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post # 297 — January 31, 2007 — a Managing, Strategy post

I received this extensive case study from “NexLevel” who would really like our help to save him from bankruptcy. Please offer your ideas.

Your article, “The One-Firm Firm” addresses my current situation. I own a salon and spa in Texas. I acquired the business 18 months ago and have faced resistance to new strategies almost from day one. As you may know, most stylist / technicians wield power by threatening to leave and take clients with them. They are the rainmakers. Therefore, most salons are what you call “warlords” shops.

I fear I do not have much time in order to implement an employee development program. Attracting other rainmakers is difficult even though we offer full “back office” support. We provide assistants, front desk, bookkeeping, etc. They do not even sweep the hair clippings as we have a housekeeper on staff. With all of the above services, the stylists still want full commission (55%). Industry analysts show that salons cannot be profitable with payroll / commissions over 45 – 50%.

Clients are very loyal to stylists and very vocal in giving their opinions, likes and dislikes. I need to terminate one of the rainmakers for insubordination, but it will hurt cashflow so much that I would have to close.

The staffing model of the salon since the early 70’s has been to have a hair-stylist up front servicing clients at full commission. Support people were hired to work in the back, shampooing and applying color and perms, washing towels, sweeping hair, cleaning the bathrooms, etc. for hourly min wage + tips. In most salons, these tasks would be a part of the job.

The irony is that the stylist received full commission but do not have do all the work and resist contributing to the overhead cost of the assistants. They know it, the clients know it too. Until 6 yrs ago none of the stylists made a great deal of money. As others retired, they took on the clients of the retirees. Now they are making money, but have no loyalty to me.

The Company at one point was a $2.8 mil dollar business and could easily afford the overhead costs. Today, I can’t. With overhead payroll and commission, total payroll is 67% of revenues. We are in a high profile strip center and rent is $8400/mth for 3600 sf. We do $800,000 yr, but there too much going out the door.

Raising prices on the existing client base would be greatly help. However, the stylist will most likely resist as they did before. That battle started the riff leading to 2 employees leaving. We retained 100% of the clients, so we have a feather in our decision making management cap. All dissenters were proved wrong.

Stylists who are afraid that they will lose clients by raising prices do not understand supply and demand or their value to the market. They only want to work harder for the lower prices. And they do this because of the assistants that perform the time-consuming tasks that they do not pay a whole lot for.

This fear becomes arrogance if the stylist has sufficient clientele to support them going independent. They will then have to accept losing clients or work more hours because they are working all alone without assistants. If they pay an assistant they are in my boat and will not make the money they want.

Among the solutions I have considered are to budget and implement regular advertising and measure results to improve, implement aggressive recruiting and training program. With a regular flow of new clients and home grown employees, I, as the owner could always have foundation and build a firm, not just a collection of independent warlords. By the time the existing stylists begin to resist policy and process changes, I will have more stability and can manage the any insubordination or non-collaboration head on.

What advice do you have for “NexLevel?”


Dominique Hubart said:

RE: NexLevel

I would transform NexLevel into a partnership (with all rainmakers becoming equity partners), in order to align the interest of all the parties (remember “Aligning the Stars”).

Of course, iit would have clear implications in terms of corporate governance, but if the alternative is closing down…

I’m in a similar process right now (although in a totally different sector). If you wish so, I can keep you posted.

Best regards,



posted on January 31, 2007

Tim Percival said:

In these circumstances, I think I would start by putting together a simple spreadsheet based model showing the financial dynamics of the business, with the ability to change variables to show their impact (eg fees, commissions, etc). Then I’d get them together, preferably with an external facilitator, to share the knowledge of how it all works, explore the opportunities, and agree next steps. You need to help them to see the financial realities of the business in a graphic way, get them to put forward some solutions and test them in the model in front of them, and project the various scenarios – good and the bad. Involve them in arriving at the obvious, rather than tell them what it is, if you can. Try, somehow, to see them as your potential allies rather than people you are inevitably at loggerheads with. Its hard, I know, but it sounds a little like the culture you describe has become a self-fulfilling prophecy.

posted on January 31, 2007

Robert Gagliano said:

I own a real estate appraisal firm and I had almost the exact problem two years ago. I started the firm in 2001 and later found that I had been too generous with my Associates.

