Nightclub investor FAQ

I'm getting a larger volume of calls from investment sources once again, as well as a number of emailed questions. The purpose of this document is to provide a 'basic overview' of the social entertainment investment.

Why would I want to invest in a social entertainment venture?

Well for one, the demand for 'quality' social entertainment product could never be better. National divorce rates now at a record 52%, and separation on the rise. Combine this with many waiting well into their late 20's /early 30's to marry, coupled with an ageing demographic. The clear result is an overall singles population that has mushroomed in both diversity and age, thus more demand than ever for "quality" social entertainment offerings.

Why do most social entertainment ventures appear skewed to a younger demographic then?

Largely because that was their traditional focus and also because many entertainment operators are slow to become aware of changes in socionomic trends. It's also an enterprise many younger, less experienced entrepreneurs pursue. Engrossed in the bliss of idealism, they often fail to carry out the most rudimentary market research. The result is product, which would not appeal to much more than a young, narrow demographic.

The few that 'have' acknowledged the radical shift in 21st century consumer landscape enjoy fewer problems, extended loyalty, good longevity, and unsurpassed profit margins. Put simply, the social entertainment demographic has expanded well beyond the likes of the 21 to 24 age group, as has been the case for quite some time.

I keep hearing about huge $$$$ in very short periods of time -is this true?

The nightly entertainment venue is a high cash flow performer as a 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 market place. 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.

So this is an easy money business?

Not quite… However, this is what lures many less experienced business people into a nightclub 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 the consumer on a "consistent" and "ongoing basis." Lame gimmicks, freebies, cheap booze, 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. Contrary to predated belief, entertainment, excitement and fun DOES NOT occur just because someone decided to open a bar. As an entertainment operator, you actually need to know how to entertain a room for several hours per night.

Most importantly, the broader scale demographic is single and more than anything else, desire 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 those that understand the need 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 marginally well.

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 400K, depending on what you want out of it. 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.

How much can these investments make?

This is largely dependent on market size, demand, and type of clientele you're catering to. 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. Larger mega clubs (1500 to 3000 people or more) can take in as much as $900,000 monthly or more.

What are the operating costs associated with an entertainment venture?

That'd be a very long list and highly dependent on a host of 'market specific' variables. Generally, modest entertainment offerings in smaller markets can maintain total expenses as low as 42% and as high as 53%. Larger venues in larger cities can vary even more. In some cases, as low as 54% to as high as 69%. In some cases, the higher costs are associated with the cost of doing business in a larger city, however in just as many cases, is the direct result of mismanaging funds, overspending, and internal losses due to the absence of proper inventory systems and cash control procedures. This is a VERY high cash flow business, so you need to keep sharp, stay on the ball, and implement the appropriate monitoring systems.

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. As a result, this is NOT a learn as you go business. You get one bite of the apple. Drop the apple and you're not getting a second chance -not in this business…

If I infuse funds into someone's entertainment investment, what type of return should I expect?

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 is expected. Most professional operators divert as much as 80% cash flow to investors until the original note with the promised return 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 besides.. I'm not a finance expert!

What happens when the clock runs out in 2.5 to 4-years?

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 the lease, you 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, top40 hit singles, and most forms of entertainment, they're fast burn investments and designed to yield a high return on the dollar in a fraction of the time conventional investments would.

if I view a nightclub venture proposal, what should I be looking for?

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.

- Entrepreneurs often submit business proposals that are riddled in contradictions, ambiguities, and so convoluted, even the best MBA's would have a difficult time making sense of them. Others present cookie-cutter presentations, which in many cases is nothing more than a badly hacked version of a generic retail based business plan with a few of the headings slightly altered. Some poor souls will pay up to $3,000 for these hoaxes in hopes of quickly procuring the confidence of a lending source.

- Incorrect financial projections. In short, most new 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 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 rather silly, 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. In this business, you either launch with award-winning success on grand opening, 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.

So what should investors be looking for in a nightclub entertainment investment?

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 predated 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. Won't work.. 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 -not overwhelming people with a barrage of hype, eye candy, and infantile marketing tactics. Again.. Those days are done.

Today's entertainment consumer BUYS EXPERIENCE -they're no longer fooled by operational approaches that in an increasing number of cases, are almost intellectually insulting to a demographic that actually understands the difference between a real experience and utter crap.

Note: We're talking about a "dedicated entertainment venue" here, not a bar/restaurants which is a completely different animal. If you find yourself stuck with attempting to make sense of a nightclub summary or business plan, consider speaking to me for help in bringing clarity to it.

Dave Hollingworth
http://nightclubbiz.com/