Opening a Salon? You need insurance..

If you are opening or own a salon, you will need insurance. Following is a list of questions I asked an insurance expert. Insurance is one of those things you buy hoping you will never need it.

The answers are from:
Michael F. McGroarty
McGroarty & Bradburn Insurance, Inc.
Pittsburgh PA
1-800-737-8494

Liability Insurance--What the insurance covers?
The insurance covers Bodily Injury and Property Damage to the public as well as operators' professional coverage for errors and omissions made by the salon or its operators.

Falls, etc. in the salon?
Any Bodily Injury or Property Damage and Professional Liability if purchased for negligent acts for which the salon would be responsible.

Services by owner and employees?
The entity (salon) and the employees are generally covered by the policies.

Services by Booth Renters (Independent Contractors who actually rent space in the salon)?
Again the salon (Corporation, Partnership, Sole Proprietorship) would be covered as well as employees. Independent contractors would not be covered. The independent contractor needs their own coverage and should name the entity as an additional insured.

Does the salon owner need liability insurance to supplement the booth renter?
The owner should not under any circumstances do anything without having their own coverage first. They should not rely on the renter to cover them. 99% of the time this will not work.

Property Insurance?
Property insurance if the salon owner owns the building?
Basic coverage should be building, contents, business income, hired and non-owned auto coverage, crime, business interruption, umbrella, professional.....be careful about things like tanning, etc. that the policy covers things that are outside the norm of the particular business.

Property insurance if the salon owner rents space?
Everything above except the building. However, betterments and improvements made to the building by the tenant that would not be taken out if the tenant vacated the premises can be covered by the tenant.

What is the amount based on?
Furniture and Equipment?
All limits should be replacement cost currently and an inflation % increase should be included at each renewal.
Small equipment such as irons, blowers, shear, etc.?
(Quite often such equipment belows to the individual operator)
The owner can include property of thers in their policy. The individual operator usually has no coverage under their homeowners for business property.
Supplies?
These would normally be covered as contents.
Records and compiter?
Should be insured separately as computer coverage with a separate limit.
Loss of business and Interruption of business?
Usually included in package policy for 12 consecutive months.

Workman's Compensation?
Is it correct that every state requires workman's comp but that it varies from state to state?
Yes, all states require coverage but the benefits differ from state to state.
Does the owner have to pay workman's comp for independent contractors?
No. But they need certificates of insurance from the independent contractor so that they do not get charged.
How can the salon owner legally reduce the cost of workman's comp?
Have no losses or have no employees.

Optional Insurances: Medical Insurance, Disability Insurance, Group Life Insurance
Is it feasible for a salon owner to offer these insurances even if the employee pays all or a large portion?
Yes!
What are the advantages of offering these insurances?
To attract better employees particularly single moms.
To allow owner to have his personal insurance as part of a group.
What are the disadvanages of offering this insurance?
Employees sometimes do not want to participate especially if they are covered by a spouse.
The age of the groiup drives the premiums.
Can independent contractors participate?
Not usually. Most plans require UC2 or W2 forms to prove the individuals are employees.

A "Must Read" article in Salon Today Magazine

There is a "Must Read" article in the October 6th edition of Salon Today Magazine (A division of Modern Salon). It is entitled "How to raise your prices". It covers when and how to raise prices and how to communicate the price increase to your clients. This is particularly important for salon owners who have been in business for a number of years.

I will return Wednesday with more information on how to open a successful salon

Choose the Form of Business Ownership that Will Work Best For You

Choose the form of business ownership that will work best for you. This decision will be made with the advice of both your accountant and lawyer. In the conduct of your business quite often you will be working with both your accountant and lawyer. Therefore, you should be certain that these two individuals can work well together.

Three Major Forms of Private Ownership:

Sole Proprietorship-- (One Owner)
Liability: Unlimited personal liability for businesds debt
Advantages: Owner retains all profits
Easy to form and dissolve
Owner has flexibility
Disadvantages: Unlimited financial liability
Financing limitations
Management deficiencies
Lack of continuity

Partnership--(Two or more owners)
Liability: Personal assets of any operating partner at risk from creditors.
Advantages: Easy to form
Can benefit from complementary management skills
Expanded financial capacity
Disadvantages: Unlimited financial liability
Interpersonal conflicts*
Lack of continuity
Difficvult to dissolve

Corporation--(Unlimited number of owners)
Liability: Limited
Advantages: Limited financial liability
Specialized management skills
Expanded financial capacity
Economics of large-scale operations
Disadvantages: Difficult and costly to form and dissolve
Tax disadvantages
Legal restrictions

This chart is from the textbook--"Contempory Business" by Boone & Kurtz, Chapter 5

*Special note on partnerships--
Quite often in salon business, the business partners are close friends and/or relatives. While there are advantages in that you all get along well, there can be disadvanages. It is imperative that a partnership agreement be made up defining each individual's roles and responsibilities. You will want to review this regularly.

Employee vs Booth Rental

As a salon owner you must decide to hire employees, contract with independent contractors (booth renters) or do a combination of both. The following are things to be considered.

