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updated 1/4/2011 4:17:09 AM ET 2011-01-04T09:17:09

Editor's note: This article was excerpted from our Bar/Club start-up guide, available from SmallBizBooks.com.

Friends, laughter, celebrations, entertainment--fun! These are the things that might come to your mind when you think about owning your own bar as you imagine rooms filled with friendly conversation, music and people enjoying themselves. If you're thinking of opening a sports bar, you might envision an exciting game on big-screen TVs with everyone cheering and having a great time. Owning a bar sounds like the perfect life to many potential entrepreneurs, but it's not always fun and games behind the scenes.

Owning your own bar/club can mean long hours, meticulous attention to detail, giving up vacations and weekends, and sometimes dealing with unruly customers. But if you have a clear vision, do your homework and learn the ins and outs of the business, it can also translate into a rewarding and financially successful enterprise.

Although people still gather to socialize in bars, just as they have for hundreds of years, other factors have come into play for the industry as well. Problems with driving while intoxicated have changed the drinking patterns of people in United States. The growing concern with health and fitness toward the end of the 20th century took its toll on the bar industry. Keeping tabs on this industry requires a look at the alcoholic beverage industry as a whole--what people buy in the store doesn't differ much from what they buy in a bar. The distilled spirits industry generates around $100 billion in U.S. economic activity annually, according to the Distilled Spirits Council, a national trade association. 

You have some pretty tough competition out there. But you're not just competing with the other bars in your area these days. You're competing with every entertainment option from which your customers can choose.

Successful new bars can be in the black within the first six months, and they can go on to recover their initial investment within three to five years. However, like many new businesses, the statistics for bars aren't in favor of the startup. Why do they fail? The first reason is they didn't have enough capital to keep the business going. The second reason is a lack of knowledge about the business.

From a personal perspective, you need to ask yourself if you're really the type of person who wants to own and run a bar. Of course, you don't have to run it if you own it, but you'd better make sure you have a team of good, trustworthy managers working for you if you plan to be "hands off." In the beginning, you will probably have to be greatly involved whether you plan to be an active owner or not. If you're the kind of person who would rather deal with paperwork or sit in an office where you don't have to talk to people, this business is not for you. You will need to be out there talking to people and shaking hands. Getting to know your patrons, even if it's just to say "Hi," can go a long way for your customer service.

Another thing you should consider is the time commitment and hours of operation. If you're an early riser, you might not enjoy having to work until 3 or 4 a.m. at your bar. If you have a family, you need to discuss how owning a bar will affect them. Many days you will have to be at your bar from the time you wake up--say, around 10 or 11 a.m.--to the time you go to sleep--say, around 4 or 5 a.m. As you can see, this could take its toll on your family life. Eventually, you'll probably be able to have a saner schedule, once your managers and staff are well-trained, but it may take six months to a year to reach that point. If this could cause problems for you or your family, you may want to reconsider the idea of owning a bar.

If we haven't scared you away yet and you're ready to go for the bottle-in-the-sky dream, read on!

Before you get started on the actual nuts and bolts of creating your dream bar, you have to decide what kind of establishment you'd like to own. Let's take a trip through the various kinds of bars--from neighborhood bar to large-scale club--and see which one is right for you.

