Do you want to exit your nightclub business by selling? If YES, here are important things investors look at before buying a nightclub and where to find them. Investing in a new nightclub business can be high risk when approached without due diligence.
Investors know this, and every nightclub owner should know this too. Still, the attraction of high drink profit margins, long lines waiting to pay a cash cover charge and be a part of the newest hot spot in town makes nightclubs a worthy investment.
Night clubs, like the entertainment and music business, have short life spans typically lasting up to 3 years. Then, the concept must be reinvented in its present location, sold or moved elsewhere. However, some night clubs have longer staying power and may last 5 to 15 years in business.
Urban locations with dense populations tend to work best for night clubs because the crowds change often and migrate from place to place. Other good locations include multiple suburban communities nestled together where one night club acts as its centre for entertainment, dancing and group socializing.
What is the Profit Margin for Nightclubs?
According to reports, the profit margins on drink sales can be as high as 45%-50% after product costs, labour and direct expenses are deducted. Cover charges add to the overall profits with no direct cost. Nonetheless, pilferage, giving away drinks and embezzlement of door covers is very easy because of the high volume of cash and credit cards exchanged.
That is why it is pertinent that good accounting and security systems are factored in as added expenses to control the money and minimize theft. For a minority investor or limited partner it is customary for a nightclub business plan to have a payback within 6 to 12 months after opening provided the night club is profitable.
For majority investor or general partner, who usually offer up to 50% of the investment funds, is customarily paid back with their desired return within 3 years or once the concept is closed, reopened, sold or expanded to another location.
Nonetheless, like any high risk investment, many investors are promised returns-on-investment (ROI) of 20%-25% but never see it. However, one good thing about investors is that they can be a great thing for your business.
6 Key Factors Nightclub Investors Look at Before Investing in a Nightclub
Have it in mind that investors are fundamentally different from lenders, and you’ll need to consider that when you decide what kind of funding you want. Lenders offer you money and you repay it with interest. Investors give you money in exchange for ownership of part of your business.
Note that their investments may come with restrictions–that you have to get approval for transactions over a certain dollar amount, for example, or that you have to set up an independent Board of Directors. And investors have certain rights, too, which you should discuss with your lawyer before jumping in. Nonetheless, below is a breakdown of the key factors investors consider before investing in any nightclub.
Note that a solid business plan demonstrates to investors that you’re serious about your business and that you’ve given thought to your plans to make money. While your business plan alone won’t be enough to convince investors to back you, no investor will put money in without one. Among other things, your business plan should include:
- Data-based, hard number financial projections
- Sales channels, with data to show why those channels will be effective
- Marketing plans and goals, with data to show why those plans will be effective
- Analysis of the nightclub competition
- Projected timeline for when you’ll start making money
- Potential obstacles and your plans for dealing with them
2. A Unique Idea
Note that both investors and the general public get excited about the words “new and innovative.” The bottom line is that if your location or market is saturated with other clubs, then your club isn’t likely to be a huge hit. That is why you have to convey to investors what it is about your nightclub that makes it stand out.
Have it in mind that you don’t have to have come up with a brand new concept, but you do need show why your club is different from or better than what your competitors offer. In business terms, this is your “competitive advantage.” It’s what will make you successful over your competitors.
3. A Strong Narrative
Do not forget that investors hear a lot of pitches packed with hard data – given by two clubs with similar projected returns, what makes an investor choose one over the other? The story! Note that investors are people, not robots, and they can be swayed by a great narrative about why this club matters to you, where the concept came from, and where you’re planning to take it. How will your club change the market? What makes it special? In fact, opening your pitch with your story is a great way to set the tone and draw your potential investors in.
4. Business Readiness
So many club owners have wonderful plans and ideas, but not many people have the drive and wherewithal to achieve these ideas and shape them into a working, financially viable concept. Show your investors that not only can you talk the talk, but that you’re ready to walk the walk.
Note that if you can show that you’ve got all the key components in place, you’ll grab investors’ interest because they’ll know that they’ll get a return on their investment sooner rather than later. To show business readiness, you have to do your homework – your market research and your business plan, for example. You need to show that you have a clear plan in place (for example, you’ve already staked out a new location or supplier).
5. A Clear Investment Structure
Indeed, buying ownership in a company has legal ramifications and investors will want to know that you’ve already considered those issues. First, you will need to have a business structure in place that allows for other parties to buy in. You’ll also need to have a clear plan for how the investment will work. If the investors are partners or shareholders, will they have the right to vote on business decisions?
Note that a crucial part of this involves having a clear valuation for your business – a way to back up your request for a certain amount of money in exchange for a certain amount of ownership. If you want $100,000 for a 10% share, for example, you need to be able to show that your club is actually worth $1 million.
