to start planning this process until you’re just so burned out you just want to get rid of it and you’re just done. All right. You do not want to be forced into fire sales because of health issues or family emergencies or market changes that you potentially did not see coming. So when we’re looking at the timeline of this process, you’re going to need two to three years of preparation. So this whole process can be like a five year process.

Think of these two to three years in minimum as preparation to get your spot even ready before you’re talking to a broker. You’re not going to be deciding in January that you want to sell. And then, you know, by March, have like your top offer. If you want to get top valuation for what you’ve built, then you’ve got to have your systems in place, your team in place, your recurring revenue in place, and not having you as the owner, be reliant. Have the business reliant totally on you. In fact, you should have the business should not be reliant on any one person. That is going to be a big price decrease if you have that as an issue. Okay, so let’s talk about the different types of options that you have to exit depending on your revenue level. So if you are a high revenue spa, I’m talking 2 million and plus, then you’re going to be in private equity territory. Okay? So there’s a lot of different options, but what private equity is looking for is recurring revenue, aka memberships, potentially multiple locations or unique marketing positions. If you go back and listen to episode 350 we had Ben Hernandez of Skytale  Group on, and he goes over everything. And Skytale Group is a private equity firm that has a med spa or a spa division in general. So they’re looking at spas, and he just openly and transparently shares what it is that they are looking for when they’re purchasing, when they’re acquiring a spa. You can also, if private equity is not your thing and you’re in that revenue range, you can also look at. At big chains that are wanting to purchase. Could you be absorbed, whether you have a unique location, whether you have like the right ICA, that’s the same as theirs. This can also be an option to sell to one of the larger chains, rather than private equity, if you are mid market, what I’m going to call between 500k in revenue to up to 2 million in revenue, then this is really a place for the individual buyer.

There’s this whole market, this whole world of people who are looking to buy businesses rather than start them on their own. And I tell you, they’re just they’re a lot smarter than me, because they’re skipping the hard part. As I said before, like going from zero to 100,000 proof of concept is the hardest part. When you go in and you buy something that’s already cash flowing, it’s already established, you’re fine tuning. Think about it like when you’re writing a piece of content, if you have a blank page, it’s a lot harder to write a meaningful piece of work than it is to take something that’s already been written and to revise it into something extraordinary. So there’s a whole market of people out there that are purchasing businesses, and what they’re wanting to do is take them, take their skill set, even if they’re not in Spa, but take their skill set to refine the systems, to refine the marketing strategies, etc, and grow the businesses.

We also did a podcast episode with Susan Wos. It’s episode 422, and we actually did that episode as a potential episode for purchasing spas as a growth strategy, which I’m going to talk about here in a minute as well. But there’s a lot of individuals out there right now that are interested in purchasing businesses. If you guys are following Codie Sanchez at all. She is the author of the book Main Street Millionaire. She teaches individuals how to purchase businesses. She calls them boring businesses. But our spas fall into that boring business. She’s teaching all kinds of people how to purchase businesses, and talks about it in that in her book. So there’s a lot of people out there looking to purchase from that way. Susan, who you’ll you’ll meet in Episode 422, if you go back and listen to that one she is talking about.

She has a company that brokers sales of spas of all sizes. So she’s very familiar with our industry, and she’s a great person to connect with if you’re in the 500 to 2 million range she she works with spas of all sizes, but to to that’s kind of if I were in that range of Spa, I would be looking to sell to someone else that wants to maintain and grow the spa as Their primary source of revenue. And then we have lifestyle businesses, or we have, what I look at these, if you’re under 500k then I would be looking to sell to another spot in your area. This is especially true if you’re a solo aesthetician. And again, this is something that is going to, you know, a sale is not just like, let me have my money and peace out, but if you’re a solo you don’t want to hire a team, you don’t want to build a storefront. You’re doing something that you love, but you would want to be in the room and you think that in maybe two or three years, you’re going to be moving to something different. You’re going to be moving on sell to a local business owner. They can give you a cash payout.

