Would You Buy 3 Skincare Franchises with Razor-Thin Margins?

0:00Welcome back everybody to Acquisitions Anonymous, the internet's number one podcast on small business M &A. Mil Snell, one of your co-hosts, joined today by Heather Anderson and Connor Gross. We talk about a Virginia-based business that is in the skincare franchise space, multiple locations, established revenue. We talk about where this business might be in the revenue ramp because some of the numbers don't always add up when you look at businesses at a point in time. It's a compelling business. We like it for certain reasons. We talk about its similarities and differences with the massage space, especially on the franchise side, med spas, which we've covered a lot, and Heather has amazing expertise on.

0:44And I think you're really going to like this episode. If you've ever looked at anything like this, you know that the devil's in the details. And this one has some things to like and some things that we have a lot of questions about. Stick around after a quick word from our sponsor.

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2:35Welcome back, everybody. Another episode of Acquisitions Anonymous. It's me, Heather, and our good friend, Connor Gross, to talk about another fantastic business for sale. And we're just going to keep running with the hits at this point because we liked the last deal, and I think we're going to like this one too. We always try to pick something where we have some experience. I have no experience with this type of business. So you guys are going to have to really carry the conversation about a skincare, three location skincare franchise in Alexandria, Virginia. This is on Biz Buy Sell. One day they might be a sponsor.

3:11You never know, but it says three open and operating skincare franchises in DMV. What is DMV? Maryland, D.C., Maryland, Virginia. Okay, okay. With$6.4 million in revenue in Alexandria, Virginia, asking price$2 million. They do not disclose any cash flow SDE. The EBITDA is$356 ,000 on$6.4 million in revenue. It's been established since 2021. And it says this is a franchisor-owned, which we just did one of these and we're on a roll with them, franchisor-owned and offering to one new franchise owner for first time. I think I understand what they're trying to say there. It says, this is an opportunity to acquire three fully staffed, open, and operating franchisor-owned locations in the DMV area.

4:05We established our first of these three locations in 2021. We are the modern, quote, facial shop that marries spa quality results with the repeat visit economics of a fitness studio. Clients book 30 to 50 minute personalized facials, add targeted enhancements, and shop curated skincare, then keep coming back through an optional membership that bills monthly and unlocks perks. That triple engine of recurring dues, a la carte services, and high margin retail gives each shop predictable diversified cash flow while meeting surging demand in the$100 billion U.S. skincare market. I have to commend franchisors on their sales pros because these are great descriptions.

4:57I'm so interested. It says a proprietary CRM drives rebooking and product suggestions and national brand campaigns feed your local pipeline so owners focus on high-level growth rather than day-to-day marketing. I can't wait to unpack that part more. Employees, these three corporate-owned locations are fully staffed, open, and operational. We don't get an employee count. Competition, they say the triple stream revenue of dues, services, and retail delivers predictable cash flow and 35 % blended margins. unlike single service spas, membership driven loyalty engine, 30 day facial cadence, proprietary CRM rebooking and product auto refills, pushes repeat visits, semi absentee scalability.

5:45That doesn't say anything about their competition, but that's okay. There are opportunities to open additional franchise locations throughout DC, Maryland and Virginia. They support and training. our franchise training unfolds in three tightly sequenced phases that blend e-learning classroom work and hands-on field coaching training team is available to provide uh the buyer and any new staff three corporate iron uh they say their lease expiration this has got to be a typo is january 1st of 1970 um and it looks like my time yeah yeah it looks like there's uh and i haven't seen this before, but there's like biz by sell edge, which I'm sure is a, is a behind a paywall, but you can get a demographic information for the area and you can get a financial benchmarks for Virginia spas and some additional info, but I don't have that.

6:40So I'm not that cool. What do you guys think about this a$2 million asking price on 6.4 million in revenue and 356 ,000 in EBITDA? Well, it feels like a med spa without Botox is what I'm kind of sensing from their description. And as you guys know, I've done a lot of med spa deals. And what we generally value the most in a med spa is recurring revenue, which has traditionally been seen at Botox, right? It's once you start Botox, you've got to come back every three months. You can't stop. And people never stop. And so it's very reliable recurring revenue. This one, it sounds like it's facials, maybe like things that you don't need license for.

