Hair Salon Business Model: which style suits you?

As a hair salon or barber shop owner, you aim to run your business in a way that maximises revenue, reduces costs, and ensures a good working relationship with your staff and customers. It is important to choose the right model that suits your business needs from the outset. We discuss below three different models of business:

  1. Full operation, whilst operating:
    1. a PAYE scheme
    2. a self-employed model for hairdressers
  2. Chair rental
    1. charging a fixed weekly rent to barbers
    2. charging a percentage of the chair’s takings
    3. a combination of a and b
  3. Shop rental

Full Operation

Full operation is the most involved and therefore carries the capacity for highest profits. This model also incurs the highest administrative costs, both in terms of money and time, including:

  1. Paying over 20% VAT on your sales if turnover exceeds £85,000
  2. Maintaining a payroll service to your staff
  3. Carrying out senior management responsibilities

Self-employed basis
As senior manager, you could continue operating the business, whilst moving some of your staff to a self-employed basis. The benefit of transitioning could save money in the following ways:

  1. No legal obligation to pay for sickness, maternity or holiday
  2. You avoid paying Employer’s national insurance
  3. There is no need to worry about auto enrolment pensions or make contributions

Should you pursue this model, it would be worthwhile implementing a service contract with the freelancers, to ensure that both parties’ expectations are understood. Of course, the risk of a barber turning up late, taking a day off or poaching clients for their own business remains. You should take on full advice, including with respect to legislation around self-employment.

Internal Controls
If you are not present at the salons throughout the day, it would be worthwhile implementing Internal Controls. These should be considered especially if you will continue to operate the salons, or even if you plan to sub-let at a variable rate dependent on performance. Internal Controls for cash sales and collections include:

  • Reconciling till rolls to cash collections each day.
  • Reconciling cash collections with banking and sales records each day.
  • Restricting the receipt of cash and the recording of sales by making sure that only one person is in charge of the cash register.

Internal Controls to accurately track employee time should be considered if you are paying your staff per hour, either as employees or subcontractors. To help you accurately monitor and control employee timesheets, we have helped our clients implement an app-based time management software which you or your management could use to organise rotas.

Chair rental

There are three models to renting out chairs:

  1. Charging a fixed weekly rent to the freelancer
  2. Charging a percentage of the chair’s takings
  3. A combination of a and b

With option 1, if there is a high volume of customers for a particular chair you will lose out on sales as the freelancer will take all of the earnings. Option 2 avoids this problem, however if the freelancer doesn’t turn up for work then you lose out on rental income compared to the first model. A combination of the two methods is arguably the best way forward, however it would require monitoring of sales figures. The incentive agreement should be set at a level where the freelancers have the potential to make more money than they currently do.

You would need to charge VAT on rental income should your turnover exceed £85,000. A non-VAT registered freelancer would then suffer the VAT. Of course, the barber may also seek VAT registration, depending on his or her particular circumstances.

Compared to the full operation model with staff there will be no wages, national insurance and pensions costs however sales will be limited as per your agreement with the freelancers. Should you pursue this model, it would be worthwhile:

  • implementing a service contract with the freelancer. It would be important to draft strong payment terms to avoid the risk of arrears.
  • implementing an EPOS till system to give you full visibility of sales (important with incentive agreements).
  • considering whether you would allow freelancers to sell their own products, or take a commission from your sales.

An additional risk compared to an employee-based model is that freelance workers may come and go, thereby requiring more management time to maintain occupancy.

Shop rental

This option is the least involved. If you do not foresee a pick-up in footfall in your salon, you may consider subletting your salon and collecting the passive income. You should bear the following points in mind:

  • First check whether your lease allows you to effectively sub-let the premises.
  • Should turnover increase more than you anticipate, you will not be sharing in the upside.
  • Should you eventually sell the business, your eligibility to pay the Entrepreneurs’ Relief rate of CGT of 10% will be in jeopardy.

Summary

  • The full operation model has the greatest potential for maximising profitability but carries the highest level of administrative costs.
  • Internal controls regarding hours worked and wages paid are paramount, especially if you will continue to be directly involved in the full operation of the business.
  • If you decide to base your business model around working with freelancers, it is important that both parties’ duties are understood (owner and freelancers). A service contract between parties is key.
  • If the chair rental model is pursued you will need to charge VAT if rental income exceeded £85,000, which a freelancer could then suffer.
  • The chair rental model is the most cost-effective option, but you risk losing out on revenue if there is a high level of footfall.

Whether you’re an existing client or don’t yet use our services, we would be pleased to help you. Contact Mouktaris & Co Chartered Accountants for expert advice or click here to subscribe to our Newsletter.

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