In the appraisal industry, “traditional” compensation is a split fee arrangement, typically 50%/50%. From the beginning, inspired by reading David Maister’s Managing the Professional Service Firm, I was determined to change the way real estate appraisal firms do business. Specifically, I want our firm to be as professional as any well-run law firm, accounting firm, consulting firm, etc. Among many other things, I insisted that all of my appraisers be full-time employees that work in our office – no one is permitted to work from home, which is common in our industry. Unfortunately, I was naive and found that the overhead costs associated with running a firm in this manner simply did not justify fee splits at this level.

In May of 2005 we had a Come to Jesus meeting, where I laid out the company’s financial woes. Initially, I was going to cut the top split fee down to the 35% to 40% level, but later I increased the top level split fee to 45% and created a graduated schedule for trainee appraisers that starts at 30% and increases based on education and licensing.

It was a horrible meeting and there was much crying out and gnashing of teeth, but I had no choice – either they accepted the reduced fees or we were out of business. After the initial shock wore off, the appraiser’s recognized: (1) that I had a vision for the firm and the industry that they would benefit from in the long term, (2) that our fees and volume of work are generally higher than average because of our aggressive marketing (by real estate appraisal standards) and use of technology, (3) that the company supplies virtually every tool available, including a wide variety of paid data services, support staff and top-notch equipment, to help them do their job efficiently and accurately, (4) that the company is a fun and energetic place to work, (5) that our training is the best in the industry, (6) that it is nearly impossible to find a firm to jump to that would provide as much and (7) the cost of duplicating all of these benefits on their own would be prohibitive.

The result? No one left, and the company slowly started making money. Since then, I have been able to increase compensation in a variety of ways and my appraisers are some of the best compensated in the area. Sometimes my appraiser’s share their experience with their peers in other firms. They come back to me shaking their heads in disgust at the way other firms are managed. Today they see the vision being realized and they believe that they are part of something great. More importantly, they see the profession and themselves as great. This is a terrific place to be if you want energized people with a commitment to quality!

For me, it was important to start with a vision (by the way, “to make lots of money” is not a vision). Then comes honesty. Tell them the truth and accept the worst case scenario before you meet with them. Get their feedback and discuss alternatives that will allow the business to survive and grow, and give them a stake in the future. I think you will be pleasantly surprised at the outcome.

posted on January 31, 2007

Tom "Bald Dog" Varjan said:

> As you may know, most stylist / technicians wield power by threatening to leave and take clients with them.

But it’s the shop that has the client names in the database, not the stylists. Only you can stay in touch with the clients. They are the shop’s clients not the individual stylists’.

What may have happened over the years that the individual stylists have been allowed to promote themselves at the expense of the shop.

> With all of the above services, the stylists still want full commission (55%). Industry analysts show that salons cannot be profitable with payroll / commissions over 45 – 50%.

My thought is that anyone who is paid commissions, as opposed a salary, doesn’t fully belong to the team. I would eliminate commissions and start paying a base salary and then would offer profit sharing. I prefer to use the same payment method for everyone.

> Clients are very loyal to stylists and very vocal in giving their opinions, likes and dislikes. I need to terminate one of the rainmakers for insubordination, but it will hurt cashflow so much that I would have to close.

But keeping that person may be more damaging in the long run.

> implement aggressive recruiting

I fear this would bring you lots of mediocre applicants.

and training program. With a regular flow of new clients and home grown employees,

> I, as the owner could always have foundation and build a firm, not just a collection of independent warlords.

This is a great point and recognition. And part of the “independent warlords” syndrome is the commission structure. People who work for commissions have their own individual gain in mind. They don’t care about the whole, about the team, about the business. If they don’t like it, they move on to the next highest bidder. In my experience, commissions destroy loyalty.

I know it would be painful, but the best bet may be to start from square zero and build a one firm firm.

And if they want to go alone, maybe just let them. Most of them go bankrupt within one year or less. Rephrasing Michael Gerber, they know how to do hair, but they don’t know how to run a business that does hair.


posted on January 31, 2007

Jim Belshaw said:

David, I received a very similar request off-line. The information in your case study is a little more detailed, especially in regard to the model already in operation. It’s quite interesting to see how the additional information changes the focus.

