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| A basic overview of nightclub and bar investments |
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| Monday, 08 February 2010 23:32 |
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We continue to receive a significant number of emails from investment sources, as well as those seeking nightclub investors. The purpose of this document is to provide a 'basic overview' of the social entertainment investment. Basic, meaning we have not calculated everything down to the last dime, but will try to provide some ballpark idea.
Well for one, the demand for 'quality' social entertainment product could never be higher. The singles population that has mushroomed in both diversity and age, thus demand for 'more interesting' social entertainment venues exists. The total singles population in the U.S. alone is now estimated at 100 million. That is a lot of single souls looking for something to do.
In addition, many types of nightclubs perform exceptionally well in recessions. See more on this here. The return on investment can be as little as 14-months and with 'competent' management, they operate quite profitably on 3-nights a week. Those are the pro's... The con's are discussed as you read on...
I keep hearing about huge $$$$ in very short periods of time -is this true? The nightly entertainment venue is a high cash flow performer. This is the result of high volume traffic, coupled with nominal per person spending. Nominal as in $20, to $50 per person spending on average or more depending on the marketplace. Now multiply that by 300, 1500, or 3000 in just over 3.5 hours. Couple this with the fact you're selling liquor product at a 400% markup or more, plus another $10,000 to $40,000 in cash door charge and you can see how profits add up rather quickly. Operating costs are lower than most conventional businesses, so net profits can be sizable.
Not quite… However, this is what lures many less experienced business people into a social entertainment venture. A common misconception is that as long as you can create a pretty décor scheme, play music, and sell booze, you too can become an overnight millionaire. So of course… Everyone from the teenager, to mothers, brothers, sisters, and uncles too figure they've finally found a way to catch up to the corporate 6-digit income earner.
Rarely does this ever become a reality. Similar to the educated high-income earner, operating a social entertainment venue requires considerable education as well. A quick million is certainly possible, but limited to those who actually know what they're doing.
Contrary to the belief of many operators, even today, social entertainment product has little to do with music, booze, and promos. It has everything to do with "what experience" you can provide to the consumer on a "consistent" basis." Lame gimmicks, freebies, and a mishmash of promos worked wonders in the 80's -they DO NOT now, and if they do, you can expect bottom of the shelf crowds who are happy to suck up your product, while paying next to nothing.
Today's entertainment consumer is substantially more educated, enlightened, and not easily fooled by cheap gimmicks. They actually want to be entertained. Most importantly, the broader scale singles demographic more than anything else, desires an environment "conducive to meeting other people." Skilled and seasoned operators 'know how to create' a social environment, which stimulates and heightens social interaction within a room. This component, more than anything else is the driving force behind successful and highly lucrative entertainment product.
I've heard the failure rate is high, is this so? There is a fast emerging divide between operators who understand the needs of the broader based entertainment consumer, and those that continue to approach it with the hit and miss philosophy. The above average failure rates in this industry are rarely the result of a lack of market demand, but almost always the result of a lack of 'market understanding'. As a result, 10, to 20% continue to make 80% of the money, while the remaining majority do fair, to struggling to maintain one solid night a week of business.
What is the typical capital requirement for a social entertainment venue? That depends on a host of factors, such as the size of room you're opening up, to the stature of clientele you're targeting. A smaller 300-person capacity room can require as little as 100K, to as much as 360K. Larger 500-person, to 1,500-person capacity or more venues can require anywhere from $500,000, upwards to 4-million. Mega clubs, usually found in Las Vegas, Miami, and other high-end markets can run as high 8, to 12-million in total startup.
How much can these investments make? This is largely dependent on market size, demand, and type of clientele you're targeting. The smaller. to intermediate class nightclub of say 300, to 500 people capacity can generate anywhere from $50,000, upwards to $140,000 a month in total revenue. Your larger 500, upwards to 1,500 person operation can take in anywhere from $150,000, to $350,000 a month. Exceptional mega clubs of (1500 to 3000 people or more) can take in as much as $900,000 monthly or more.
