Valuing an existing club??

[pheremone7]

Hi everyone, this is my first time post but I have been a long time reader. This is a great site since I have been looking to purchase/start a club. I have been weighing the pros and cons of buying existing vs starting new. Recently, an opportunity presented itself to buy an existing club/lounge in a great thriving area. I am going to be engaging with my accountant and friends in the business about the value of the club but I wanted to get a feel from the collective experience of those on the site as well.

This club has been in business for 3 years and has a great following. They cater to chic and trendy young professionals and the city has the highest concentration of this segment in the state. I have asked for high level financials and without getting into specifics, I see that the operating revenue for 2004 was 1.4M. This was a 20% improvement over 2003. 2005 however has a 10% decline. Net Profit is at roughly 500k for 2004. The revenue is trending down but not sure why that is. Maybe the “newness” is starting to wear off.

What it all boils down to is the asking price. The club does have a very favorable lease and is asking 1.2M dollars. The price does not include inventory. Does the price sound like it is in the ballpark or should it be lower? I figure PP&E would be roughly 200K-250k. They do sell food but that is a small part of their business. And while I understand that there is no guarantee moving forward with new ownership, the club seems quite risky at that price.

Thoughts? Other items to consider?

Thanks in advance!

[pheremone7]

Hi all, sorry I posted this type of question. Probably most situations are different. I wasn't sure if there was some trend in the industry to compare to. I am working with local business reps to help with a detailed review of the financials and proper valuation. Thanks and I look forward to becoming an active member.

[Michael Black]

Do you mean "gross profit" and not "net profit" and "FF&E" not "PP&E?

What's the square footage? Cover charge? Days open? hours of operation? # of people through the door and average check per person?Whats the lease per foot per year or monthly rent and what is the market rate that it is below? How many years remain on the lease and any major increases down the road? And, any other relevant info? We need alot of info to help you out in arriving at a reasonable price. Once again, each case is different and it all depends.

Mike

[pheremone7]

Hi Mike,

Thanks for responding. I suppose I meant Gross Profit since I do not think the 500k figure was owner discretionary income after taxes. So for 2004, the business has a pre-tax profit of 500k. And yes I meant FF&E. PP&E is obviously for those industries where manufacturing is involved.

Let me answer your questions best I can. Square footage is about 5,000 SQF distributed rather evenly across 3 floors. The place has 4 bars, is open on Thursday - Sat 8pm - 2am. Not sure number of people through door (on average) but I have seen click counts upwards of 1,000 when I visited the club. Also not sure of check per person, would have to know an average daily revenue to calculate (which now that I think about it can derive from the yearly figures). The monthly lease is 3,750 dollars with 12 years remaining on a favorable lease with minor increases down the road.

I hope this helps.

[Estefon]

I only own a small sports bar/grill, but if I could find a place that profits $500k from being open only 18 hours a week, I'd be all over it. Where did you get this figure? P&L's are one source of info, but I'd be more concerned with the cash-flow.

1.4 million in annual sales (kick-ass for a small place like that if you ask me) would mean that they're operating at a 36& profitability. WOW! I don't know if that's true or not, but my little bar runs around 15% profitabily before taxes. I guess if you're all alcohol running at a 16% PC and low labor, it's possible.

If the numbers hold up, I don't think they're asking too much at all. You'd recoup your investment in less than 3 years (including inventory purchase, licensing and working capital).

My only concern would be the 10% decrease in sales last year and whether or not you think you could reverse that. A thousand people coming into the club in 6 hours means a ticket average of $9/customer. (1.4 million / 52 / 3 / 1,000). Without knowing the average drink price, I would guess that the ticket average is much higher and the guest count is much lower. 5,000 sq. feet seems too small to hold that many people. whats the fire occupancy level?

That's some pretty cheap rent too. If this is all true, I'm getting out of the sports bar/grill business and buying a club.

