Open After Dark

On a typical Saturday night, Gregory Bowyer can be found moving swiftly and inconspicuously through the crowd at Excalibur, his year-old nightclub. While he’s checking on operations and making sure his clientele is happy, hip-hop and R&B beats swell the air. And the number of young club-goers sipping mixed drinks and hitting the dance floor grows by the hour.

Patrons arriving at the Washington, D.C., hot spot are welcomed by medieval decor. There’s a knight’s full coat of arms, and replicas of King Arthur’s legendary sword–the namesake of the lounge–adorn the walls and ceiling of the 2,200-square-foot space. Excalibur is the top floor of The National Grill, Bowyer’s three-level restaurant, bar, and lounge. By day, customers can dine on classic American fare as they sit amidst walls decorated with pictures of area landmarks. When the sun goes down, the clientele head upstairs for the nightclub experience.

Business is solid. Bowyer’s establishment generated $350,000 in revenues in 2004 and he anticipates generating $500,000 in 2005. But success has not come to the 33-year-old entrepreneur without a lot of hard work and long hours. “This isn’t the type of business where you sit home and wait for a check to come to you monthly,” he says. “You have to be involved on a daily basis with the intimate details of it–down to cleaning the bathrooms and shellacking the floor. There’s no time to be hands-off, so your heart really has to be in it.”

Bowyer is just one of many people looking to cash in on the demand for the dimmed lights, music, drinks, and dancing that is the nightclub business. According to the National Bar & Restaurant Management Association, the nightclub and bar hospitality industry is valued at upward of $50 billion. But half of all new nightclubs fail within the first three to four years of operation. Some succumb to increasing competition. Others find it hard to keep up the financial and work pace needed to maintain such an operation. But those who plan properly and tough it out have the potential to make millions. In this installment of the BLACK ENTERPRISE Dream Business series, we look at some of the pitfalls and rewards of starting a nightclub.

COVER CHARGES
Whether it’s a Technicolor dance club, ultra-hip lounge, or another type of space, it takes a lot of money to get this party started. Startup costs vary greatly depending on the location, size, and type of club, but a small club in a small market may cost between $50,000 and $100,000 to launch. New club owners wanting to open larger establishments in more posh areas can expect to spend $500,000 or more to get started. “A million-dollar club used to be a big deal, but when you start talking about real estate prices, a million dollars can be eaten up really fast,” says Michael Harrelson, chief editor of the NBRMA’s Nightclub & Bar magazine.

Bowyer’s space may be small by club standards, but its price tag wasn’t: $2.7 million. But rather than purchase the property outright–an initial outlay that most new nightclub owners couldn’t afford anyway–Bowyer instead opted to lease the space with an option to buy. Still, he needed more than $150,000 in seed money to cover the costs of his lease ($8,900 a month), renovations to the club ($70,000), permits/liquor license ($5,000), equipment ($50,000), food ($10,000), liquor ($7,000), and promotions ($10,000).

Using $50,000 in personal savings, a $20,000 bank loan, and a $100,000 investment from Maroon Bachare, a real estate developer he had met years prior, Bowyer signed the lease for the property. He renamed it The National Grill in March 2004 and quickly started renovating the space. It opened for business in July. Bowyer created fliers, ran newspaper ads, and bought radio time to advertise the club, but he also formed alliances with on-air personalities at radio stations that reached his demographic, creating special events at his venue.

The costs for all the materials, manpower, permits, and other essentials required for a successful opening can mount quickly. NBRMA experts say typical startup costs for a nightclub include the following:

Rent: Rates vary depending on a number of factors, including city, state, size of space, and proximity to residential areas, and can range from $2,000 to $30,000 per month.

Liquor license: This is a requirement for any nightclub. Costs range from $1,200 to $170,000 depending on the market. You can’t acquire a liquor license if you have a criminal record. Liquor License Specialists (www.liquorlicense.com) is a national organization that assists nightclub owners and other hospitality professionals with locating, negotiating, and purchasing or selling their liquor license.

