How do I determine if an investment in a club/lounge/bar is worthwhile?
I've been approached to invest in a upscale club in a major US city. However, I have zero understanding of the industry, besides being a patron. In addition to my pondering below, are there any resources and/or literature that might guide/educate me on investing in the nightlife industry?
What are the top issues to consider? What type of returns are typical? What is the historical success rate of such venues? Is such an investment riskier than a restaurant? What sort of metrics are typical (i.e. cost per square feet, management fees, etc.)? What sort of terms are customary (i.e. liability, distribution of returns, sale of shares, etc.)? Above all, is such an investment wise if I do not live in the same city as the club (I do make frequent trips to the city for other reasons, but cannot keep weekly tabs on the club's performance)?
As you may or may not know, anytime one invests in a high risk business such as a club, you are asking for failure. Now, if you are talking about an Upscale Lounge, then it can be a very profitable business to get in to. The top issue would be liability due to the alcohol being served. The insurance rate for such an endeavor is high, but if it was a dinner club that also served food, the rates are somewhat better. I have lived in many big cities around the country, and the one thing I have noticed about Night Clubs is; They will be hot for about a year to a year and a half, then its downhill from there. I am in the entertainment business, and know for a fact that all clubs seem to boom for a short period, and then the next thing you know it is closed. For whatever reason may be debatable, but still they don't seem to last very long. If one invested in a club on a short term (such as a Two year term) you could see a very nice return on your investment. Beyond that, is no man's land, and gets risky. On the other hand IF the business were to be highly sucessful to the point of expanding into more cities, one could see huge returns. Your major problem would be finding management that one could trust, since you would not be in town to watchdog the business. I have a neice that manages a business such as you are talking about, and they have been highly sucessful for about five to six years now, and the business has went from one club to many clubs across the southeastern United States. Her Job has been to train the managers, and get each club on its feet. I can't say this for many clubs, as this is not the norm. Then again every business doesn't share the sucess of McDonalds. You say you cannot keep weekly tabs on the club's performance. I question this thinking since we live in an information age. Many business's are ran this way now, and can be kept under your control through video conferencing and computer technology. Your biggest problem IS finding someone you can TRUST to oversee your investment. If you cannot be there to watch the progress, then I would suggest you find someone that can do the job for you, or not take the risk. All the other concerns you have are mute unless you are more specific as to location, regional factors, proximity to suppliers, and the exact type of club you have in mind. Are you considering a Rock-n-Roll Club, or a Chicken wing Sports bar, or a very upscale black tie members only type club? Employing an investment firm to hammer out the details, and a managment team to impliment your vision would be in line with being able to answer the other questions. What I see is a person with capital to invest, but with reservations about the endeavor to begin with. As you may know, there are only two things in life for certain, death and taxes! The sucess of your marketing scheme cannot be projected until you are knee deep in the details. One may have the best idea since sliced bread, but if it is not marketed properly, and placed behind a rock solid managment team, the risk factor can get very shakey. Many finiacial and investment firms are there for the answers, and many studies will have to be accounted for in order to give a thumbs up to the risk factors involved. If it sounds too good to be true, then it probably is!
I hope I have been of some assistance to your questions, and have gave you solid advice. Good Luck!!!