They can also, there’s something called seller financing, where you know they’re giving you a lump sum of cash and then paying you with interest on the remainder of the of the purchase. What they’re buying from you is your client list, and they will likely ask you to stay on for a year to be able to help facilitate the transition in and kind of the merging of your business into their business, but it’s a great benefit for a solo aesthetician who’s built a great practice, but perhaps just doesn’t want to grow the business further. They want to you want to see your patients, right? You want to see your clients. Clients you want to do the work rather than operate the entire business. And it’s a win for the spa owner, because, number one, they’re getting a dedicated employee that already has relationships that’s already going to be full so they’re immediately growing their Brit their business at a lower risk. So great strategies there as well. Okay, and there’s different, you know, Susan, if you listen to that episode and check her out, there’s different approaches, different types of sales, whether it’s an asset sale, you know, however you’re you’re structuring it, but they can help you with that, to come up with the value of your business and and moving through that sale process. So no matter what your size, you have the opportunity to sell. Okay, so that’s a really, really important thing to remember. Now I want to talk about what is going to make your business have the highest amount of value to a buyer. Okay? So it when we look at what the business is going to sell for, we’re looking at it in terms of multiples, okay? And what that means is we’re going to look at your net profit. So that’s everything. You have, your top line revenue, and after you take out all of your expenses, then you have your net profit. Okay? Then you’re going to do something called add backs, which are going to be, like your owner’s salary. There’s a variety of different things.

Again, your CPA can help you get more granular on this and understand what your true net profit would be after add back. Sometimes this is called EBIAT as well, which is Earnings Before Interest and After Taxes. I’m not sure the exact acronym, but it’s, it’s a fancy acronym for all the things that we are going to add back. I think it’s interest, amateurization and taxes. So again, your CPA is going to help you figure out what that number is, and then your multiple is going to be on net profit. So it can be a multiple of one of two, of three, sometimes even of 10, depending on the size and how turnkey the business is, okay, but you’re going to have to have a an extremely turnkey business to get a multiple that high. So what we’re looking at of things that add value to your business, recurring revenue, so memberships, subscription services, buyers are going to pay for Predictable Revenue.

You are lowering their risk. Okay, that’s a really important thing. So I would aim for 40% of recurring revenue. If you’re going to sell 40% or higher, that’s going to be a big risk reduction, and something that is going to be a value multiplier when you’re going to sell. The next thing that we want to look at is owner, independent operations, meaning, can your spa run without you? If you were to step away for a month, would everything still be profitable? Would everything still work just fine? If not, you’re selling a job. You are not selling a business, you’re selling a job. And so we need to get your spa as working as independently as possible, without you. And a lot of times this is where your spa manager comes in. Okay, so that leads me kind of to my next thing is a strong management team. So buyers want to see some level of depth in leadership. So a spa manager, a lead aesthetician, a front desk supervisor that’s all hand all capable of handling the day to day operations. Okay? So you don’t want to have a front desk that you just automatically say is your spa manager, because they’re helping you with a handful of administrative tasks.

Your front desk is your front desk spa manager is someone who can handle all the operations of the business, okay? And allow you to truly be owner, to truly be CEO, working on the business, all right, we also want to have diversified service offerings so. So if you, let’s say you are just a weight loss clinic, and the only service that you offer is weight loss, well, we saw, in the past year, there’s been a lot of significant changes with weight loss. And so you know, a lot of these practices that were focused, whether it was natural weight loss or using GLP ones, they’re diversifying. They’re diversifying because there’s a lot of there’s a lot going on with the weight loss in the past couple of years. Okay, so we want to have multiple revenue streams, whether that’s from facials, energy based devices, retail membership, add ons, whatever it is, we want to have some level of diversification. A lot of the weight loss we’re seeing HRT combined with it, that works very well, right? So we want to look at like, how can we diversify and not just have all of our eggs in one basket? And then, of course, clean financial documentation, this is so vitally important. So at least three years of clean books, documented systems, clear profit margins. Buyers want to know exactly what they are getting. Okay? So you want to make sure that you are documenting really everything, every system, every process that you’re charting, is up to date. So if it’s in your head, it needs to be on paper in your systems.

Now we love using Monday.com, and Google Drive. This is we, if you’ve ever been in one of our growth factor programs. So we have growth factor fundamentals, and we also have growth factor elite, both of them, we are very heavy on systems. We we have. We talk about systems, whether it’s in your sales, whether it’s in your social, whether it’s in your team, every single aspect of your business. We’re talking about how to systemize. Okay, so it’s a really, really important thing in year one, also of prepping. So when we’re when we’re, well, let me, let me zoom back here for a minute. Okay, so you first remember we talked about those three things, the emotional aspect, the belief, if it’s possible, the feeling of giving up. You’ve got to get all those things cleared up first, then for preparation to sell, you take year one and you say, alright, I’m documenting every single piece.

