What is the value of your brow business?

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1. Background

Understanding the value of a brow business is complex, especially for artists who view their business as their "baby." Feeling emotionally connected to something you've invested time, energy, and skills into is natural. However, when evaluating the business's true value, particularly from an investor's perspective, it's crucial to set aside emotional attachments and focus on empirical metrics. To gain insights on this topic, we consulted eight angel investors and venture capitalists with over 30 investments in the beauty industry.

2. The Reality Check

Many artists might claim their brow business is worth significant amounts, such as "USD 100,000," "a quarter of a million," "half a million," or even "one million." However, the actual value often differs. It's important to understand that "value" is not an abstract concept in business. It represents a realistic sale price or an investor's potential investment. Value must be potentially liquid; it's more than a subjective opinion of the business owner.

When evaluating brow businesses for their true market value, there's often a large gap between the owner's perception and an investor's fair valuation. The main lesson is that actual value determination requires a grounded approach. This approach should include tangible metrics and investor perspectives, not just emotional attachment or perceived worth.

3. Price-to-Earnings Approach

Valuation Based on Net Profit and Earnings Multiplier

When valuing a brow business using the Price-to-Earnings (P/E) ratio, its value is based on its yearly net profit multiplied by an industry-specific earnings multiplier. This multiplier is usually around 5 or 6 in the beauty industry's various sub-categories. This realization can be surprising for many artists, especially those who have not included labor costs in their calculations.

Understanding Your Role in Valuation

To accurately determine your brow business's value, you must calculate the cost of replacing yourself. This includes salary and associated employment costs like taxes, insurance, and other potential expenses. Many artists find their business's value significantly lower when recalculating their net yearly profit after these deductions. To gain a better understanding, use this formula:

Value of Business = (Net Profit per Year - Cost of Replacing You) × 5

4. Other Approaches

This valuation method is similar to the Seller’s Discretionary Earnings (SDE) approach, which adjusts net profit by adding back owner benefits such as salary and perks. However, other traditional methods, like the Discounted Cash Flow (DCF), typically do not yield high valuations for small-brow businesses where the artist is central to operations.

Financially, while artists may view their brow business as highly valuable due to emotional or skill-related reasons, common business valuation metrics often present a contrasting picture. Understanding this difference between perceived and actual value is crucial for artists considering future investments or potential sales.

When the Owner is Irreplaceable

In cases where the business owner is deeply integrated with the business, the valuation often depends on the owner's continued active involvement for a set period. This adds a conditional aspect to any valuation.

This situation is like estimating an employee's value based on their commitment to stay with a company for five years. Such a valuation becomes highly speculative and uncertain.

Consequently, traditional valuation methods like the Price-to-Earnings ratio are less applicable for artists closely tied to their brow business. These methods are more effective when detaching the owner from the business operations is theoretically possible. The valuation becomes ambiguous and less reliable if such detachment isn't feasible.

5. Risk Capitalist Perspective

Moving away from the Classic Approach

Many brow artists believe traditional valuation methods do not fully capture their businesses' assets and growth potential. This view sometimes perplexes even experienced investors, some with over 34 years in the beauty industry, as such claims are hard to quantify. However, a business's valuation can exceed traditional estimates in the context of risk capital.

In Search of the “Hockey Stick”

The "hockey stick" in risk capital refers to a specific growth trajectory. Like a hockey stick, a business might have modest growth initially, then a sudden, sharp increase in revenue or customer base. This growth pattern is attractive to venture capitalists seeking high investment returns. They invest in startups and new ventures, anticipating rapid growth and high profitability. This potential for substantial growth can make a business appealing to venture capitalists.

Valuing Your Brow Business with Potential Growth

If your business shows potential for this exponential growth, the valuation criteria change completely. In such cases, your business's worth could exceed the previous figures.

Probability of “Hockey Stick” Growth in Brow Business

Two critical factors are necessary to achieve a "hockey stick" growth trajectory in the brow business: substantial proof of high demand and unique, proprietary assets. Without these, securing a high valuation from venture capitalists is unlikely.

Understanding "High Demand"

High demand refers to a widespread, essential need for what your brow business offers. Identifying a prevalent problem and providing a solution is key. However, opportunities for such impactful "problem-solution" pairings in the brow business are limited.

Intangible Solutions Explored

Intangible solutions in this context focus on brow-related services and training. Microblading's emergence around 2015 led to a notable surge in demand and significant industry growth. Since then, minor surges have occurred, but none have matched that impact. Therefore, businesses offering standard services like Hairstrokes, Powder Brows or Microblading will unlikely attract venture capitalists seeking exponential growth.

The main point is that for venture capitalists, merely doing something slightly differently is not enough to suggest "hockey stick" growth. Even expanding services, like online training, is not a unique competitive advantage if it's common in the industry.

6. Physical Products

The Potential of Physical Products

Analyzing the last 15 years of investments in the beauty business and related startups reveals potential in physical products. However, achieving exponential growth that attracts venture capital in this area is extremely challenging. The market for products like PMU pigments, brow serums, and PMU machines is well-established. While entering this market is relatively easy by branding products from existing manufacturers, it offers limited opportunities for innovation or differentiation.

Initial Investments and Market Saturation

Launching specific physical products for the brow business usually requires a significant initial investment. Additionally, these products often lack novelty and are easy to replicate. If products like brow serum or PMU machines can be sourced as "white label" items from existing manufacturers, achieving substantial growth in today's competitive market becomes challenging.

Given these factors, it's unlikely that a venture capitalist would be convinced of significant growth potential in your version of existing products. High market saturation and the ease of product duplication make this a less appealing investment option for those seeking high returns.

Criteria for a Truly Novel Concept

To attract investors, your brow business must offer a truly innovative solution to existing problems, one that can create significant demand. This is the key to positioning your business for "hockey stick" growth and attracting venture capital interest.