  • Neighborhood bar. Conceptually, the neighborhood bar is still an American version of the English pub. You'll find them everywhere in the United States. If you own this kind of place, you can expect to know many of your regular customers. As on the TV show "Cheers," you may find yourself taking phone messages for customers or cashing their paychecks. It's because of the friendly "home away from home" atmosphere that neighborhood bars are successful. Some of these pubs open as early as 6 a.m., and they sometimes close earlier than other bars--depending on the clientele. This type of bar is perfect for small-scale entertainment options, such as darts, pool tables, video games and jukeboxes.
  • Across the country, this is probably the most popular type of bar you'll find. There are a lot of neighborhoods out there, but you might find that there is room for one more in your area. According to the experts we interviewed, the startup cost for this kind of bar ranges widely, depending on the size and concept, but mostly on location. You can buy an existing neighborhood bar in a small town for $20,000, or you can spend a million dollars building a brand-new one in a big city. Not coincidentally, the amount of revenue these businesses produce varies greatly, depending on your bar's location and capacity.
  • Sports bar. Depending on the establishment's capacity, sports bars can be a specific version of the neighborhood tavern, or they can take on a life as big as a club. You may have the latter in mind, but your market research may point to the former. It's important to do your homework! Generally, sports bars offer some kind of menu options, such as sandwiches, burgers, pizza, sandwiches and appetizers. Since the main attraction is sporting events, sports bars have televisions in view of every seat, sometimes all tuned to different channels. Audio and video technology comes into play, with some owners spending a large percentage of their revenue on keeping up with the latest in technology--from satellites to big-screen TVs. As with neighborhood bars, startup costs and revenue potential vary widely, depending on the size, concept and location.
  • Brewpub or beer bar. Studies have shown that although consumers are drinking less alcohol, their tastes are becoming more discriminating. As a result, microbrews are more and more popular. In a brewpub, you can brew your own beer right on the premises. In a beer bar, you can offer a large selection of different types of beer, including microbrews produced elsewhere. It's often easier to get a liquor license for a brewpub or beer bar than a full-scale liquor license, since you don't need a fully stocked liquor bar. Most brewpubs only sell their own beer options on tap (draft beer), with a few selections of bottled beer options, too. Since you're creating your own product in a brewpub, you also have the ability to control what you make and sell--from quality to quantity. The startup costs of a brewpub can be quite high--from $100,000 to $1 million--because of the brewing equipment you need to have. If you produce a popular beer, you have the opportunity to grow into a very successful operation. Beer bars tend to have lower startup costs, which can often mean obtaining a less expensive, fixed-price license from your state government. Beer bar startup costs range from about $20,000 to $100,000, depending on size and location. The revenue potential depends on the geographical location and drinking trends in the community.
  • Specialty bar. Specialty bars, which concentrate on one type of libation, from wine to martinis, or theme, like cigar bars, are gaining popularity. Although some specialty bars focus on only one drink category, there must be a wide variety available within the genre. Take martinis: They have become very popular due to the variety they offer. The traditional martini still has a solid appeal if made with quality vodkas and gins, but other mixes, like sour apple martinis, have expanded the martini-drinking base, especially among women. But even with their increased popularity, martinis are still looking up at wine. Beyond the traditional glass or bottle with a nice dinner, for many, wine is the drink of choice. In fact, women order wine more often than any other alcoholic beverage. Wine bars offer guests the opportunity to taste a variety of different kinds of wine and the ability to learn more about their qualities. Specialty bars tend to stay small and intimate in size and are located in more sophisticated neighborhoods. The costs and revenues you can expect to find when opening a specialty bar depend mostly on the type of product you serve and your location.
  • Club. Like the neighborhood bar, nightclubs can take on a number of different personalities. You can open a small cocktail lounge with a jukebox or a tinkling piano in the corner. A medium-sized club might look like a neighborhood bar during the lunchtime hours, then spring to life with a popular band at night. Or if you have a big enough budget, your club might be a large dance club where the most fashionable people and hippest celebrities hang out every weekend Whichever path you take, you must be prepared to spend a great deal of time and money on promotion to create your "buzz." Clubs can make plenty of money if they're managed properly. Most successful clubs draw on a city population of 500,000 or more. If you're in a small town or suburb, you may not have the customer base to open a large dance club. Market research is key.

The FBI has a department called the Behavioral Sciences Unit that creates profiles of criminals to help track them down. As a bar owner, you need to embark on the same kind of relentless detective work to profile your customers before you start investing large sums of money in your business. The majority of the research material you need is probably already available to you. You simply have to compile it. You can go about developing your customer profile in several different ways, then compare the results to determine your direction.