This particular area might likely involve some negotiation. Your investors may want a larger share for a lower price and they may want adjustments or additions to the stockholder’s agreement. The trick is to come in prepared, knowing that these issues are important and that you’ve already thought of them. This is one of those times when you should really consult your lawyer – you don’t want to grow into a successful business only to find that you’ve lost control to your investors.
6. Background and Experience in the Business
Note that investors don’t want entrepreneurs to make mistakes on their dime. Investors look for experienced club owners and management teams with a track record of high performance and leadership in the nightclub business or in prior ventures. Most investors will research your business experience and your background in the industry. Passion and commitment should be evident to inspire confidence in investors and stakeholders.
Where to Find Nightclub Investors
It’s might be hard to believe, but finding investors is not the hard part of getting funding for your nightclub– in fact, through the process of trying to raise money, you might have opportunities to talk to upwards of 40 to 50 investors, depending on concept and location.
Nonetheless, just as it takes a quality idea and pitch to find success, it also requires a quality investor – one who has interest in the industry, one who is able to shed wisdom throughout the development of the club, one who can come to a reasonable financial agreement that suits all parties involved.
Places to find investors in the United States may include:
- Angel investor networks
- Accelerator programs
- Business Brokers
- Your city’s entrepreneurial community
- Top-tier business schools
- Investment clubs
6 Tips on How to Pitch to Nightclub Investors
Your pitch is the main thing that could either get your Nightclub off the ground or sink it. Below are some of the amazing tips to get effective pitch ideas for your nightclub.
a. Make your pitch a story
According to experts, storytelling is the best way to attract the audience. It is a scientifically proven way to capture listener’s attention and hold them to remember what you say. Hence, with storytelling, you can make your pitch unforgettable. Note that difficult to understand valuations, spreadsheets and numbers do not attract investors anymore. When you are pitching using your story, the investors get all the information that they want.
b. Choose the Right Audience
Not everyone would want to invest in a Nightclub. So right before you start sharing your idea with an investor, it is advisable to know about the interests of your investors. As a Nightclub owner needing funding, what would be the use of pitching to investors who are not willing to invest in your club? Different investors can only finance your business when it is at a specific level.
According to experts, it is advisable to start pitching your ideas to angel investors. Your club audience plays a very important role when it comes to getting an investor to help you financially. After recognizing your right audience, it is suitable to design your presentation in an appealing way. Set the goals and objectives of your club and state the period as well.
c. Create a Simple yet Incisive Pitch
Note that the presentation is a crucial aspect of pitching investors, and most nightclub owners go wrong while presenting their pitches. Many club owners think that using a different language can benefit them, but this is a common misconception. Have it in mind that the primary purpose of the pitch is to show your club’s objectives and check how funding would help to expand it.
In addition, making the pitch simple to understand helps to achieve your aim. Moreover, it is advisable to use a simple language while preparing your pitch. It should be in such a way that a kid can understand it. Craft your pitch so that it is neither too long nor anything important is left to tell. Keep it concise, simple and straight to the point.
d. Put Strict Timelines
Every business, even nightclubs, is expected to work on deadlines. Therefore, it is pertinent to add deadlines while pitching. Consider setting some particular timelines that meet the specified period for your investors. Note that this shows how serious you are about getting funds for your club.
Remember that the more dedication you have for your club, the more satisfaction investors will have in supporting you. Thus, it is suitable to set deadlines for yourself and make potential investors aware of them.
e. Be Courageous
The primary aim for nightclub owners these days is to pitch to investors to get the best. But how many of them do it effectively? Note that to effectively pitch your concept to investors, you have to tell them about the part of the club that hasn’t been discussed. Let them know that if the potential is unlocked, the business will flourish.
Remember, it is about convincing investors of how the infusion of funds will help you in achieving the goals. You must take care of the capital deployment of the investor in your pitch as well. It is because every investor desires that the money they use to fund your club would earn those profits.
f. Speak Up About the Sales
If you are a new club owner who has just started generating sales, make it a point to mention this while pitching to potential investors. State the sales graph and make sure that you explain them within a timeline. For example, if you say that after only six months, you have already made $100,000, it shows the investors that you are getting sales and investing in your club can benefit them.
Note that once you have mentioned the sales in your pitch, the next challenge is to get ready for questions such as “how are you going to maintain the sales”, among many others. When an investor puts their money into your nightclub, it means that your business will grow. Thus, your pitch should state how the club will accelerate the sales when the club expands.
Investors are in it to make money, so your task as a Nightclub owner is to show them that you’ll do just that – and that you’ll do it better than their other investment opportunities. To make a successful pitch, the most important thing you can do is to be prepared. That business plan should be as watertight as you can make it. Your story should be compelling and well-thought-out.