What is the value of my PMU business?

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2. The Reality Check

Many artists might claim their business is worth amounts like "USD 100,000," "a quarter of a million," "half a million," or even "one million." However, the reality often differs. It's important to understand that "value" is not an abstract or arbitrary number in business. It represents what the business could sell for or what an investor might be willing to invest. In other words, value implies potential liquidity; it's not merely a subjective opinion of the business owner.

Thus, when evaluating pigmentation businesses’ actual market value, there's usually a significant gap between the owner's perception and what an investor considers a fair valuation. The essential point is that determining the real value requires a grounded approach that includes tangible metrics and investor perspectives rather than solely relying on emotional attachment or perceived worth.

3. Price-to-Earnings Approach

Valuation Based on Net Profit and Earnings Multiplier

When applying a traditional valuation method like the Price-to-Earnings (P/E) ratio, the value of a pigmentation business is based on its yearly net profit multiplied by an industry-specific earnings multiplier. In many sub-categories of the beauty industry, this multiplier is typically around 5 or 6. This revelation can be eye-opening for many artists, especially those who haven't included labor costs in their calculations.

Understanding Your Role in Valuation

To accurately assess your business's value, you must calculate the cost of replacing yourself. This includes your salary and associated employment costs such as taxes, insurance, and other potential expenses. When artists recalculate their net yearly profit after these deductions, they often find that the actual value of their business is significantly lower. To get a clearer picture, the following formula can be used:

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

4. Other Approaches

This methodology is similar to the Seller’s Discretionary Earnings (SDE) approach, which adjusts net profit by adding back the owner’s benefits like salary and perks. While other traditional methods exist, such as the Discounted Cash Flow (DCF) approach, they generally don't yield high valuations for small pigmentation businesses where the artist is central.

From a financial perspective, a pigmentation business may not be as valuable as the artist perceives it, considering their emotional attachment or skill. Understanding the gap between perceived and actual value is crucial for artists considering future investments or potential business sales.

When the Owner is Irreplaceable

In cases where the business owner is integral to the business, valuing the business depends on the assumption that this indispensable person (likely you) remains actively involved for a set period. This conditionality affects the valuation.

This situation is like assessing an employee’s net worth based on their commitment to a company for a set number of years. As a result, the valuation becomes speculative and uncertain.

Therefore, traditional valuation methods like the Price-to-Earnings ratio are less suitable for artists deeply tied to their pigmentation business. These methods work well when the owner can theoretically separate from the business's functioning. If this separation is not feasible, the valuation becomes less clear and reliable.

5. Risk Capitalist Perspective

Moving Away from the Classic Approach

Many lip-blush artists who own businesses often express, "The classic valuation method doesn't capture all the assets and growth potential of my business!" Even seasoned investors in the beauty industry, some with over 34 years of experience, find such statements challenging to quantify. However, in risk capital discussions, a business's valuation can indeed exceed what traditional methods suggest.

In Search of the “Hockey Stick”

What is this "hockey stick" often mentioned in risk capital contexts? The term refers to a specific business growth trajectory. Imagine a hockey stick, flat for a length before curving sharply upward. A business might show modest growth initially but is expected to experience a sudden and significant surge in revenue or customer base. Graphically, this growth resembles a hockey stick—the "blade" represents the initial period of steady growth, and the "shaft" indicates the abrupt rise.

Venture Capitalist Perspective

Venture capitalists are particularly drawn to the "hockey stick" growth pattern because they seek high investment returns. These investors fund startups and new ventures, anticipating these businesses to scale and become highly profitable. When a business achieves rapid, hockey stick-like growth, it can provide substantial returns, often compensating for losses from other, less successful investments.

If you can demonstrate your business's potential for such exponential growth, the valuation criteria change entirely. Your business could potentially meet or exceed the initial valuation figures mentioned.

Probability of “Hockey Stick” Growth

Two critical factors are essential to assess the likelihood of "hockey stick" growth in the pigmentation business: substantial evidence of high demand and unique, proprietary assets. Without these, convincing venture capitalists to consider a high valuation is challenging.

Understanding "High Demand”

"High demand" refers to a widespread, intrinsic need for what your business offers. Your solution should address a common problem. However, such "problem-solution opportunities" are limited within the pigmentation business sector.

