Owners Meeting

The investor was on with her agents, David Hou and husband. They want to know about Otto Plaza. They asked the status. I said it closed on 11/5/2015 and explained that it is being cleaned out so the materials can be sold. They then asked what the selling price would be, I said right now we feel it is valued at $20,000. They said they felt it should be valued at $100,000 and asked why so low. I explained 3 reasons. 1) The store never got to break even. A location is sold on the multiple of net cashflow. 2) The customer list was moved to Sweetwater, their other location and 3) The branding of Fantastic Sams changed in June of 2015 and so the old brand has a lower value. They spoke in Chinese among themselves.

They asked the reason we close the store, how much it costs to open, how much the store is worth right now.
I explained that the reason we closed the store was the clientele that was coming to the store was a very low end client and so the ticket average was raising very slowly. It is next to a military base where we felt we could draw in customers and a highway, but those channels are not producing the clients as originally planned. They are not responding to the marketing. The local community is where the clients are coming from and it is in a TEA. We got to the point where we had to make a decision, do we drain the asset to save Otto and have both locations fail because they ran out of capital, or do we save one. We felt it was best to save one and Sweetwater was the better performing salon. We discussed this with Dia Yan and Dia Yan chose to go this direction after being presented with the information instead of providing additional capital.

Dia Yan's husband said that he didn't advise to close the salon. He said he wanted more information before making the decision. I told him I took notes of the conversation and posted them in the portal for his review. I re-read the notes form 10/27/15 which summarized the call discussing the decision on Otto. I explained on this call again that we believe the capital needed to keep Otto open and get it to break even would be considerable estimated at $100,000 and we there is no guarantee that it will break even with that contribution either. I explained that we did have a translator but it was an independent translator through a service so I'm not sure how the communication could have broken down that much. I said I can't explain that any further. I explained that he can always go in the portal to review the summary of the call and comment on his perspective if he feels it is inconsistent with their understanding. I explained the categories of updates posted: Owners Meeting - Owners Questions & Communications, Management updates, and Bank Balances. These are the main categories we are updating regularly.

Dia Yan's husband is who I am referencing as "he".

He understands the financial situation and wants to see the Otto financials to see where funds were spent. It's mostly in payroll.

He also asked about the lease. I explained there are 3 possible scenarios.
1) We get someone to take over the lease. We are talking to buyers of the salon assets and in those conversations we are discussing this as well.
2) We still owe the 5 years of the rent, so the Sweetwater location will have to pay for the rent for Otto until it is satisfied. If we go this path we may be able to reopen Otto at a later date.
3) We negotiate a settlement with the landlord, freeing them to rent it to someone else and the landlord takes a reduced amount of the payments.

I explained the capacity of a salon and how at max capacity a salon has 8 chairs and the goal is to get to a $25 ticket average with those 8 chairs. That's $200 an hour. A salon can be open around 74 hours a week. The cost for the $25 ticket is around $15 for the cost of the service. That means at max capacity a salon has the ability to make is between $15k to $20k a month or $180,000 to $240,000 annually. When selling a salon we take a multiple of EBITDA. We will look for a multiple of 3-4 times the EBITDA which is a little more than annual net cash flow. We believe there is a chance to retain the value of this asset, it is going to take a dedicated focus and a new strategy, but we are committed to this, however there are no guarantees.

They asked, "Why do we think Sweetwater can get to the level it needs to be at to be successful?"
My response: The team is strong. They are doing a good job. The marketing we are doing is responding. We have good customer flow. It is next to a high end grocery store so the clientele are customers who spend money. We are also creating a new strategy and marketing plan that is different than the Fantastic Sams model which is value, deeply discounted haircuts. We are focusing on color which is a higher ticket average. In the new plans, we are designating an employee who is a community marketer and she sets up events, promotions, employee programs, and sells people on the experience of the stylist and that we are the color experts. That way we are getting in the right clients at a higher ticket average. I explained that this is the new model that has been tested by Fantstasic Sams corporate. We are in the regions who have their own regional franchisor. Those regional franchisors did not use that model. They used the cheap hair cut model. We are following corporate.

Communication. They asked how we can have better communication. I shared that we can have the regular meetings and we are putting updates in the portal weekly, where they can see status. I advised that they can read them and they can comment even in Mandarin and we will have it translated.

They said they are at a disadvantage being in China. They want me to summarize this meeting and our marketing plans. I told them we are actually working with Fantastic Sams on a formal marketing plan which we believe will be completed in about 3 weeks. I told them I will send them the formal plan in 3 weeks but will summarize now.

We are focusing on a social marketing strategy in addition to the things we are currently doing that are working. We have engaged a social company to do a monthly promotion. We also are setting a strategy for a employee who is a local marketer who's entire job is to bring customers into the salon at a higher price point. The marketer will market to schools, businesses, churches, local events, will hold fundraisers, collect reviews and testimonials from past customers, will upsell and promote in the salons on certain days, explain to the community the experience level of the stylist and that we are the color specialist.

Christine asked why we think we are at break even soon. She is showing a loss of $7k for Sweetwater. That report was when we were at $2,500 a week. I stated that the last 3 weeks we held steady at $3,000 a week. Our goal for break even is consistency at $3,500 a week. That's the standard break even point for a salon. Once we get to the $3,500 we can adjust payroll, but currently we are still in growth so we need a little extra payroll to be able to quickly service new clients who aren't loyal to us yet.

Investor wants to appoint a supervisor to manage us. This person has the authority to check the situation and have access to all files. They need someone they trust to get information for them and explain it.

They want to know if we have a budget and expenses plan bi-weekly and monthly for the stores. They want to see the budget. They want to see how we are performing compared to it. I explained we set a new budget and the accountant is loading the new budget into Quickbooks which will allow us to quickly be able to send the budget to Actuals to them.

They want to have another meeting to go through a strategy for helping. They said they trust us and they really want us to try our best to make this successful. They put the money in this because they believed in us and they want us to honor that trust. I said I know and that we are working really hard to make it a success and we will do everything we can. I said we are going to figure it out, we always do. They said thank you.

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