7:25They have talked about their training programs. So it's probably a lot of different, you know, micro abrasion, micro needling, all kinds of other little treatments that you can do that are effective, but not like Botox, not medical, you know, you don't need licenses for. That is generally not as recurring as Botox, but it sounds like they use their CRM to try to make it as recurring as possible, like really going back out to their clients and reminding them and recommending products and telling them to keep going with it. So I would say the valuation's a little rich, given that they don't probably do injections and it's just facials.

8:06But, you know, nice business. I think it has some merit, you know, and I like the things that I heard there. I just think the valuation sounds a little high. Yeah, it's interesting. I was trying to think about it more so as a massage concept, but it's more niche than that because they only do facials. Because I know like Massage Indy and Hand in Stone, I know they do your standard massages, whatever you call it, but they also do facials. This sounds like it's exclusively facials. So I don't know if there's a component of that that brings it closer to a med spa. But that was kind of the adjacent business that I was trying to piece it together with.

8:46In this wellness space, if you will, there are all kinds of little niche models popping up. Believe it or not, there are places you can go for a scalp treatment, scalp massage. They don't do facials. They don't do massages. They just work on your scalp. And they don't even do hairstyling. It's literally just that. So this is kind of in that category. but facials are a little more mainstream. A lot of women and men, some men will go get facials. Just people are more aware of skincare. And again, there's so many new products. And I think this could be appealing to people who want someone else to figure it out for them.

9:28Like, you know, analyze what's going on with my skin and tell me what are the right products for me that would be effective. And I think that's kind of an interesting niche because the space is flooded with products and new tech, you know, technology and everything all the time. So I think it could be appealing in that regard. I like that there's like a consultative nature to this. And I think that probably, I don't know, it, it seems like this, there's, there's a lot going on here that doesn't really add up to me, but it seems like they would have a stronger path to higher margin than like Ulta or Sephora where there's, there's salespeople, right.

10:07But they're not actually like really performing services they're just you know letting you test stuff and saying that looks nice on you um they say they have 35 gross margins right it wasn't it gross but i mean this is five percent net margins this is really really low i guarantee you they have one one location is bleeding me at least i'm also wondering like is there some one-time opening, like the oldest store is four years old, maybe going on five years old. So are there one-time expenses related to, or just the ramp up of revenue, right? On some of these locations that they're like, look, we just don't have the patience for them to pan out.

10:52Just seems like a terrible time to sell if you've already done all the work. Yeah. And they would be better presenting their revenue and EBITDA by store and showing you this is our most mature store, middle store, the newest store, that would answer a lot of those questions. Yeah, and here's what's possible. You can get, you know, high teens, you know, net margins. It's not, you're not locked in at five. Yeah, yeah. Where you read the header where they phrased it as a franchise offering to one new franchisee. That is what they were telling you is that we will give you the two that you're going to want.

11:27And you also have to take the one that you don't want. One franchisee. Yeah. Yeah, that's a good point. Yeah, and it's funny. They even compared it to the economics of a fitness studio, which I've never seen a boutique fitness studio with 5 % margins. I've seen them with either 25 % or negative 25%, but never 5%. That's awesome. I don't know that I follow the parallel there. So what has always scared me about the massage space in general is just how unscalable the labor model is. I mean, you have one person that is there is only serving one person at a time and you cannot outrun that at any point.

12:12So I've seen more specialty things where they're just able to command such a premium price where it does change the economics of the business. But just curious what you guys think about whether or not that might come into play here. It reminds me of like the limitations around like a law firm model where, you know, that, that lawyer may bill out for$450 an hour, but they're basically only getting paid$150 an hour, right? Like it's kind of a three to one ratio, whether it's a law firm or a dental practice or some one-to-one like this, where it's one person providing service to one person. And if the dentist hands are not in somebody's mouth.

12:50Like there's no revenue, you know, but I think it, I think it could work. Um, I just, I just wonder to me, this seems like it's too good to be true. And they're doing a great job describing this like triple threat, you know, uh, thing, but this just seems like such a discretionary expense that I get it. I think that the person goes in, they have a great customer experience. Everything goes great. They feel like really benefited by the like value add, not just of the service, but also the upsell of these products that should be a higher margin. But I think when my wife comes back from this place, I'm like, why the hell are we still paying, you know, on subscription for you to like, and not to be mean about it, but like, I just think this gets cut really quickly from the budget, especially under a membership model.

13:47I'm sure there's a lot of churn in their members and I think that's one of the things if you're a buyer you want to get right at that what is the churn because for a while people might pay this but long term you're right eventually they're going to go I could just buy these products I don't need to go in and have them sell it to me every time what I do like about this model is when you're doing Botox there's special training and medical training and what not and there's somewhat of a shortage of injectors that can be very difficult. This model says, we've got the whole training program. You know, we can basically hire people without skills and turn them into skilled providers.