  • General demographics. Contact your local chamber of commerce or SBA to find out about the age, gender, income level, marital status, and political and religious affiliations of your target market. Your bar's concept may go in a totally different direction if you're in a college town with a high percentage of young, single students than if you're in a quiet, conservative suburb populated with families.
  • Alcohol trends. National and regional alcohol suppliers keep records of how their product fits into the market. Your potential suppliers can provide valuable information about your customers and what they like to drink. Generally, they are glad to help. If you do your research and have a successful bar, your suppliers will profit, too.
  • Other important statistics. Visit your local public or university library. Many libraries have business departments that have a wealth of information about demographics, income levels and spending trends.
  • Lifestyle trends. Call the lifestyle and entertainment editors at your local newspaper and regional magazines, as well as the advertising and marketing departments of local radio stations. They can give you information about your competitors and tell you more about the establishments that have been successful in the area.
  • Your customers and the competition. You can discover a ton of information about your customers using Internet resources. Besides general demographics, you can surf the web for information about other bars in the area. Pop into chat areas and newsgroups to find out where the action is and which bars are the hot spots. (This is especially important for clubs!)

Once you've compiled all your research, you can devise a concrete profile of your clientele. For example, you may decide your target customers are professionals between the ages of 30 and 50 who have incomes of more than $40,000 and like jazz music. Whatever you set as your target market will affect all the decisions you make from here on, so make sure you get it right!

Once you have your profile, you can develop your menu and bar inventory based on what your customers like. Look for trade magazines and industry associations that provide data on food and beverage spending patterns. The National Restaurant Association publishes the annual Restaurant Industry Operations Report, which details the performance of many eating and drinking establishments. It's also available for select states. You can get a large chunk of this information from your suppliers as well.

Keep in mind that you may have more than one profile to work with. You may have a conservative professional clientele during the daytime and a rowdy college crowd at night. If you use your research wisely, you can develop a bar that caters to both profiles for even more business.

As we've discussed, the bar/club industry can be a pricey undertaking. Because of the high failure rate, you may come across desperate bar owners willing to take a low purchase price just to get out of the business. You'll also find that startup costs for bars vary depending on size, location and target market. So we can't give you a concrete amount for what you can expect to pay to start your business.

We spoke with one entrepreneur in California who spent $25,000 taking over someone else's bar business. Another bar owner in Florida spent several million dollars starting his club (and he didn't even build the building!). The numbers vary all across the board. Your bar's size, location, type and concept will make your startup costs as individual as your business.

However, the chart below will give you some idea of what you'll be looking at--from the low end to the high end. Again, you could buy an existing bar that would nullify all the numbers on our low-end chart or start a large-scale club that's off the map from our high-end numbers. You'll have to do some research to find out what your bar will cost based on your concept, size and location.

Here are the startup costs for two hypothetical bars. The first, Night Owl, is a tavern with a maximum capacity of 100 people and serves only beer and wine with a limited menu. Night Owl has annual sales of $327,416. The second, Neverland, is a 1,000-person-capacity nightclub with a full-service bar. Located in the downtown area of a metropolitan city, Neverland has annual sales of $976,132.

 

Expenses Night Owl Neverland
Rent (security deposit and first month) $3,250 $6,125
Leasehold improvements (heating/air conditioning, electrical, plumbing, painting, carpentry, sign, flooring, smoke detectors) $18,000 $65,000
Equipment/fixtures $43,000 $212,000
Licenses/permits $35,000 $45,000
Beginning inventory $22,000 $38,000
Phone/utilities deposits $150 $375
Payroll $5,550 $18,730
Grand opening marketing $1,000 $3,000
Legal services $425 $1,150
Accounting $250 $650
Insurance $450 $2,350
Miscellaneous expenses (add roughly 10 percent of total) $12,907 $39,238
Total Startup Costs $141,982 $431,618

 

Calling your bar an operation fits because of how much operating it takes to keep it running. Someone will have to mind the store every minute your doors are open and some minutes when they aren't, and your place will need some sort of monitoring during the off-hours to prevent vandalism or break-ins.

