Posted by Eric C on July 29, 2003 at 19:55:22:
Posted by Eric C on July 29, 2003 at 19:55:22:
Hairdresser - Posted by Louise
Posted by Louise on July 29, 2003 at 10:20:30:
My small commercial space has been vacant for almost 1 year now. We have been approached by a woman who wants to open a hair salon. My agent says that we shouldn’t lose - if this woman doesn’t make it, then there will be many others wanting to lease it once it becomes a salon.
Do any of you have experience with salons? Does this reasoning ring true - will there be others lined up to take the space once it is converted into a salon.
Not only the Hairdresser knows… - Posted by ray@lcorn
Posted by ray@lcorn on July 29, 2003 at 18:53:55:
Eric has given you a lot of insight below and you’d do well to follow his advice. My own experience mirrors his…
We’ve had several beauty shops as tenants over the years, and while I wouldn’t agree with your broker across the board that “once a salon always a salon”, I do understand where the thinking comes from.
We’ve got a saying around our office about salons… they are a lot like small churches… one tends to grow until somebody gets mad at somebody else, and the shop splits into two shops. (it might be a regional “southern” thing about churches… no offense intended to anyone, but here churches tend to multiply in direct proportion to the number of strong personalities one building can hold.)
The story of the last salon tenant we had is a good case in point…
We bought an old vacant drive-in restaurant building on a commercial corner at foreclosure auction. We immediately started construction to add the maximum amount of space allowed under the zoning district to turn it into a small neighborhood strip. During construction a local beauty shop operator approached us about moving her salon, in business for over twenty years, into the new space. We customized the space to her specs, agreed on a rent amount, and signed a three-year lease.
Time passed, and she was a good and dependable tenant. Always on time with her rent, a good neighbor for the other tenants, and fairly reasonable when it came to maintenance issues.
The lease came up for renewal and she made us a new proposal. Seems she decided she wanted to slow down… semi-retire, and sell the shop to her “number one chair”… (in case you didn’t know, most operators rent out the “chair” space to the other girls for a set amount each month plus a percentage of their gross revenue. The best hairdressers get the best chairs, and the best gets ?number one?.) Number one was going to become the operator, and our present tenant would become one of the “chairs”.
To us this sounded like an okay deal. We knew the operation was steady, and since the original tenant would still be there we didn’t figure a lot would change. We checked the new buyer’s credit and it was a little edgy. She’d been through a divorce and didn’t own anything, been late on a few payments, but nothing serious. We asked the original operator for a continuation of her personal guarantee. She begged off saying she would be there to mind things just like always but couldn’t be responsible for the rent since she wasn’t collecting from the “chairs”, and besides, the new tenant had been with her for five years and was a solid bet. I hate to admit it, but we caved… we negotiated a new rent figure and agreed to a new three year lease with the new operator. Big mistake.
Problems started immediately. The first rent check bounced. Excuses were made about getting the books set up, etc. Then we started getting calls for all sorts of maintenance problems… clogged drains, broken thermostats on heating units, wiring snafus that burnt up expensive equipment, then plumbing leaks… it was like the building had a ghost playing havoc with the systems. (Sabotage was likely, because if there was something wrong with the building the “chairs” didn’t pay their rent. Get the picture?) Another rent check bounced. Late fees and check charges piled up. The rent checks that didn?t bounce were slipped under our office door days late, but dated back to the due date, with claims of no late fee due. The calls degenerated into personal attacks on our staff over parking issues, signage, and all sorts of unrelated complaints trying to make us the bad guy. The other tenants began complaining that shouting matches between the hairdressers were spilling over into the parking lot.
Much discussion ensued, with the two salon women pointing fingers at each other, then at us as the evil landlords. A lot of “he said, she said, you said” back and forth that did nothing to cure any of the problems, most important to us of which were timely rent payments in good funds. All-out war between the chairs seemed a welcome scenario to get us out of the middle. I dreaded even driving by the place.
To fast forward to the end of the story, the root of the problems were in the two women not being able to get along because all of a sudden the one who had been in charge wasn’t, and the one who hadn’t been was. Eventually the inevitable happened? you guessed it… the shop split right down the middle, and the original operator left the business. Because of the strife the shop lost most of its clientele and income, and the rent became seriously past due. The last straw was when the tenant gave me the finger through the window of a gas station one day.