How fast in the principal note returned? Strong entertainment offerings will return the original note in as little as 14-months and as much as 18. Due to the fluid nature of the social entertainment arena, extending the window of 'initial return' much beyond 18-months increases the overall risk substantially. These are not long-term investments. 2.5 to 4-years is the average lifespan, but sometimes more in smaller markets due to less competition and slower overall change in entertainment climate.
Hmm… That's highly variable and largely reliant on the deal structured between entrepreneur and investor. If it's a simple cash loan, a 25, to 35% return, sometimes more... Is expected. Most professional operators divert as much as 80% cash flow to investors until the original note, including the promised ROI is paid. There are numerous types of deal structures that are possible, but going into all of those here would take us well beyond the scope of this document, and quite frankly, our core business is not finance :)
If all has gone well, you've received a sizable return on your investment. As for the club, several outcomes are likely: - Depending on the term of your lease, you could re-concept the venue. Most of the primary infrastructure is currently in place so reinvest into a new look /feel and drive another 2 or 3 years out of it. - Pack up and open your next one - If it's purchased real estate, convert it into some other use, such as office space.
Now, some may perceive this as a 'fly by night' business, as in here today, gone tomorrow. Again, entertainment ventures are not long-term investments. Similar to movie releases, hit music, and most forms of entertainment, they're life expectancy is short, but nevertheless can yield a high return on the dollar in a fraction of the time conventional investments would.
Possibly the following: You may not be at all familiar with an investment of this nature, which may raise many questions as to what makes sense and what does not. Nightclub entrepreneurs often submit business proposals that are riddled in contradictions, ambiguities, and or so convoluted, even the best MBA's would have a difficult time making sense of them.
Incorrect financial projections. Most business startups can take several years to establish leads, recognition, clientele, and eventually profit. As a result, financial projections usually increase over a 5-year period. Not so with pure nightclubs… Prime revenue spans across months 1, to 4 in most cases, before descending somewhat and holding for the next 18, to 24-months. The first 1, to 4-months are also termed the "honeymoon period" and where a nightclub recoups a sizable portion of the investment.
As a result, projecting prime or elevated earnings in year 3 or 5 is a little off base, as most nightclubs have well past their prime at this point, thus very unlikely they're going to match or exceed the financial performance of the first 4-months of operation. In this business, you either launch with award-winning success, or you may very well end up with a while elephant on your hands -it's not a business you grow a little bit each month. Suffice it to say, nightclub entertainment proposals can be exceptionally difficult to understand or make sense of at times.
How can revenues projections be qualified in any way? They cannot… Nightclub ventures do not have an average earning potential, or at least an officially stated one. Add to this a flood of variables, which range from operator competence, to size of venue, demographic target, entertainment costs, ability to manage a budget, and too many cooks in the kitchen sometimes, and you can see how qualifying costs and projections can be difficult. Nightclub financials are not publicly disclosed. They're not mainstream investments and generally funded by small private sources. Therefore, P&L's, or other types of financial records are generally unavailable, unless you know someone kind enough to share them with you.
As crazy as this may sound to some, you need to use your gut to some degree. This is obviously easier to do 'if' the person requesting the funds is a seasoned operator. If they're not… You can either take them at their word, or insist they take someone onboard with a strong working knowledge of the social entertainment arena. Again likely not what many of you wanted to hear, but that's why nightclub venues are inherently high-risk investments.
In short, an experience driven product. Don't confuse this with million dollar décor schemes, state of the art light shows, and overpaid DJ's or promoters. Despite the high industry failure rate, many prehistoric thinkers continue to approach the social entertainment equation with the "I'll gimmick the living hell out of people and then they'll spend like crazy" mentality. That has not worked in over 12-years…
High cash flow Nightclub entertainment is about carefully and brilliantly thought out concepts that actually "accommodate" the fundamental reasons why people would patronize a social entertainment venue in the first place. It's about providing an experience and if your operation can achieve that, you stand to do very well.
Side note: We're talking about a "dedicated /standalone entertainment venue" here, not a bar/restaurants which is a completely different structure. Hope this helped a little.
Dave H |
| Last Updated on Tuesday, 02 March 2010 16:46 |