Latest / The Buyout Show with Fexingo: Private Equity, Roll-Ups, and Business Acquisitions / How Private Equity Is Consolidating the Tanning Salon Industry
Transcript
- Lucas: Luna, you ever walk past one of those storefronts that you swear has been there for fifteen years but you've never once seen anyone inside? Luna: All the time. Usually it's a mattress store or a tax-prep place. Lucas: Add tanning salons to that list. And what's interesting is that those sleepy little shops are the target of a pretty aggressive private equity roll-up right now. Luna: Tanning salons? I thought that industry was on the decline — more awareness about skin cancer, younger generations staying out of the sun. Lucas: You'd think so, but the data says otherwise. The indoor tanning industry in the US is roughly a $3 billion market, and it's been growing about 3 to 4 percent annually. Private equity has noticed that a typical standalone salon can throw off 40 percent EBITDA margins. Luna: Forty percent? That's restaurant-level margins without the food costs. Lucas: Exactly. The economics are beautiful on paper. A standard tanning salon — maybe 10 to 15 beds, in a strip mall — generates around $200,000 in annual revenue. Rent is cheap, electricity is the biggest variable cost, and the beds themselves depreciate over five to seven years. Once you've covered those, most of the revenue drops to the bottom line. Luna: So who's doing the consolidating here? Lucas: One of the most active players is a company called BT Brands. They've been buying up salons primarily in the Southeast and Midwest under the Palm Beach Tan brand. Over the last 18 months they've acquired about 120 locations. Their playbook is standard roll-up: acquire independent operators, centralize back-office functions, negotiate better pricing on bulbs and lotions, and push a membership model. Luna: The membership model — that's the subscription shift, right? Instead of paying per session, you pay a monthly fee. Lucas: Right. And that's the real profit driver. A typical pay per visit customer might spend $15 to $20 per session and come in maybe six times a month. That's about $100 a month. But a membership — say $40 to $60 per month — locks them in, and the salon knows exactly how much revenue to expect. Members also tend to use the service more regularly, which builds habit. Private equity loves predictable recurring revenue. Luna: But acquisition costs must be high. How do you get people to sign up for a tanning membership? Lucas: Historically, these businesses relied on local radio ads, flyers, and foot traffic. The big roll-ups are shifting to digital — Facebook ads, Instagram influencers, geo-targeted promotions. But the cost per acquisition is still relatively low because the service is local. You're not trying to reach everyone, just people within a three-mile radius of your salon. Some chains report a customer acquisition cost under $50. Luna: That's cheap. But what about the demographic risk? Tanning has a reputation for attracting teenagers and young adults. Are those customers sticky? Lucas: That's the tension. The core customer is women aged 18 to 34. And yes, they're more fickle, they move cities, they change habits. But the roll-up thesis is that you can offset churn by buying more locations. If you have 300 salons, losing 50 customers in one market is noise. Plus, the membership model creates auto-pay, so customers have to actively cancel — and many don't bother. Luna: So inertia becomes a retention strategy. Lucas: Exactly. And the industry has another lever: add-on products. Tanning lotions, eye protection, moisturizers. Those have margins of 60 to 70 percent. Once a customer is in the door, you can upsell pretty easily. Luna: But there's a big regulatory shadow here. States like California and Vermont have banned indoor tanning for minors. There's a federal excise tax of 10 percent on indoor tanning services, thanks to the Affordable Care Act. Doesn't that cut into margins? Lucas: It does. The 10 percent tax is essentially a cost of doing business now. Some salons pass it on to customers as a line item. But the bigger risk is outright bans. If more states follow California's lead, the addressable customer base shrinks. The roll-up guys are betting that the regulatory environment stabilizes, or that they can lobby effectively through a trade group. Luna: It's interesting — this feels like an industry that's being consolidated precisely because it's a bit under the radar. Not glamorous, not high-tech, just cash churning. Lucas: And that's the pattern across so many roll-ups. You see it in HVAC, plumbing, pest control — boring businesses with steady cash flows. Tanning fits the mold perfectly. Luna: Speaking of which, it's worth mentioning that a big reason we can dig into these niche roll-ups every week is because of listeners who support the show directly. We don't run ads, and that keeps the conversations focused. Lucas: Yeah, if you've gotten something out of these episodes, a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo. It's really what keeps us going, and it means we can keep covering the weird corners of private equity without any outside pressure. Luna: Exactly. And it's not about a big ask — just if you find value, that's where you can help. Now back to the tanning story. Lucas: So the roll-up is still in early innings. There are roughly 18,000 tanning salons in the US, and the top five chains control maybe 15 percent of the market. That leaves a huge fragmented base for private equity to acquire. Luna: What's the typical acquisition price for an independent salon? Lucas: Based on recent deals, you're looking at 3 to 5 times EBITDA. If a salon generates $80,000 in EBITDA — remember, $200k revenue minus maybe $120k expenses — that's a purchase price of $240,000 to $400,000. For a private equity firm, that's a small check. They can roll up 20 salons for the price of a single software company. Luna: So the barrier to entry is low, but the operational challenge is high. You have to integrate all those independent owners, who often ran things on a shoestring. Lucas: That's the hard part. Many independent owners kept messy books, didn't track membership churn, had inconsistent pricing. The roll-up firms bring in a centralized CRM, standardized training, and a uniform pricing structure. That's where the value creation happens. Luna: But do customers notice? If your local salon gets bought out, do you see a difference? Lucas: Often yes, and not always positively. The new corporate owners may push for higher membership prices, or push sales of lotions more aggressively. Some customers feel the personal touch disappears. But the counterargument is that the new owners often renovate the facilities, replace old beds, and improve cleanliness — which is a big deal in a business where hygiene matters. Luna: Given the health concerns, I'm surprised more insurers or regulators haven't stepped in. Is there any liability risk for the acquiring firms? Lucas: There's definitely liability. Lawsuits related to skin cancer have been filed against tanning salon chains. But the industry has responded with waivers and disclaimers. Most salons require customers to sign a release acknowledging the risks. Whether those hold up in court is another question, but so far, the litigation hasn't been a deal-breaker for private equity. Luna: So what's the exit strategy? Do these firms plan to build a chain and sell to a larger operator, or take it public? Lucas: The most likely exit is a sale to a larger private equity firm or a strategic buyer — maybe a company that already owns fitness or wellness brands. There's some logic to bundling tanning with gym memberships, for example. An IPO is possible but less likely given the industry's stigma. The bigger play is to build a platform, improve margins, and flip it in 5 to 7 years. Luna: Interesting. So it's a classic roll-up story with a slightly controversial twist. I'll be curious to see if the next wave of regulation changes the math. Lucas: Absolutely. And that's exactly the kind of thing we'll keep tracking. For now, the roll-up continues, one strip-mall salon at a time.