Many compare running your own business to raising a child. If true, then a smooth-running, problem-free, profit-making bar compares to parenting a happy, well-adjusted, self-assured teenager preparing for adulthood. But don't worry, the bumps in the road hold the best lessons. And as with parenting, you succeed with consistency and concern instead of rigidity and blame.

The groundwork you lay to operate your bar includes the systems you use to track liquor and food. How much does the customer owe the server/bartender, and in turn, how much do they owe you? Also, what liquor and food do you sell the most? The systems you choose depend on the type and size of bar you have.

In most bars, only the bartenders and servers handle money. Cashiers or takeout staff may also have cash-handling responsibilities. Factors to consider when choosing an accounting system include the level of sales you expect, both from alcohol and food, and the efficiency needed for your staff to operate at its full potential. Also, look for holes that your accounting system might leave open for theft at all levels, not just servers and bartenders. No one thinks they are hiring a thief. Many people who might steal if the opportunity arose do not consider themselves thieves, either, so they don't come off as such.

If you use the cash-and-carry system, where the drink is ordered by the server verbally and then paid for before the bartender or server rings it up, you might find many "forgot to ring it up" drinks, as well as a few given away for free. It is the nature of the system. If your inventory controls are so tight that you will notice when too much has been used, or if your manager, who shares in the profits anyway, is your bartender, then you can use this system without much fear.

Your choice of location will depend on how you want your bar to look, what you want your bar to contribute to the community, and the kind of clientele you want to patronize it. Then you need to decide whether you want to buy the location or sign a lease. Again, that depends on your budget. Finally, you need to figure out how to fuse your concept with both your name and your location to your best advantage.

People who know this industry well have polar opinions on the concept of location. Some owners and experts we talked to put enormous importance on the bar's location while others refuted its significance altogether. It all depends on what you want your bar to be and what your strengths are as an owner. If you want your bar to get impulsive neighborhood traffic in a particular area, then you should be closest, and most obvious, to them. If you'd rather spend the time and money saved by more affordable real estate to develop your establishment's concept and create your own buzz and destination, your actual location won't matter so much.

You should consider factors such as safety, parking, accessibility to customers--even the history of the site--when choosing a location.

The word "location" can refer to two different things--what area your bar is in (downtown, uptown, suburbs, etc.) and where you are in relation to your customers. Are you on their way home from work? Or do they have to make it a point to get to you?

Michael O'Harro, a National Bar & Restaurant Management Association board member, explains how he took a bar location nobody wanted in Virginia and made it work. "It was in an alley," he says. "It was a 15-foot-wide alley, and we were 128 feet away from the street. No one would go up the alley--[people] were afraid of it. So the building sat empty for 50 years. But the bar at the end of the alley was spending $20,000 a month in rent, while my rent was $500. I figured I had $19,500 to put toward marketing per month. I made the alley fun and chic. In the alley, I put down Astroturf that I purchased from a football stadium. I had signs, lights and banners. It became the alley. Nobody knew it was there, and then all of a sudden it was the hottest alley in town."

On the other hand, you can have an incredible spot and still not be successful. For example, if you are lucky enough to have the only sports bar right outside your town's athletic coliseum, you should be rolling in cash at least during every in-season homestand. But if your staff is stealing from you, operating procedures are badly managed, or your service isn't up to par, you could quickly find yourself out of business--grade-A location and all.

