Investing in a nightclub/bar - other side of the fence

[heech]

Hi all,

I'll just start by saying I have some capital that I'm looking to put to work, but I also have zero experience in the entertainment/hospitality industry (uhm, other than the fact I enjoy being entertained and hospit...ed). My background is in technology and finance, and I have many years of experience investing in startup businesses as an angel investor.

So, frankly, I'm interested in seeing whether investing in projects in this industry makes sense for me.

In the technology circles I'm usually in, angel investors are somewhere between silent partners + active managers. That's the kind of experience I'd like to duplicate. Put up money (say, $100k-$250k range) to help an experienced + proven management team get going with a project, for a substantial share of equity. Have *some* management input along the way... and enjoy the perks of being associated with a brand or project that I can be proud of.

So, I'd like to hear from current owner/operators. Have you guys worked out similar terms with investors in the past, and how does it work for you? Does a working relationship with active/passive/semi-active investors work? What are the potential pitfalls? What kind of potential returns can I reasonably demand?

I see that entire businesses including RE tends to be in the dollar amount range I'm thinking about... so maybe this doesn't make any sense. But just for anyone in the market... I'm interested in opportunities along these lines in Northern Cali (Sacramento/SF Bay). I'd consider Vegas as well... just anywhere that I am at least somewhat personally familiar with the marketplace, and can keep an eye on my investment.

[Ruben]

Hi all,

I'll just start by saying I have some capital that I'm looking to put to work, but I also have zero experience in the entertainment/hospitality industry (uhm, other than the fact I enjoy being entertained and hospit...ed). My background is in technology and finance, and I have many years of experience investing in startup businesses as an angel investor.

So, frankly, I'm interested in seeing whether investing in projects in this industry makes sense for me.

In the technology circles I'm usually in, angel investors are somewhere between silent partners + active managers. That's the kind of experience I'd like to duplicate. Put up money (say, $100k-$250k range) to help an experienced + proven management team get going with a project, for a substantial share of equity. Have *some* management input along the way... and enjoy the perks of being associated with a brand or project that I can be proud of.

So, I'd like to hear from current owner/operators. Have you guys worked out similar terms with investors in the past, and how does it work for you? Does a working relationship with active/passive/semi-active investors work? What are the potential pitfalls? What kind of potential returns can I reasonably demand?

I see that entire businesses including RE tends to be in the dollar amount range I'm thinking about... so maybe this doesn't make any sense. But just for anyone in the market... I'm interested in opportunities along these lines in Northern Cali (Sacramento/SF Bay). I'd consider Vegas as well... just anywhere that I am at least somewhat personally familiar with the marketplace, and can keep an eye on my investment.

You enjoy the entertainment im glad! This is what you should do. Only be the investor! Sure have a bit of say is good but i would keep my nose out of it unless you see that the place is not doing well. I would start by making sure that the place(team) your investing in has some years of experience doing what they do. If your gm is a newbie then forget it don't bother. Make sure that the Business Plan is done up well and figures do add up. Go in and look at the place they are wanting to lease etc. Have market demographics and stats. If they are really serious about doing this then they will have all the details + more then required. Thats how i see it when it comes down to giving people any sort of money. You have a plan that works then perfect but if that plan doesnt work ... problems!

It all depends how you want to do it. Take 51% ownership or 50/50 or what How much are they putting in and how much are you putting in. In the end they should be also consulting you with the daily operations of the club. If they are in a hole or if the place is doing well. If you invested in a club i personally would be at the club every night that its open making sure that they are actually making the place work.

[heech]

Thanks for the feedback. The decision-making question probably will have to be case/case. But unless the team is incredibly experienced/proven... I think I will have a very hard time just writing a check and then being completely hands off.

I'm willing to be creative. Another solution that has been used in other industries... Maybe I'll find a team that's looking at a specific property for their nightclub/bar. I'll buy the property (and even fund necessary improvements/build-out), and then lease it to them. I can then retain the choice to take a % in the business instead of taking lease payments. ie, instead of paying me $10k a month in rent, give me the equivalent in % of business... with a fixed formula for deciding valuation.

That way I'm protected (by owning the real estate), and the management team can still get the financial boost they need to get started. What do you folks out there think of that approach? Would it be attractive?

[The Comedy Zone]

Open a comedy club!

LOL

Just my vote!

20 years in the business!

Enjoy the type of venue you are looking to invest in...meaning don't invest in a Live Heavy Metal Club if you don't enjoy Heavy Metal!

[bruce]

A better thought might be to find a manager you can get along with and hire them to run your business for you with possibly a salary plus bonus based on the business. That way you are able to change management if things go bad for some reason.

[Emerson]

Run :)

Although given today's economic climate your money may probably have a better rating being locked into a F&B venture than with the various financial market opportunities that seem to have crumbled.

We use to start our pitch meetings with our clients telling them that if investment into this business arena was not with an understanding of the risks associated then they may as well put it into a Money Market, now we have done a 180 as the F&B venues can provide certain safeguards and mitigated risks that provide the same if not greater comfort level than the stock exchange.