I’m going to make sure that I am building my management team, and I’m also going to clean up my financials and establish my recurring revenue. These are your main things, documenting everything just starts from day one and continues to go. Building your management team can take time. You may need to develop the leaders, you may need to increase revenue to be able to support a management team these, you know, these can be kind of mixed, so establishing the recurring revenue, maybe once you get X amount of members, then you’re going to bring in a spa manager. That doesn’t mean that you can’t act as the spa manager and be documenting those processes to ensure that you are going to be well on your way when you bring somebody in cleaning up your financials. Get a good book. Bookkeeper start there. We recommend kickstart accounting, but interview your bookkeeper.

Make sure that you have a good relationship with them. Make sure that they are providing you your reports on a monthly basis. Make sure that you’re checking in with them. They should be guiding you on how to prepare for tax season, on how to save money with taxes, right? These are really important aspects of the relationship that you should be having with your bookkeeper and CPA. So that’s year one, really looking at the structure that might take you more than a year, and if it does, that’s okay, just get those things in place, your documentation, your management team, your financials cleaned up, and recurring revenue in place. Okay, get those things done, and then you focus on the next year, the next phase of this process, on removing yourself from the daily operations. Okay, you should be in a place where you’re working on the. Business not in it. You are looking out, creating long term strategies, developing your brand presence and brand identity within the community, getting out there and being the mayor of your town.

You should also be pouring into your management team. The managers should be handling problems, running daily operations, and then you should be checking in with them to help develop them, build their confidence. You should also be focusing on profitability. So do we need a price increase? Are there certain services that we should be focusing on? Are all the softwares that we’re using still serving us, or the product line still serving us, right? We want to regularly review these things to ensure that we are maximizing profitability. And then once you feel that you have that dialed in, you’re happy with your profit percentage, then we’re going to get ready for market preparation. This is when we’re going to reach out to a broker or an advisor, okay? Let them tell you what they feel the value of your business is okay, and they’re going to help you prepare marketing materials are going to help you create financial summaries, Operation overviews, all of these things that are going to tell your story to a potential buyer and really showcase the value of the company of what they’re buying.

You want to make sure that you’re optimizing timing, market conditions, seasonal factors and kind of your personal readiness, going back to those emotional aspects that we were talking about in the beginning. Because if you go through this process and you’re like, All right, we’ve got recurring revenue. We have a strong leadership team. I’ve removed myself from the business. Do I actually, really want to sell? Because right now I I’m enjoying this I’m getting paid a great salary. The business is running on its own. Do I want to sell so and that happens, we work with people who are saying, okay, like, let’s, let’s go through this process. I need to sell. I’m going to prepare. I’m going to do all this stuff and wait now, this is actually enjoyable. I’m not stressed out. I’m not overworking myself, I’m not violating my own personal boundaries, and I’m making a great salary. Is this something that I actually want to do? So you’ve got to make sure that you’re regularly checking in with yourself, and maybe you don’t. Maybe you say, You know what, I think I’m going to pass this down to my kids, or I’m okay with the risk that I might get pulled back in if something happens right, if I know, like during covid, a lot of a lot of owners that were acting as owners, not operators, got pulled back into operations. That’s a risk that you take, and that’s it’s okay, but you’ve got to kind of revisit and understand what it is that you want to do. What is the important thing for you? All right, so when we are moving in. Let’s say that you decide to sell price and terms are going to be the two things that you’re looking at when I talk about terms, there’s something called seller financing that is incredibly popular. Seller financing, essentially is when you say, Okay, I’m I’m willing to do seller financing on the business.

The current owner of the business needs to also have trust in the buyer to that they know what they’re doing, that they are going to be able to run the business and grow the business, because essentially what seller financing is, is the current owner becomes the bank. So they’ll say, hey, I’ll I’ll give you X amount down, and then I’ll pay you X amount per month with 6% interest or 7% interest for five years or for 10 years, and they are paying that out of the profits of the business. And so it becomes beneficial for them, because they’re not using their cash, they’re using the cash from the business. So it’s like an investment for them. But there’s risk. There’s always risk, right? There’s risk that the business might go under. There’s risk that a variety of different things, right? Where, if they do traditional financing, like an SBA loan or a cash purchase that goes directly into your bank account, okay? Okay, and there’s also tax benefits. So that’s another thing. When you’re looking at terms, you want to have your CPA run through and say, Well, what? What’s the financial impact? What’s the tax impact, if I were to receive this large lump sum, versus doing seller financing and receiving X amount over the period of 10 years. What does that look like? These are all really important aspects that you want to have an understanding for. This is why we don’t want to do this reactive sale. We really want to have an understanding of what these things look like.