Other permits/licenses: There are a host of other legal documents that new club owners must acquire. These may include cabaret, patio/zoning, restroom, and live music permits, as well as health, tobacco, outside/sidewalk café, and food and beverage licenses. Fees vary for each but can range from $400 to $1,000. Check with your local municipality for the exact documents required for your club.

Equipment: For a small club with few frills, equipment replacement can run from $2,500 to $7,000 to start. For more elaborate clubs, owners can spend upward of $50,000.

Insurance: For nightclubs, battery and assault insurance is very important. You will also likely need general liability, liquor liability, property, fire, workman’s compensation, flood, vandalism, and equipment insurance. Premiums vary and are based on a club operator’s projected gross revenues for a given period. Taylor Rau, editor of Nightclub & Bar, says a nightclub that’s doing well may spend at least $10,000 per year, but it is not unusual for some to shell out as much as $40,000 a year.

Food and beverage: Costs vary greatly depending on the menu and types of beverages served. “A bar carrying mostly ‘well’ or ‘call’ liquors will have a much less expensive inventory than a bar carrying mostly top-shelf spirits. The same applies to food,” says Rau. New club owners can expect to spend anywhere from $20,000 to $50,000.

Promotions/advertising: These budgets depend on a number of factors, including club size, marketing resources, target audience, and scope of promotions. Some establishments spend as little as $3,500 per year. Some spend that in a week. Still others put on promotional events that cost $10,000 each. An average promotions/advertising budget is about $30,000 a year.

Liquor and cash control systems: Manual liquor control gauges can cost as little as $100. But for the high-tech stuff, expect to pay between $2,500 and $5,000. This price doesn’t necessarily include the software systems that can cost several hundred dollars. Cash control systems hover in the $3,000 to $10,000 range.

ID verification systems: The bulk of this expense comes from the electronic data storage of driver’s license information and camera setup at the club’s entrances and exits. Costs can range from $1,000 to $4,000.

Security systems: Price varies greatly and depends on the scope and size of your system. Industry guidelines dictate that every nightclub needs a minimum of one security guard per 50 patrons. For owners with a taste for all things digital, security systems can cost from $50,000 to $100,000 depending on venue size. However, simpler systems can be obtained for as little as $10,000.

Payroll: This depends on the size of your staff, but a nightclub owner’s annual salary could range from $80,000 to $100,000. Nightclub managers can make between $50,000 and $70,000, and sometimes more.

Attorney fees: This type of business requires having a lawyer on retainer. Fees depend on a variety of factors, but most lawyers charge at least $200 an hour.

LOCATION, LOCATION, LOCATION
It’s said that in certain industries, three elements are most important: location, location, and location. As with many servi
ce-based businesses, the success of a nightclub hinges in large part on its address and appearance. “If you’re in a major city, a prime location is typically the downtown area. Corner spots are usually the best, and two stories are better than one,” says Rau. “Also, any property with a basement or lower level works well as that, typically, is great space for dance areas and/or VIP areas.”

Bowyer found securing a location one of his biggest obstacles: “I had to research the market value or leases for that size space and the [type of business I wanted to open.] I had to [look into the business that was there previously,] the reasons why it had failed, and if those were systemic problems inside of the business or issues outside of the business. I had to check the flexibility of the neighborhood because [the property] was located inside of a residential neighborhood. I also had to make sure that I could get through planning and review for the type of liquor license that I wanted to hold.”

After that came negotiations with the property owner, who wanted Bowyer to pay nearly $11,000 a month in rent. Not pleased with that amount, Bowyer walked away from the deal. A second round of negotiations wasn’t much better, so he rejected the deal again. After holding out for three months for a better price, Bowyer received not only a reduced rent but the existing kitchen equipment, which saved him $200,000 in startup costs. “You have to use the art of negotiation when purchasing property and employ every resource you have to check and double check every aspect of the deal. That’s what I did,” he says.