14:26And so that might keep your labor costs down a little bit and also give you kind of a steady stream of replacement or growth employees if that's the direction you're going in. So I do like that. But on the other hand, I do agree with you. This is a tough one to really have low churn. You're gonna have high churn. And that means you're going to have high marketing costs. So you have to always go out and find your new clients. And then you've got physical locations to set up with furnitures and fixtures and equipment. Leases, multi-year leases that you're taking on that didn't end in 1970. Correct.

15:04Right. So it's an expensive business model from a lot of different angles, including marketing and customer acquisition.

15:12Acquisitions Anonymous Hosts:big thanks to high level for sponsoring this video and helping us pay for our editors high level is the all-in-one crm that handles your emails text funnels and more all in one place think of it like the swiss army knife for small businesses and you can try it for free for 30 days at gohighlevel.com slash michael girdley at least with the gym too like there's a community aspect and like they're gonna do like culture building events and like you're gonna have camaraderie and then like even if you don't want to keep paying for the gym you don't want to leave your friends, you know, here, like this is a solo experience.

15:45It's not something that, I mean, maybe they do like, you know, girls nights or something like that, you know, and, and, but I just think that it's not going to have the same communal kind of pull and stickiness that gyms at least try to have. No. And that's been, I think that's been seen in a lot of med spas is you need to go, you need to be located in an area that has very high income, average income levels, which this does. Alexandria, Virginia, very nice area. But, you know, even with the high income levels, you're still going to have, you know, that churn is still going to be there no matter what.

16:18And you're right. This is easy to cut. You don't even feel guilty. You just don't go. Yeah. I'm curious because I always think about gyms as like the way to spot a winner in fitness franchising is where the customers wear the gear like it's a sports team. Like you've seen that with every single person. Heather in a med spa concept, I would guess people don't do that because there's kind of a, like, you wouldn't be advertising, like, you know, this is where I get my Botox, right? It'd probably be... Yeah, there tends to actually be the other way around. Act like you're just naturally looking this good all the time.

16:53Right, exactly. I'm going to tell you it's$1 ,000 on your face, you know. So, yeah, you do the opposite. Mills and I are not wearing the t-shirts of where we get our Botox done, so... Although, a scalp massage Sounds really nice. I might have to look that up. Yeah, we need to check it out. I had one of those done in India for about$1.50. My guess is they'd be a little bit more expensive. Not as cheap here. Yeah. I think what literally makes or breaks this deal is the breakdown by store, both like the economics by store and also the opening timeline. Because the thing that would change it for me is if they had one or two locations that were still ramping.

17:36And it can't be ramping after, if they were all opened in 2021, they can't still be ramping, right? With a brick and mortar business, you can't, you do not want to do that if it's not something that can be fully ramped, quote unquote, within the first 12 to 24 months. But if they had one that had opened up within the last 12 months that showed, you know, a more promising pro rata, you know, monthly number, that would get me more intrigued. Which is interesting. To Mill's point, they did a great job describing the benefits, like what a customer would feel about this business, but they did not do a great job in this teaser of the financial benefits to a buyer.

18:17Yes. You know why, Heather? And this is my biggest critique of this deal, is this right here,$356 ,000 in EBITDA and a$2 million asking price, it does not pencil. No. There is no way the math works, right? And this is not a, you know, put 10 or 20 % down and finance the rest scenario. There's just not enough free cash flow to service the debt associated with the purchase price, which makes me really skeptical. Yeah. I think it could work if it was one of those trajectories where you had one or more locations that was ramping because you'd want to do part of it as a seller note with an earn out feature in there.

18:58But depending on the trajectory and the deal structure, obviously, I could see them getting that number if it was really strong. And if you're going to get a loan and you've got that ramping problem, right? You've got multiple locations. We've got to look at the maturity of each one. That, even with the best of data, even with a really great chart that shows each store and when it opened, that's really hard for lenders to swallow because they're going to come back to, yeah, but you only have$356 ,000 of EBITDA. You know, so they don't want to lend on the pro forma of these other stores and the fact that they're going to get there.