7. The Proprietary Aspect

Trademarks and Patents Explained The second essential pillar for attracting investors, alongside "huge demand," is the proprietary nature of your business. This goes beyond merely differentiating your brow service. The crucial factor is your ability to protect that differentiation. Convincing investors to support a high valuation is much more challenging without a protective edge.

Paths to Proprietary Advantages in Your Brow Business

A few key avenues exist for establishing proprietary protection: trademarks (or patents), domain names, and technical solutions. However, these options are difficult to achieve or require significant initial investments.

Trademarks Versus Patents: Understanding the Differences

A trademark is your business's unique identifier, like a name tag. It could be a symbol, phrase, or word that signifies to customers, "This is uniquely mine!" For example, Nike's name and "swoosh" logo are trademarks indicating the origin of their products, protecting the brand from imitation.

In contrast, a patent is an exclusive right to produce, use, or sell an invention for a certain period, typically up to 20 years. If you invent a novel brow microblading technique, a patent ensures that no one else can legally offer the same technique for the patient's life.

Practical Implications: The Challenge of Patents

The chances of securing a groundbreaking patent are very low in the brow business. Innovations like a unique Permanent Makeup (PMU) machine are incredibly rare and difficult to achieve, akin to making a significant medical breakthrough.

The brow industry already has many patented formulas, techniques, and solutions, often originating from other industries. Creating something genuinely new, even with chemistry or related sciences expertise, is extraordinarily challenging.

8. Trademarks

Trademark: A Viable Path to Proprietary Business

Considering trademarks is a practical way to establish a proprietary aspect in your brow business. However, the value and utility of a trademark are complex and nuanced.

Types of Trademarks Explained

Trademarks can be word marks, figurative marks, or combinations of both. A word trademark, like "Apple" in technology, protects the name regardless of visual representation. A figurative mark, such as the Nike "swoosh," emphasizes the visual symbol. A combined trademark, like McDonald's golden arches with the word "McDonald's," safeguards the name and design together.

The Practical Value of Word Trademarks

A word mark offers substantial protection. It provides a competitive edge if registered across relevant classes in the brow business. Other trademark types can seem like "vanity solutions" to investors, as competitors can easily design and register distinct trademarks. A word mark, however, prohibits others from using that term in the protected classes, irrespective of visual design. While large companies like McDonald's or Nike need figurative trademarks to protect their symbols, startups often find more value in word marks.

Challenges with Word Trademarks

The effectiveness of a word trademark depends on its uniqueness and brevity. Long, descriptive trademarks with limited brand potential offer little value to investors. Short, brandable trademarks are highly sought after but difficult to secure.

The Complex Landscape of Trademark Acquisition

Obtaining a valuable word trademark is challenging, with many applications failing and others unexpectedly succeeding. The rise of AI has led to increased challenges and malicious applications. Securing a strong word mark often involves navigating legal challenges, negotiations, and sometimes conceding certain classes or subcategories to overcome opposition from "trademark terrorists."

9. Domain Names

The Importance of a ".com" Domain Name for Proprietary Value A unique and proprietary “.com” domain name can provide protection and distinctiveness for your brow business. In the realm of domain extensions, entrepreneurs might argue for the value of alternatives like ".io," ".ai," or ".studio," but the reality is that “.com” remains the most influential.

The Dominance of “.com”

A ".com" domain is considered most valuable in the brow business. Arguments for other extensions generally don't persuade venture capitalists, particularly if a similar “.com” domain is owned or could be acquired by a competitor. While country-specific domains can indicate success within particular regions, they often suggest limited business scope.

Investment Needed for a Generic “.com”

Acquiring a generic ".com" domain in the brow business can be costly, ranging from $10,000 to higher sums. Many desirable domains, like "microblading.com," are not for sale, and others, like "ombrebrows.com," are listed at high prices.

Advantages of Owning a Generic ".com" Domain

Owning a generic ".com" domain brings benefits like increased reach, discoverability, and authority despite the high cost. It can also negate the need for a word trademark if the term is generic. A well-optimized website on such a domain can outperform competitors in web traffic.

Thus, a well-selected generic ".com" domain can significantly enhance the proprietary value of your brow business to venture capitalists, but acquiring such a domain often demands a hefty financial commitment.

Technical Solutions as a Proprietary Advantage

Technical solutions offer another path for proprietary advantage in your brow business. While not as legally protective as patents or trademarks, the complexity of the technology itself can deter competition. This complexity can demonstrate to venture capitalists the low likelihood of others undertaking similar technological endeavors, thus strengthening your business’s proprietary standing.

10. Conclusions

A prevalent misconception among brow artists and business owners is overestimating the value of their businesses. Often, the market value of many brow businesses is low or negligible, making them unattractive to venture capitalists.

Traditional Valuation Method

The usual method to value a brow business involves an earnings multiplier, accounting for the artist's contributions and profits. This typically results in valuations close to the average net profit minus the artist's potential wage multiplied by five. When applied, this formula often lowers the business's estimated value considerably.

Dependency on Individuals

Some brow businesses are so dependent on a single individual that objective valuation becomes challenging. This heavy reliance is a significant concern for potential buyers or investors.

Requirements for Venture Capital Investment

For a brow business to appeal to venture capitalists, it must show potential for rapid, significant growth, known as "hockey stick" growth. This involves meeting a large market demand and having proprietary elements. While meeting high demand is achievable with digital products without substantial initial investment, physical products usually require significant upfront costs.

Proprietary Value

To provide genuine proprietary value, a brow business should hold trademarks and patents, own generic ".com" domain names, or possess unique technical solutions. Most brow businesses, however, do not meet these stringent criteria, limiting their attractiveness to investors.