[Michael Black]

As WYGK posts under General Subjects:"considering buying a bar in NJ". I would agree that a full financial audit by a qualified accountant is in order in your case as well. It's easy top see all the pluses- focus on the downside especially competition and an average club's peak lifespan and the decrease in numbers. Although not a drastic drop vs its peak as is often the case in a trendy club's 3rd or 4th year, I would use this to get the price down significanly. The numbers/info seem almost too good to be true but possible.If the audit checks out, argue that a club does not have the years like a sports bar or restaurant to regain the purchase price based on revenue. And you say it's been around 3years? Any new competition or possible causes for further decline?Argue $100/ft tops at 5000 ft= $500,000. Based on limited info, I would say $250,000-$500,000 would be ballpark.Exceptional proven revenue/profits as you state,may spike it up another $250,000 - 500,000 or $5000,000-1mil. Maybe shoot for half of that 1.2 mil or $600,000 and consider the resale value if you are forced to sell & what you might stand to lose.Also, where you could go and what you could build elsewhere with that kind of money is an important issue vs building and suceeding to the level that this seller has achieved. I really have to question why they would sell if these numbers are true and they are doing that well with low rent and a relatively small club with high effienciecy- money produced per sq foot.

-Mike

[The Prof]

No way would I pay 1.2 mil for a bar/nightclub with the financials that you have provided, MIKE is right. And to be quite frank with you I wouldn't give them more than $200,000 and only if i was drunk at the time of closing the deal. Tell them to throw the building in with it or walk away at 1.2 mil. Way to much. Have you considered that in order to keep it fresh and exciting you will need to invest alot back into the business as well. and if that doesn't work then where are you, no club, No building to fall back on and you owe someone a lot of money! No offer is a bad offer, they will either say yes or no. Offer them 150,000 and see what they say. 1.2 for a club that does 1.4. If there making that much money why would they sell to begin with.

[Michael Black]

The Prof makes a good point that I meant to make when I suggested that you consider what else you could do with that money. I also believe in buying the property if possible and building out or renovating and existing failing/failed one. You don't have a landlord paying his/her mtg. and something to fall back on or reconcept with less pressure. Also, you have the equity to use for future capital/loans. However, renting/buying makes sense when it is absolutely a fantastic location that can greatly feed your business and no property is for sale there or way too high or require too much of your capital. But as we said, with a current successful bar like this, one has to question their sale. Some will also argue that if you really have the concept, party, experience & know how, you can attract a crowd to a destiantion club off the beaten path within reason - not 100 miles away from the population:)! You said it yourself:"quite risky at that price". Reduce the risk by buying much lower and figuring the extra money needed and the resale value if you have to get out, or look for property to buy and build, or find a closed place to rennovate.There are alot of opportunities out there. If you are new to this game start out alot smaller and learn to reduce your risks and max the returns on your money. Go bigger and more $ from there, have patience and an eye for the right opportunity, and understand that you win some & you lose some.

[Estefon]

Perhaps I need some education from the professionals on this subject. I don't understand how buying a club that makes 500k in profits/ year for 1.2 million unreasonable.

I know that I'm not an expert by any means, but one could recoup their investment in 3 years (max) with those kind of profits. He may not have a building to fall back on in case of losses, but he would have considerable amount of FF&E, inventory and goodwill that could account for a considerable amount of losses if he fails.

Why not hire a 3rd party broker to evaluate the business and determine if the asking price is too high? Is a 36% profit margin common in the nightclub business? It's not for the average restaurant and bar in my market. If I could run a club with this kind of sales profitability (if it's true) and only be open 18 hours a week.... boy oh boy. I'd be on that like white on rice.

Where is the error in my thought process here?

[Michael Black]

It was $500,000 on 1.4 mil or 35+%. Most small to med size operators are shooting for 20-25%. But if the gross starts to climb over 1.2 mil, 1.5, 2 mil, the profit margin could go up to 30-35%. This would be dependent on very good liquor contol, good cover charge revenue, great labor efficiency, low rent as a percentage of those gross sales or property owned outright, etc.. Clubs doing 2-5mil or more could see 40 -50% profits depending on the situation and market. Incredible as it might sound, I know of a very high volume sports bar 50 feet from a major stadium that is dead on non-game days but does well over 3mil on 81 baseball games and 65-75% profit on those game days without a cover charge.This is a very rare case as the property is owned with an outstanding location, 90+% of sales are very hi-volume beer cans passed out at about $5/can with very deep discounts from the beer supplier, no advertising, little mgmt salaries, highly efficient labor for the sales volume times of 2 hours before and 2 hours after the game and low overhead for those games.