I have put the request I received plus my response up as a post with a link to this post.

posted on January 31, 2007

Linas Simonis said:

This is classical question “Who owns clients – your’s rainmakers or your’s salon brand”.

If your’s salon brand is weak (it means, if you don’t have good point of difference), you are in trouble.

In this case rainmakers are real owners of salon. Because they “own” clients.

If your salon have strong brand – if you have good point of difference, it is easier not only keep old or attract new clients, but even makes easier manage own staff – this is experience from my fifteen years of consulting practice.


Creating strong brand takes time. Strong brand is long-time issue. Do not expect quick-fix.

So, find good point of difference, transform it to positioning idea, use all guerrilla tools to communicate it (PR, personal blogs is my favorite) and start create customer’s loyalty not to your’s rainmakers, but to salon.

Yes, it’s very difficult, it means you must deal with staff, etc., but you have no choice.

All the best in your’s hard branding job!

posted on January 31, 2007

David (Maister) said:

My thanks to everyone for particpaating and commenting. I have a busy work (and travel) week, so it’s taking all I can do to add new posts. I appreciate it that all of you, the community, are keeping the discussion going without my prompting. I hope it’s a sign of a good dinner party when the host doesn’t have to intervene all the time to keep the conversation going. You’re all acting like good guests, and you’re all invited back!

posted on January 31, 2007

John Irving said:

All good comments so far…my advice is based on dealing with many many failed businesses over the years…most owners refuse to accept the signs of impending disaster and then leave it far too late to act. The business in question will fail if nothing is done, therefore the first move is to do something…almost anything to implement CHANGE…the “come to jesus” meeting is as good a place to start but needs a plan of action to follow up quickly i.e. its not enough to confront the stylists with the problem…they will need to see the solution as well. That plan should address a range of changes that will be needed…focussing on one big change will usually not do it…attack 4 or 5 key issues and remain focussed!

posted on January 31, 2007

Heather Gallegos said:

Salon owners everywhere feel your pain with the 55% comissions… and you are right that you’ll never reach profitablity at those rates. However implausible it may seem, changing your compensation structure is the only way. I don’t recommend salaries for stylists because salaries don’t motiviate the behaviors you want. Correct me if I’m wrong, but you want your stylists to do two things: 1) give a great service and 2) keep the books full with clients. I offer up that you should also focus on them selling retail products as a way to increase their income (and yours). I’m assuming your stylists are all employees and not independent contractors. If so, then you should keep in mind that you are the employeer and can change compensation, performance standards, policies, etc. If you dont’ already have your client files…you should. Legally they are your clients. Many salons (with employees) do not permit stylists to have client data. While you should expect employees to leave when they don’t like change, with advanced planning and other strategic measures you can retain the “good” ones and hire on new staff that start with the new (profitable) polices.

posted on February 1, 2007

Kent Bernard "NexLevel" said:

Thank you all for your feedback. All were spot on. I’m late reading them due to firewall issues that kept blocking my access to this and several other sites. All of your ideas were tried / implemented over the course of the past year. Yes, we too decided to have on last “Come To Jesus Meeting”.

In Feburary, my wife and I were prepared to present a detailed plan that would in effect be a profit share proposal. The meeting would be Thursday March 1st COB complete with updated P&L and Expense statements as were presented several times before in the most simplied manner possible.

Tues. Feb. 28 – we recieved a call from an area suite salon owner that several of our stylist had been there inquiring to lease space. A “Suite Salon” is basically a tenant / landlord business where someone leases a retail space, subdivides into small rooms / small 1-2 person salons each with 4 walls and its own door, then sublease to independent stylist, massage therapist, skin care, etc. Each can use it’s own business name, come and go as they please. A beauty mall if you will.)

Weds Feb 29 – (7:00am) – Could not reach our recptionist so we called one of our stylist (an ally) that opens the salon daily, to alert him that we may have a visit from the landlord (we were again late paying the rent), and to keep an ear open for talk of quitting and client recruitment by the stylist. In the conversation I commented that if anyone leaves we may have to close.