So you going into it if you run those scenarios with your CPA, you may already have an understanding of that without having to go through it with the potential buyers. Okay? So really, really important to understand different types of terms and what you’re willing to accept. Okay, so here’s what I want you to do right now, I want you to rate your current exit readiness on a scale of one to 10. Okay, some of the things that you want to look at, you know, we talked about owner dependency, we talked about financials, we talked about not having documented systems. Those are things that you know, yes, we want to get those things in place, other things that you may want to dive into to understand the sellability, or the sellability of your business.

That’s word, a high customer concentration. So if you have, like, your top 10 clients are spending huge amounts of revenue, and so they’re really like, there’s a concentration of of this group of of clients or patients that are bringing in the majority of the revenue, that’s going to be a red flag, right? We want diversification lease issues. So we want to make sure that we want to look at short term leases. We want to look at personal guarantees. We want to look at your landlord. We also want to look at any kind of regulatory issues, so licensing compliance or legal disputes. These are all things that you want to be aware of. So look at all of those things, and then rate yourself on a scale from one to 10 of where you’re at. And you can kind of put these into different categories. Is systems, my biggest obstacle, our financials, my biggest obstacle, our team. Is that my biggest obstacle? Am I the owner? Dependency? Is that the biggest obstacle? So look at these, and then just focus on one at a time, right? This is a marathon, not a sprint. Focus on correcting one or getting better, little by little, one at a time, to get yourself to the place where you are able to sell, okay, set a 90 day goal for yourself, document what you’re doing.

We my team when we kind of started getting into when we started getting really serious about systems, this was about 2018 we just picked one thing every day. We are part of your routines, part of the things that you need to do on a daily basis. Every single person needs to document one thing that they’re doing every day and create an SOP about it now with chatgpt and softwares like loom, it’s so incredibly easy to do this, you just have to create the habit of documenting what it is that you’re doing this is removing the dependency on any One person, because if, let’s say that your front desk is you have SOPs for every single thing that needs to be done, you could hire somebody to come in, and even if they’re not as fast or efficient, there’s an SOP that they can follow for how to book An appointment, for understanding what your policies are, your cancelation policy, your return policy, your no show policy, right? Like all of these things, if you have that all documented, it’s infinitely easier to hire and train somebody than just losing all of that knowledge with one person. Okay, then put on your calendar now, when you’re doing your quarterly reviews, and if you’re not doing quarterly reviews, put those on your calendar for, especially for 2026 we want to do an annual review in January of 2025 and then we want to do quarterly reviews of, are we hitting our goals? And. You’re including in there part of your goals are things that you want to accomplish on your exit strategy. So let’s say that getting your financials in order is the biggest thing, and maybe under those financials, step number one is hiring a bookkeeper. So then the task is to interview bookkeepers and get that in place. Start documenting, start organizing, start understanding the numbers and under and having an idea of where you need to clean up. Okay, so that’s your action item that you’re doing for q2 if you’re focusing on systems, then put into place that, hey, we’re going to start documenting every single person, one a day is going to be documenting a system. Little by little, we’re going to be building up, like by the end of the year. Imagine all the systems that we’re going to have in place, right? So really, really important that you just take small actions, small, consistent action every single day to help you get closer to your goal.

Okay, all right, so focus on that. If you have questions around this, please come hang out with us in the Spa Marketing Made Easy Facebook Group. Post your questions in there.

We do a video series every single week. It’s called Spa Marketing School, where we are giving you business tips to help you get more profit in your business. We try and make these videos 15 minutes or less. So we’ve got those once a week. We have over 12,000 spa owners inside of that group. So it’s a great place to connect with one another, to ask questions, to learn from one another. So post a question, tag me in there. If you have anything that you want to learn about when it comes to exiting your business, let me know. That’s where I want to keep the conversation with you, where I can continue to help and support you and have a two way conversation together. I love saying a rising tide floats all boats, so let’s focus on that. All right, my friends, be sure to check out the resources in this episode, we’ll link up those two podcast episodes that I mentioned and a couple of the softwares that I mentioned as well. And here is to your success.