19:30They need to be there. So this really limits your borrowing ability to buy a business that's got stores that are ramping and sort of dragging on earnings, you know, in the recent history. So I think, you know, that's the main problem here. You know, you're not going to pay$2 million and whatever you are going to pay, you're not going to be able to borrow very much. You're going to have to pay a lot of equity. Yeah. Yeah. So we talked about another franchise or carve out. Then part of what I brought up was just like, why aren't they selling it to a franchisee? And we talked about that happened to be a business where it was much more owner operator, smaller, community oriented.

20:11I think about something like this as the inverse of that. This is the business for someone who wants to scale, who has more capital than they do time. And so my question there, more amplified, why are they not to a franchise um because if they aren't going to to me that's a red flag of chise or like why would they not be supportive of franchisees adding um and if they asked and franchisees didn't want to obviously like that's a red flag too so that's my big uh that's my big question here and like we're assuming best case scenario that they're ramping if they're not ramping like The people who know this business the best and started it and know what every best practice is for every other franchisee can't make it work.

20:59Here, I'm a newcomer. I think I can make it work. There's just some cognitive dissonance there. I think that there's a big pull for franchisors to think, this is going to be great. I'm going to get this concept off the ground. I'm going to go through the FDD certification process. I'm going to sink all this cost in. And this is my path to, you know, royalties, you know, in perpetuity. And then like, yeah, if the franchisor is going great, you kind of want to be out of the franchisee game. You don't want to own corporate locations so that you can allocate resources like the last one to supporting franchisees.

21:42There's not really any mention of that in this. I think it just might be like a falling knife and they don't want to hold it anymore. What are we, thumbs up or thumbs down? I'm thumbs down for a bunch of different reasons on this one. It just scares me. I am thumbs down as well. I think where I generally like med spas, I'd much rather see them with Botox and other medical services here. And it's just the earnings are pretty thin for that reason. I'm thumbs down with the caveat, like I mentioned, that if I was to take a look at the unit level performance and the timeline, there's a scenario where it could get me interested again.

22:21But the fact that they didn't break that down tells you kind of what you need to know about how that would reflect in the deal. If this was like$1.2 to$1.5 million in EBITDA and the asking price obviously was higher, I would go, okay, there's proof of concept. It is sticky customer relationships. They do extract margin because of the service retail membership mix. I mean, and I guess, I don't know if let's just say this is average, right? Two ish million dollars in revenue per location for a retail store. Like, I think that's pretty good. It just doesn't seem like the margin is proved out, which is at the end of the day, like you're doing a lot of work and taking a lot of risk.

23:05It's got to, you got to be compensated for it. Completely. And I also, Mills, would think about it differently if you removed the franchisor mitigating factor. Like if the franchisor wasn't the seller here, I could get my head wrapped around more easily. Okay, this is somebody that is selling for maybe personal reasons, lifestyle reasons, and they're just looking for an off-ramp. But yeah, it just to me does not reflect positively on the franchise or to be selling it directly on the back end of like incurring all of the downside and then selling right before the upside, you know, theoretically should be coming.

23:40Which the fact that they're unloading at that point leads me to believe that they are skeptical as to whether or not that upside is going to come. We joked about the lease thing too. It really concerns me because not only am I taking on an obligation to acquire the business, I'm assuming the liabilities with the leases, which you have those like point in time, okay, I have X amount of years left on the lease and that's a liability. but also you have like the, the future reinvestment risk, so to speak of, I have to re-up those leases and the landlord has me at that point because I've built out a really nice space and, you know, whether they're five-year leases that are about to come up or seven-year leases that are coming around the corner, you know, you've just got, these are, these have to be in nice areas, uh, in order to, to work and attract the right clientele.

24:28Um, I, I would just be really worried about getting a new lease. What are those lease rates going to be now five to seven years later? How much more is that going to eat into my razor thin margin? It just could, it could get, it could go from bad to worse. Agreed. Location dependent. Anytime you're location dependent, it's a little scary because it's a whole other layer of risk. Yeah. Okay, so we're all thumbs down, but Connor has a caveat. There could be a good story, you know, behind it that, that might turn this around. And I agree. I'm curious about that. Like, and I think if they don't come right out of the gate and give you the metrics by store, then this is, you know, run away at all costs.

25:13Yeah. Yeah. All right. Well, that was a fun one. Thank you, Heather and Connor for bringing your expertise. And thanks everybody for listening. If you enjoyed this episode, there's hundreds more like it at acquanon.com and Heather and Connor are both incredible experts in their fields. Heather's at Viso Capital, Connor Gross. They can find you at conorgross.com, LinkedIn, and Twitter. All right, everybody. We'll see you next time. Thanks.