Weds Feb 29 – (9:00am) – Recieved call from receptionist telling us that two stylist had went in and began to pack their belongings. Soon, everyone, including those stylist that were scheduled to be off that day, were at the salon wanting know what was going on. I headed to the store.

Weds Feb 29 – (9:30-40am) – Arrived at the salon. Several boxes packed at the stylist stations. One stylist that was working that day, decided not to charge for services in protest during the two hours/ 4 clients before I got there. (I wonder if got his money later.) Client cards had been raided, and some product taken. They said that they understood that we were closing and they had to make plans and wanted their final paycheck (that was not to be delivered until that Friday). No one wanted to hear what we had to say.

Weds Feb 29 – (1:00pm) Everyone was gone. Phone rings with echo in a 3600sf, $8100/mth, empty salon. The two former owners who were our employees and on consulting contracts with non-compete agreements, were also gone. (Can you say breech of contract?)

Thurs March 1 – No one shows up for work not even the two former owners / stylists who were on contract. Phones continue to ring with clients wanting appointments. But calls were fewer than normal and by 10:00 am had slowed to maybe a third of normal. The same on Friday and nearly zero on Sat. Why? Every stylist was working somewhere on Thursday, the day after the walk out, and had already called their clients. By Saturday all clients were contacted. Even the previous owners / stylists that we still had on contract were working elsewhere. The assistants went with them but were working at different locations yet all applied for unemployment benefits. So did some of the the stylists.

Mon. Mar 5 – Met with former owners. They said they did not know anything was going to happen, even though the wife of one them, was one of two stylist named by the Suite Salon as having put a down payment on a salon suite. He had already started working at a separate salon away from his wife. I asked them to buy back the salon for $1.00 (FREE) and forgive the owner financed note. I would keep all debts I created and catch up the rent, any tax matters. They Refused!. (we had began using employee taxes to fund the business – $140,000. I konw, I should have gotten out long ago, but I lost my regular job and the salon was our only income. I was out of work for 7 mths. and still not working, however, I am now going to work in my Father’s Marine Construction / Ship Repair Business – General Contractor to Petrochemical Industry. I will need to make alot more money to cover the debts and have considered consulting to other salon owners – suggestions please. Think I’m qualified?).

Mar 5th – Put salon up for sale in whole or sell off equipment. Responses were slow. One prospect fell through. Began getting quotes from wholesale equipment suppliers in the area. Hoped that they would not find out that the salon was already closed and low ball me.

Property Manger – says we had until March 15 5:00pm to pay pastdue rent or default on lease.

Several inquires, but no serious players that could handel the $8100/mth rent and $2000/mth utilities and a purchase note ( I even offered to give it away).

March 12 – Retail equipment buyers / ad responders are no-show. Wholesellers are no-show but one said they would come on the 13th.

March 13 – Wholeseller #1 (primary repair person and supplier to the salon for many years before we took over) – no-show. He sent truck to another pick up. Similar feedback from wholeseller #2.

Weds – March 14 – Wholeseller #1 – Says that now he does not have room or budget after previous days purchase. Wholeseller #2 now give a revised (insulting) offer and can’t come until the 15th – the last day before property manager changes the locks. I rent a U-Haul and begin packing and moving. Confirm with property manager that we had until 5:00pm on the 15th to be in the store. He says YES. Unload U-Haul at storage facility at 11:00pm. All styling chairs and hair dryers, PBS phone system, some beauty products were still in salon to show to a last minute salon owner wanting to buy the salon/equipment or for the wholeseller to pick up. I did move the 4 computers, vending machine, retail beauty products, pictures, mirros, fountains, etc.

Thurs – March 15 – 8:30 am – DOOR LOCKS HAVE BEEN CHANGED! (Eight hours before the 5:00pm deadline.) I can’t get in to get my equipment. Wholeseller is there with a $10,000 check, but I can’t get in. Property Manager says nothing he can do unless I want catch up the rent. (2 mths = $16000)

Mar 15 – Present – Have recieved about 7 inquires to buy the whole salon buy serious buyers (knowledgeable of all basic costs). One even sent a Letter of Intent. Too Little…Too Late.

Again, thanks everyone.

posted on March 26, 2007