Once you settle on a site, experts recommend that you clearly define your club’s atmosphere and style. Every club has a theme, and deciding which one to adopt for your venue is entirely up to you. Rau says, first ask yourself, “Do I want to be drastically different from everything else in the area or do I want to not rock the boat and just focus on doing basically the same thing that everyone else is, only bigger and better?”

When it comes to developing a strategy for attracting customers, Rau says most new owners stick to tried-and-true marketing methods such as flashy fliers and catchy radio advertisements. But many also use what is known as street teams. “It’s a form of guerrilla marketing that includes club employees going out on the street and passing out fliers and business cards, and putting up posters, and saying, ‘Hey, have you heard about this new place down the street?'”

There’s no doubt deciding on location and ambiance are two of the biggest challenges when starting a nightclub, but there are others. Harrelson says that while there are a lot of risks involved in opening a club, there are also several rewards. Unlike some businesses, nightclubs continue to do well during tough economic times. And their revenue potential is very good. “Clubs in top markets are doing at least $1 million. Marquee, in New York, will do $10 million this year,” he says. “Smaller clubs can earn anywhere from $250,000 to $500,000.”

In the club: 10 Steps to Opening Your Nightclub

1. LEARN THE ROPES. There’s no substitute for hands-on experience–behind the bar, at the door, or in a management position. A good resource for information on the industry is the Nightclub & Bar/Beverage Retailer/Food & Beverage Convention & Trade Show (www.night club.com). This national event attracts thousands of people who work in the hospitality industry. The 2005 show will be held at the Trump Taj Mahal in Atlantic City, New Jersey, Oct. 10 — 12. Another resource is Nightclubbiz.com (www.nightclubbiz.com), a site offering information on how to start a nightclub. The National Bar & Restaurant Association (www.bar-restaurant.com) provides networking opportunities and a variety of services to restaurant, bar, and hospitality professionals. Also, be sure to check out Rocco John’s Nightclub Management L.L.C. (www.nightclubman agement.com
   ), a consulting and management services company that specializes in the nightlife industry.
2. DON’T OPEN ON A WHIM. Being a successful nightclub owner is not just about having enough money to open, it’s about having enough money to stay open. Think your club idea through. Create a business plan that outlines all your ideas and strategies for implementing those ideas.
3. FILL A NICHE. Don’t open a reggae club where there are already 10 reggae clubs. Find a void that needs to be filled. For example, if you’re in a suburban area, it might be a sports bar. Be sure to study the demographics of the neighborhood and get a feel for what its residents like and dislike.
4. CREATE YOUR OWN BRAND. Don’t try to duplicate someone else’s success. The whole idea is to make your club unique. “It’s all about branding now,” Harrelson says. “Make people want to come back again and again and bring their friends.”
5. DON’T GO IT ALONE. Opening a nightclub can be a huge financial burden. It might be a good idea to take on a partner or two. In addition to easing some of the financial strain, you can also combine experience and skill sets.
6. RAISE AND SAVE. Banks and other investors tend to loosen the purse strings when business owners throw some of their own money into the mix. If possible, try to raise half of the total startup costs. It could go a long way in securing the needed capital for your club.
7. CHECK ID. Don’t let a teenager with a fake ID put you out of business. If you’re caught serving alcohol to underaged drinkers, you could not only lose your liquor license but your entire club. Install ID verification systems and use them religiously.
8. TEND YOUR BAR. Rau says the overwhelming majority in the industry hire bartenders based on personality, then train them. And make sure you monitor your bartenders: Over-pouring can lead to big financial problems.
9. HIRE PEOPLE YOU TRUST. You can’t be at the club around the clock, so hire people as committed to the business as you are. Bowyer’s wife and some other family members work at The National Grill.
10. CREATE A BUZZ. Now that you’ve built the club, will they come? That depends on how you promote it. Use tried-and-true methods such as drink specials, celebrity appearances/performances, reduced admission before a certain hour, and the ever popular “ladies get in free” tactic. Just remember that the public is fickle and a club can go from “hot” to “not” in just a matter of months. Start with a strong promotions campaign.