That said, it is possible. The trouble with clubs is that they can decline very quickly after 3-4 years especially with new competition and if it is not kept fresh with the regulars. If it dies too quickly without action and gets a negative rep, it can be nearly impossible to bring back to life. Alot of money can be lost in a hurry or much reinvested for a close and changeover. Resell value of FF&E alone is low like 20-30% of new value at best and usually dumped at auction. At that point there is no goodwill value.In fact, there may be a badwill liability associated with the location.

Although it apears that a usual club is only open 18 hrs a week, most are open far more and there are significant more hours of ongoing work behind the scenes that most people/customers are oblivious to know and understand. I still have some doubts on the 500g that is decreasing in the 3-4th year here and thats why I also backed an audit. Yes IF the #'s and situation checks out, then it would be worth towards the 500-600g, but a dead or potentially dying club would only be worh 50-$250g. In between, then maybe the 250-500g I stated. It all depends on the exact situation and market.Yes, far more $ can often be made in a club vs a rest or bar but far more $ could be lost in the same short time span.It's even more riskier and sometimes a bar or rest open more hours could pull more steady money over a few more years, but that would all depend too. That baseball sports bar does better than a top 5mil+ grossing 40,000 square foot nightclub I once promoted because of the size, overhead, and efficiency. But the large club is still very good because of the economies of scale.

You have to remember basic economics where the more they climb over their fixed expense, the greater the profit margin and efficencies thus giving them those high profit %'s.This is why alot of small clubs and bars fail because of the high rent, overhead, liquor costs,etc.. The size cannot allow for the numbers needed through the door. The only choice is to go very high end with drinks and food to get the revenue off the smaller number of customers. Otherwise, you better have a superior location and concept and lines down the street with turnover like fast food. This is why I reccommend at least a medium size space if one wants to make good money- more than a small place, and at less risk than a large club. Small bars and clubs are good to get your feet wet, or if you plan to bartend and do most of the work yourself you can make a good living. Also, at relatively low risk, some operators opt for several small bars at a modest profit on each like a diversified portfolio instead off putting their eggs in one basket or a one large club/bar. Most investors in any high risk investment would be looking for 25-50% min returns and not just for 1year.If that club is dying or there are other circumstances,debts,lawsuits, etc that could drop that roughly 40% (500g on 1.2 mil) to 15%-0% in a hurry.In short, there are better investments.This MIGHT be a good investment but a thorough audit and alot of questions need to be answered first like why the hell they are selling in the first place if it's so great. My guess is they know they are in the dying phase and are starting at a very high asking price that would equal what they might get out of it in the next 2 years anyways and they themselves can move on to another club or better investmens. As they are taking in income and it is declining they will probably lower the price.Get it? There are experienced operators that plan an exit strategy in the 3-4 year from the begining or a complete dramatic changeover. Sometimes a club kept fresh can last for more than a decade, but usually not in most competitve markets.Branding is key but I digress. OK that's enough for today's lesson,time for a drink!:)

-Mike

[Michael Black]

I was just looking at a company that values clubs and restaurants fairly high and gets them sold in the Chicagoland area.It is interesting to see some of the value points and comparison between properties available:http://www.abausa.com/listings.html

[Estefon]

I've been meaning to reply to this for some time. Sorry for the delay Michael and thanks for your input. Here's my response/questions.


Most small to med size operators are shooting for 20-25%

I guess we have a different definition of "small to medium size operators." Do you consider $1.4 million in annual sales to be a small medium or large business? I think it depends more on your expenses than anything. I've worked for a club that did over $1 million a month sales during peak season, but they were only operating at 8-10% net profit. I've also worked for a small bar and grill that averaged $25k per month and was profiting near the 25% mark.

I've never seen a bar operate at 35%+, but understand that it is possible if ran well and fixed expenses are low. But if I may say so, I'd take the 8% profits from the $1 million/month bar more than I would the 25% profits from the 25k/month store any day of the week. I'm sure I'm preaching to the choir here, but for anyone else reading this who may not know, cash is king for any business. $75k in annual net profit at the small bar vs. $960k for the club.... what else is there to say to that?


Clubs doing 2-5mil or more could see 40 -50% profits

50% net profit on $5 mil!?!? Holy cow! No wonder the club owners I meet look down their noses at me when I tell them I own a neighborhood bar and grill. It's becase I'm a Chump with a capital "C".