Of the hundreds of opportunities we receive daily to invest in nightclubs, bars and restaurants we have actually followed through with very few. Of the plans or concepts that look interesting we just about always have a face to face meeting where we ask them to login to their online bank. If the person asking me for money to invest in his project does not have enough to live for six month to a year then he will be relying on this investment to pay his rent, car and other lifestyle expenses.

Given the choice an operator will always pay his personal rent before his nightclub tax liabilities and personally that is a gamble we are not willing to take and expect safeguards to prevent it.

That and a solid exit strategy work best for us.

Thanks

Emerson

[DavidTownsend]

A unique thing about the nightclub and bar business is that it has two components - the business side and the "fun" side.

All that customers (and usually potential investors) see is the "fun" side. But there is a ton of hard work that goes on behind the scenes not only to make sure that the business runs smoothly, but especially to make sure that the place is safe, exciting, and - most importantly - FUN for the target market (however they define their "fun").

I have done dozens of deals over the years exactly like what you are describing (see my website) and here's my advice...

Find a concept/operator that you like. If they are successful in this business, chances are they know a whole lot about the "fun" side. They know their market, the music, the marketing, the promotions, the products, the lighting, the decor and the other things that draw people to their place and keep them coming back for more. Once you find the right person - listen to them when they are talking about any "top line" business elements.

On the flip side, you seem like a very astute businessman and that's where you could help out with the business. It is one thing to bring a lot of money into the doors - and quite another to make sure you keep it. That part of the business is generally boring, mundane, and often overlooked. The best partnerships are those that combine a great top-line operator with a great bottom-line investor.

So, your involvement in the business should be behind the scenes during the daytime working on the "business" side. When the place is open - go there and party. If you see something that you think is wrong, tell only your partner in the office. Do not interfere with managers, DJ's, or line employees. In fact, it is best to just make a note of it and bring it up the next day.

On another note... the break-even line in the nightclub business is very steep. That's because once your fixed costs are covered by the sales, the incremental costs are very low - especially if you are charging a cover charge. Product cost should be in the 20% range (no product cost for cover charge) and it only takes a few more minimum-wage line employees to do a lot more in sales. In other words, a place doing $40K a week will make a LOT more money than if it were doing $35K a week (assuming a break-even of $30K a week).

That's why is is critical that the top-line of the business is very healthy. That's where the real money is. And that's why you need a partner that really knows that part of the business.

As far as how the deal works between the investor(s) and the operator(s) goes, there are dozens of ways to structure that. But as a general rule, it is best that the investor gets the lion's share of the profit (like 80-100%) until the investment is returned, 50/50 until the investment is doubled, and a small percentage after that for the rest of the life of the deal.

What kind of return can you expect? Hard to answer. Some fall out of the gate, some limp along for years, and some hit big. If they hit big, the return can be huge - more than just about any legal business.

Good luck with your search. It should be easy to find someone that wants to open their own nightclub/bar. They are everywhere. If you'd like for me to give you a second opinion on any of the deals you come across, you can contact me through my website.

[heech]

Much thanks for the excellent responses, especially from the last two gentleman. David in particular, very insightful, and I'll follow on your website for some time to come as well.

I'm going to keep exploring the idea, but I'm going to say goodbye to this particular forum. I don't really understand the moderation policies, but they seem pretty restrictive. Of the 5 posts I've written, three still haven't shown up (including one in this thread). I don't really understand the logic behind that, but it makes any sort of meaningful exchange on this forum impossible.

[Michael Black]

You have 4 posts. Please click on your name to trace "recent posts". As explained in the suggestion box, new members have to post 10 and wait for moderation of those posts. After 10, you are free and clear.This is for controlling spam and a few bad apples/problem users. Sorry, but it is a necessary evil.Good luck to you.

[WIDAVE]

thanks for the good info.

[tmckinney]

I just had the same issue where I am. Not knowing for sure how to pick which investment was going to be the best: start my own place and hire a GM to run thing or invest and sit back and just enjoy the perks. I also had no experience in the industry.

What I did is found a owner that had a similar "business" mentality as I do and struck up a deal with him. I took a small part of my total investment money and some of my "time" and made an investment in the company. It is a company that I could add value to AND I am getting a crash course in running all aspects of the restaurant/bar biz. That was part of the deal.

It is a win/win due to my business management skill set. So I get a paycheck (not huge), work part time (kept day job) as an OPs Manager for 4 facilities, I'm learning the industry, and I get a little money on my investment.

I work my guts out right now but in a very short time I will have everything I need to launch my own venue and my current risk is small.

[bourbon]

That is really good information David. I was wondering if anyone else can chime in regarding the profit split between the main investor and the general partner. Is this a typical split where the investor gets most of the profits until they receive the original investment, half until it is doubled, and only a small percentage afterwards?

Are there specific methods used to calculate the value of the business? Net present value maybe?

[jetzflyer]

I am outta here for good!