• Does your state cosmetology and/or barber rules allow for independent contractors. There are some states primarily in the east that do not. Even in states that do not permit booth rental, there are Legal ways of doing it.
• What is the norm in your community
• Control is the "question"
• How are retail sales handled

Advantages of IC (Independent Contractors):

• Salon Owner eliminates paperwork
• It is attractive to potential stylists and techs who feel they are in control.
• Salon owner does not have to pay workman's compensation insurance on IC but in most cases they have to provide proof that the IC contractor does carry their own insurance. This varies from state to state.
• Salon owner does not have to pay the employers portion of Social Security taxes. However, they must have proof available for the Federal government that the IC is filing an income tax return. They must provide them with a 1099 indicating their earnings.
• Stylist provides their own product. Salon owner does not have to inventory separates product lines for individual stylist.

Disadvantages of IC (Independent Contractors)

• Salon owner loses control.
• They cannot tell the stylist/tech when to work or what to do. Charges can only be determined by contract.
• Storage area must be provided for each stylist/tech.
• If you plan to provide any type of group insurance, the IC may not participate and may keep the business from being eligible for group insurance.
• Salon owner must determine that taxes are being filed by the IC. This sometimes causes hard feelings as the IC feels this is not the salon owner's business.
• There is very little loyalty to the salon from Independent Contractors.
• It is difficult to encourage IC to attend educational events. Salon owner cannot force them to attend.
• A dress code becomes difficult to enforce.

Most salons will still have some employees such as receptionists, maintenance people, etc. even if the majority of the stylists/techs are IC.

It is not recommended that groups be split. If your stylists are Booth Renters, then they all should be. However, you may want to have all your stylist be booth renters and the skin care technicians be employees.

How Computerized Willl You Be?

How Computerized Will You Be?

By now you have met with your accountant and determined how much paperwork you plan to do yourself and when you will turn the records over to your accountant. Most like this will have to be done at least quarterly as most tax returns must be filed quarterly.

Your basic service and retail sales and receipts should be on your computer. This is similar to basic accounting for all service and retail businesses.

Client Information (including appointment book) is most important. You can set us your appointment books on the computer as well as your client record cards. Contact by phone and/or email prior to appointment to avoid no-shows. Decide how often chemical clients should come in and follow-up. For example: if you expect a color client every 6 weeks and it has been over 5 weeks since their last appointment, call them to schedule an appointment. If client will not schedule an appointment, try to find out why. If there is a salon problem, fix it. Keep track of retail purchases and print out an order form for each client to review as they leave the salon. Do Birthday cards, anniversary cards, etc.

Print out schedule for each operator each day. This will eventually tie into payroll.

Inventory Control can save you money.

Payroll will be handled in the next blog.

Software costs range from $250.00 to $1200.00+.

Software support cost varies. You may decide to spend a little more on software support in the beginning then cut back as you are more comfortable using the software. Limit access to the computer particularly access to payroll info and client records.

Find an accountant and decide what functions you want him/her to perform.

Hire An Accountant

You will need an accountant to help you determine if you are earning money, to help you control expenses, to file and pay your taxes, to manage your payroll if you have employees. You must decide how much of the bookkeeping work you plan to do yourself and how much you plan to pay someone to do. At what point will you turn the dailey records over to your accountant? How often will you meet? This is your decision. there is no right or wrong. You will also have to decide how computerized you want your business. There are a number of good programs geared specifically for beauty and nail salons. You do not have to have any programing skills to use these programs.

Below are questions to answer. Think about them and we will discuss on Friday:

• Will the people who work for you be independent contractors or em,ployees? (There are a few states that do not permit booth rental or independent contractors.) It is also [ossible to have a combination of both.
• Do you plan to emphasize retail?
• Do you plan to run a sole propriertship, a partnership or corporation?
• Do you as the owner plan to actually take clients or do you just plan to manage?
• Do you plan to hire an in-house business manager, receptionist or combination of both?

Seasonal Tip--Plan to offer free to "good customers" a free styling of their "HalloweenWig" for the big party. 10 to 15 minutes of your time could create good will and good publicity.

In the Begining You Must Have a License

Get a License

Salon Licensing is controlled by each individual state and varies state by state.

To obtain licensing information online go to: www.__.gov

(In the blank space, enter your

state's 2 letter abbreviation .)

For example: www.nc.gov for North Carolina; www.tx.gov for Texas

Look under Cosmetology Professional Licensing and/or Cosmetology Salon Owners' License. Most of the time nail salons licensing information is under cosmetology. Barbers are usually separate.

You may also contact your local state government representative. These representatives usually maintain staffed local offices within their districts. It is part of the job responsibility (and a very positive function) to assist constituents who want to open new businesses.

Your local municipality may also require a mercantile license or zoning permit.

Suggestion: If you mail anything to your state, send it "certified mail--return receipt requested". It is worth a couple a dollars if you must have proof you sent it.

Special Advice from the author:

Even if you are planning a small one-station, please follow the law and get a LICENSE. The time and money spent is small when compared to the time and money + the worry and embarrassment if you get caught with an illegal operation.

Plan Your Salon--Surround Yourself with Trusted Advissors

You Can't Do Everything

Trust Yourself with Trusted Advisers when Starting Your Salon

The following people should be available to call on when needed:

• Accountant & Tax Adviser
• Banker
• Insurance Agent
• Lawyer
• Real Estate Agent
• Community Representative
• Distributor Sales Consultant(2)