I know of a very high volume sports bar 50 feet from a major stadium that is dead on non-game days but does well over 3mil on 81 baseball games and 65-75% profit on those game days without a cover charge

How much profit does this bar pull in annually, I wonder? I pull in 50% profitability on Friday nights. It's the rest of the week that sucks that average down.


Although it apears that a usual club is only open 18 hrs a week, most are open far more and there are significant more hours of ongoing work behind the scenes that most people/customers are oblivious to know and understand.

I know this all too well. My bar is open 112 hours a week (16 hours a day, 7 days a week) and there is someone there before and after the doors close much more than that. I would say the building is unoccupied about 3 hours a day. BUT, If I had a club that was only open for operation 18 hours per week, I still think I wouldn't need to work more than 50-60 hours per week.

In closing, I agree that the operators are planning an exit strategy during peak performance and the price could be lowered, but not by as much as you suggest. If they estimating the selling price by what they can get out of it in 2-3 years, it would be in their best interest to stay in it rather than sell for less. Or spend $100k on a face-lift, shut the place down for a couple of months, put a new name on the sign and say you're the "newest, hottest club in town." I know there are plenty of operators that do this and I think its brilliant.

My question is, why should the current owners sell it for less than what they can recoup out of it in a couple of years? My guess is that you're going to tell me that it's going to lose money at an accelerating pace if they don't sell now. True, but wouldn't they still be ahead of the game if they held out for two more years and sold it for virtually nothing after all the
goodwill is diminished and the FF&E is slated for the junkyard?

[Michael Black]

Well I was hoping for the original question asker to chime in here again on the situation. What's up pheremone7?

Estefon-

I would consider a very small place to be less than $500,000 in sales and less than 2500 sq ft.Small, 500g-1mil, 2500-4000 sq ft. Med, 1mil -2mil 4-8,000 sq ft. Lg, 2.5-5mil 8-12,000 sq ft. Very large, 15,000 sq ft-25,000 sq ft 5mil+ and huge over 25,000 sq ft and 7.5-10mil+. BUT like you said it's all relative: the bottom line money is what it makes vs the investment. A small place is capable of doing better than a large one but the larger one does have ecomomies of scale in their favor but they also have larger overhead and fixed expenses not in their favor and tend to react and move slower than smaller businesses. Also, clubs have more risk than a neighborhood sports bar, but can also do more $, but once again it all depends. I'll take the one with the highest return on investment with the lowest risk, but that's a trade off.This might mean stocks or real esate in some situations and not the club or bar.What else is there to say? It depends on how much was invested in that bar or club vs the return. If I invested 20 million on that club doing less than 1mil or <5%, I wouldn't be as happy as you first appear to be:) Understand? If I only invested 75,000 in that bar, I would be estatic and try to copy it across the world if I could get 100% return on my money.One must also seperate any time/work invested as well vs say,stocks with little work other than research and education.That is, if I worked 70 hours a week on top of my $75,000 investment I would not be as happy as I only made about $15/hr for my time and 0 on the investment. But, perhaps that would be far better than working for someone else and maybe at less pay. But, if I hired a great gm for $35,000 and a working bartender/assistant mgr for $15,000 + tips and I pocketed $25,000 on the $75,000 it would still be good at a 33% return.It all depends.

Clubs COULD see high profit margins, but kep in mind relatively few do and/or for a very short time period.Many do not get back the invetment they risked to try to get the $!

That bar i spoke of probably does much less than $500,000 year outside of baseball days. I would guess only $250,000 which they do on a very busy long weekend of baseball! It wouldn't even make sense to be open, but there is something called the IRS:) In fact, without the location, it would be closed in less than 180 days the way it is operated- they would be losing money or maybe have very low profits.This is an example where location is everything.

We don't have all the info on the club in question. Perhaps there are partners that want to go their seperate way? Obviously, the high price is exactly because of what you say- it does not make sense for them to sell for less given the circumstances. However, if they could get all the money right now for sure, instead of 2-3 years and are betting on a decline, and could use that money elsewhere for a better financial return as I suggest above, it then does make sense! Once again, it all depends:)

By the way, owners/GM"S of clubs and larger bars/rests often work 70-100 hours!Hours of 50-60 would sound like a vacation to some even though this is probably an average week for an average manager in our industry.

- Mike