We evicted the tenant… and guess who called wanting to rent the space? The woman who had been number two’s number one chair, left with the original operator, and then inherited the original operator’s clientele when she finally retired.
I wish I had a neat, happy ending to the story, but I don’t. For purely financial reasons, we made a decision to liquidate the property. Progress had caught up to the neighborhood and we sold it for redevelopment. We had a landlord’s lien on the fixtures and furnishings from the shop that we had not subordinated to the bank’s equipment loan (we rarely do), and sold the equipment at auction to recover (a portion of) the lost lease income. It brought about the same percentage of value as used restaurant equipment. The bank took a loss too.
Even though we sold the property, I won’t forget the lessons learned in dealing with this particular tenant type.
First, the shop is only as good as it’s proprietor and their credit. Personal guarantees on the lease from a creditworthy tenant are a must.
Second, as Eric noted, it’s a personal service business and as such it is highly dependent on the personalities involved. Clientele move with the service provider, so the income stream is dependent on more than just demand. Knowing their business model is also a must.
Third, any strife between the personalities will directly affect the income from the shop, hence the rent checks, hence the need for a creditworthy tenant and collectible guarantee. Don’t look for more than ten to twenty cents on the dollar for the equipment, and then only if you have an unsubordinated landlord’s lien. If you subordinate you likely won?t collect anything.
I can also tell a story of a successful spilt of a salon where we wound up renting to both in different locations, but I didn’t learn much there other than being in the right place at the right time. We can (and do) hope for that of course, and when it happens it’s the icing on the cake… but hope is not a plan.
Just remember that there is a worse case than vacant space… that’s occupied space that isn’t paying, but generates expenses and problems every week. Be very careful to draft a strong lease, and then enforce it firmly from the get-go.
A little know secret… - Posted by Eric C
Posted by Eric C on July 29, 2003 at 11:26:02:
– is that hairdressers and salons (where I’m from they’re called “beauty shops”) rarely go out of business. At least the better established ones don’t.
Hi Louise -
Take some time to look into your potential tenant’s background –
do they have experience in this field or did they just graduate from beauty school?
Do they have an established client base or are they planning to “wing-it”?
Will you be expected to finish out the building and if so, to what degree?
What kind (how much) of liability insurance does she currently carry and do you need her to get a new policy (for your benefit)?
Is she in this for herself or are there other “silent partners”?
Has she applied for and received the proper licenses and permits?
What’s her business plan? Her past experience? Her cash reserves?
Who’s drawing up the lease? To whose benefit?
Whose doing the “books” CPA, other, or will she employ the “personal touch”?
Employees? Plans? How to pay them? Payroll reports, etc?
OK, do you get the idea here? Perhaps your Realtor is right, there might be others wanting it after it becomes a salon,… but I wouldn’t count on it. Perhaps his commission is clouding his judgment a bit.
These are service businesses – plain and simple. Pay attention to and grow your customer base and these things do very well indeed. Ignore the fact that “salons” are a dime a dozen and that you can be easily replaced (in most locales) and you’ll go broke.
Like so many other businesses (restaurants come to mind), these can look deceptively simple to outsiders. After all, how difficult can it be to keep women happy, right?
Hmmm, maybe I better leave that one alone.
Anyway,… my point is that it’s primarily up to the individual business owner to make these successful. The location can be a big help to be sure, but it would be nice to know that your tenant has the skill and fortitude to make this thing work – for both of you.
Check her out. Make sure your questions get answers and then make your decision.
Most of us have had a bad tenant or two (some of us many more than that). Personally, I can tell you I’d far rather keep the place empty than to put a weak tenant into a situation they can’t handle. Too much hassle.
On the other hand, if she’s the only choice…
PS - about that little secret… most experienced bankers will tell you (at least those who have been the actuall business of lending for a few years) that beauty shops rarely go bankrupt and sharp operators are always welcome (to apply for a loan). “Salons” are one of those industries in which the business cycle is quite irrelevant – no recession here.
PPS - new operators often take out loans for all the equipment - chairs, dryers, etc. Don’t expect those things to hang around should your tenant not “make it”.There are also some wholesale folks you can check with to evaluate your tenant – Armstrong-McCall or Sally’s beauty supply. They’ll either know your person or not, but they can also give you a lot of insight into the local scene (another opinion as to the desirability of your location).