Intangible Solutions Explored

The focus here is on pigmentation-related services and training programs. The last major demand surge was with microblading around 2015, leading to significant industry growth between 2016 and 2018. Since then, there have been smaller surges, but none as impactful. Thus, businesses centered on established services like Powder Brows, Lip Blush, or Microblading, even with slight variations, are unlikely to attract venture capitalists seeking exponential growth.

The crucial point for venture capitalists is that merely doing something slightly differently isn't enough for a hockey stick growth trajectory. Scaling your service, such as offering online training, doesn't provide a unique edge if it's a common industry practice.

6. Physical Products

The Potential of Physical Products

When analyzing the last 15 years of investments in the beauty business and related startups, physical products emerge as a potential avenue. However, achieving exponential growth that attracts venture capital in this area is extremely challenging. The market for physical products like PMU pigments, serums, and PMU machines is well-established. Entry into this market is straightforward, as products can be sourced from manufacturers and branded, leaving little room for innovation or differentiation.

Initial Investments and Market Saturation

Launching physical products in the pigmentation business often requires a larger initial investment. These products typically don’t offer anything novel or hard to replicate. If products like brow serums, PMU machines, or consumables can be sourced as "white label" items, achieving exponential growth in today's competitive market is a formidable challenge.

Considering these factors, venture capitalists are unlikely to be convinced that a new version of an existing product could achieve "hockey stick" growth. The high market saturation and ease of duplication make this a less appealing investment option.

Criteria for a Truly Novel Concept

You must offer something innovative to position your pigmentation business for "hockey stick" growth. Investors are open to backing unique ventures, but your business must provide a differentiated solution to existing problems that can create "huge demand."

7. The Proprietary Aspect

Trademarks and Patterns Explained

The second pillar, equally critical as "huge demand," is your business's proprietary nature. It's not just about differentiating your pigmentation service but protecting that differentiation. Convincing investors to support a high valuation is much more difficult without a protective edge.

Paths to Proprietary Advantages in Your Business

Fortunately, the routes to establishing proprietary advantages are limited, simplifying the task. However, the challenges lie in achieving these or needing substantial initial investments. The three main avenues for creating proprietary safeguards in your pigmentation business are trademarks (or patents), domain names, and technical solutions.

Trademarks Versus Patents: The Key Differences

What distinguishes a trademark from a patent? Consider a trademark as your business's unique identifier, such as a symbol, phrase, or word. It tells customers, "This product or service is uniquely mine!" For example, "Nike" and its "swoosh" logo are trademarks, signaling the origin of the products. Trademarks protect your brand against imitators or confusion created by similar branding.

A patent, however, is like an exclusive license. It grants you the sole right to produce, use, or sell a particular invention for a set period, typically up to 20 years. If you invent a new pigmentation technique, securing a patent means no one else can legally offer that technique for the duration of the patent. It safeguards your innovation and investment, preventing duplication.

Practical Implications: Patents Are Highly Unlikely

The chance of securing a groundbreaking patent is slim in the pigmentation business. While you could theoretically invent a novel Permanent Makeup (PMU) machine, the likelihood of it being unique and patentable is extremely low. This challenge applies to developing new pigments or other PMU products and supplies.

Exploring this area reveals many existing patents, often originating from different industries. Creating something genuinely new in this crowded field, even with a strong scientific background, is exceedingly unlikely, akin to making a delicious, affordable ice cream or cake that aids in weight loss.

8. Trademarks

Trademark: A Viable Route to Proprietary Business

Considering trademarks, this is a practical approach to establishing a proprietary aspect in your pigmentation business. However, the value and utility of a trademark can be complex and nuanced.

Types of Trademarks Explained

Trademarks can take various forms. They can be a word mark, a figurative mark, or a combination of both. A word trademark focuses on a specific word or phrase, such as "Apple" in the tech industry. This safeguards the name regardless of its visual representation or font style. On the other hand, a figurative mark emphasizes the visual symbol rather than the wording. The Nike "swoosh" is a prominent example. Then, there's the combined trademark, which incorporates the name and the visual elements. An example is McDonald's golden arches paired with the word "McDonald's." In this type, the name and the design are protected as one unit.

The Practical Value of Word Trademarks

Among the trademark options, a word mark provides the most tangible protection. Registered across relevant classes in the PMU business, it can offer a competitive edge. Other types of trademarks might be seen as "vanity solutions" by potential investors, as competitors can easily design and register a distinct trademark in the same classes. However, owning a word mark ensures robust protection, preventing others from using that term within the protected classes, regardless of its visual form. While established companies like McDonald's or Nike require figurative trademarks for their symbols, startups often find more practical value in word marks.

When considering word trademarks, assess how challenging it would be to obtain a similar trademark. Suppose the registered word trademark is a long, multi-word term with limited brand potential. In that case, its value to an investor may be minimal due to the high likelihood of successful registration.

The Complex Landscape of Trademark Acquisition

Securing a short and high brand potential value word trademark is often unpredictable. Many promising applications have failed in the past 15 years, while seemingly risky ones have succeeded. The rise of AI has also led to an increase in malicious challenges or applications. Obtaining a word mark that provides true protection can be demanding, with challenges from existing trademark owners or their legal representatives forcing "co-existence" agreements, even when there's no realistic operational conflict. This situation can lead to negotiations or the need to relinquish classes or subcategories to counter these "trademark terrorists.”

9. Domain Names

The Importance of a ".com" Domain Name

A unique and proprietary domain name is crucial for protecting and distinguishing your pigmentation business. However, the choice of domain extensions can be challenging. Entrepreneurs might argue that extensions like ".io," ".ai," ".studio," ".art," or ".digital" are as valuable as the traditional “.com."

The Dominance of “.com”

In evaluating a domain name's value in the pigmentation business, ".com" is typically considered superior. Arguments favoring other extensions usually don't resonate with venture capitalists, particularly if a competing business owns the corresponding ".com" domain or could potentially acquire it. While some businesses succeed with country-specific domain names, this often indicates that their operations are limited to those countries.

Investment Needed for a Generic “.com”

Acquiring a generic ".com" domain name in the pigmentation business often demands a significant investment. Prices can range from $10,000 to higher five-figure amounts. For example, popular generic names like "microblading.com" may not be available, as current owners may choose not to sell. The domain "ombrebrows.com" is listed at $25,000, a price unlikely to decrease significantly.

Advantages of Owning a Generic ".com" Domain

Despite the high costs, owning a generic ".com" domain brings several benefits, including increased reach, discoverability, and domain authority. Additionally, if the domain name is generic, there's no need to register a word trademark, as these are often unenforceable for generic terms. Furthermore, a well-optimized website on such a domain can outperform many web traffic competitors.

In summary, a strategically chosen generic ".com" domain can significantly enhance your business's proprietary value in the eyes of venture capitalists. However, acquiring such a domain typically involves a substantial financial commitment.

Technical Solutions as a Proprietary Advantage

Technical solutions are the third avenue for establishing a proprietary edge in your pigmentation business. While they don't provide absolute protection like patents, trademarks, or domain names, the technology's complexity can deter potential competitors. This complexity can signal to venture capitalists a low probability of another entity undertaking a similar technological project, thus reinforcing your business's proprietary strength.

10. Conclusions

A common misconception among pigmentation artists and business owners is the overestimation of their business value. In reality, many pigmentation businesses have low or negligible market value, rendering them unattractive to venture capitalists.

Traditionally, business valuation involves using an earnings multiplier adjusted for the artist's contributions and profits. This results in valuations closely tied to the average net profit minus the artist's potential wage multiplied by five. When applied, this formula often reduces the estimated business value to a modest amount.

Additionally, some pigmentation businesses rely on a single individual, so objective valuation becomes challenging. Regardless of the business's seemingly promising prospects, this dependency is a major concern for potential buyers or investors.

A lip blush business must show potential for exponential "hockey stick" growth to attract venture capital and be considered investable. This usually involves meeting a large market demand and having proprietary features. While the market is saturated, meeting high demand is possible with digital products that don't require massive initial investment. In contrast, physical products often necessitate significant upfront costs.

To truly provide proprietary value, a business should possess trademarks, patents, own generic ".com" domain names, or have unique technical solutions that are hard to replicate. Unfortunately, most pigmentation businesses don't fulfill these criteria.