When it comes to naming a bar, experts generally fall into two major schools of thought. The first says your bar is your dream--your hard work--so you should name it anything you want. The second approach to naming says your moniker is the first and greatest form of advertising for your drinking establishment. A name like Bill's Bar & Tavern doesn't really tell the public anything about your business, but The Haystack, Romp and 3rd & Vine give customers something to connect you to. You wouldn't consider going to bar called Romp if you just wanted a quiet drink. Likewise, you wouldn't travel up and down 4th Street looking for a place called 3rd & Vine.

O'Harro advises that your name should exemplify your concept. "First, I would try to figure out what my concept is going to be," he says. "Sports bar? Discotheque? High energy? Low energy? Singles bar? What exactly am I going to be? Then, what's the name of this business going to be? I would do tremendous research to try to come up with a name that literally fits with the concept."

When coming up with different names, don't stop until you love at least three. In your brainstorming sessions, keep these three questions in mind:

  1. How well does the name fit the concept you want to create?
  2. What types of customers will the name attract?
  3. What will people expect based on the name?

It's time to start planning how you're going to get people into your bar to enjoy it. Just like any other aspect of operating your bar, marketing is an ongoing process. Many bar owners think marketing is the most fun and exciting aspect of running a bar. The entrepreneurs we interviewed agreed that advertising in the media didn't bring as much reward for the cost as it does for many other types of businesses. Generating a buzz for your bar will mostly come from word-of-mouth and the special promotions you set up.

"The only cost-effective way to advertise a bar is word-of-mouth," says Bob Johnson of the Beverage Management Institute, in Clearwater, South Carolina. "When you don't have word-of-mouth working for you, you are in serious trouble. It's not necessarily terminal. There are still ways to get some advertising and marketing out there without spending a ton of money. But anytime you reach into your own pocket to buy advertising for a bar, it's not good.

"Word-of-mouth advertising is priceless," he continues. "It means everything is right. Everything is happening. The bar is alive. Your employees love working there. They are talking and saying great things about the place, and that is passed on to your customers. The customers love being there, and they tell other customers. If you can get to that point, it's just priceless."

So what are some ways to generate word-of-mouth buzz? You can get involved in community events and charity functions to gain exposure. You can launch a direct-mail campaign with a newsletter for regular customers, develop a website, and use any other creative marketing techniques you can dream up.

A great way to promote your bar is to create special internal promotions. If you fully developed your bar's concept, your promotions and events will seem so natural you may even take them for granted. R.C. Colvin, a neighborhood bar owner in Niles, Michigan, got into the bar business because he loves to play pool. "We have pool tournaments several times a year that bring in people from all over. We [also] have a couple of hayrides every year, and people get a kick out of them," says Colvin.

Once you have established what your promotions will be, it's time to start making them happen. After you bar is up and running, you'll have a better idea of what nights need a little boost. Most bars are busy on Friday and Saturday nights, with Thursdays coming in third place. You might decide you need to pump up business on Monday or Tuesday, so pick one day and keep it going until you have established enough regular business to move the promotions to a different day. Of course, you'll still do your holiday promotions, like July 4th, Super Bowl, Cinco de Mayo, etc., on the appropriate days.

Here are some ideas to keep in mind when you're working on promotional events.

  • Prepare. Work out a budget. If your promotion continues for more than one day, budget for the entire time you want it to run. A good goal to shoot for is to make a profit that's three times the cost of the promotion.
  • Make a schedule. Design a planning calendar at least eight weeks before the promotion. Depending on the size and magnitude of the promotion, you may want to start advertising it at this point, too. Never advertise an ending date, though, so you can cut it early if it doesn't do as well as you planned or you can extend it if it really takes off.
  • Maintain the energy level. On the day of the promotion, don't stop the action to give away prizes or make announcements. You can turn the music down, but don't turn it off. This will keep the energy level high and consistent. If you absolutely have to turn off the music, never keep it off for more than 10 minutes, or you risk people getting impatient and leaving.
  • Party all night. Schedule your prize giveaways, contests and entertainment to run throughout the night. If you have a grand prize to give away or a finale planned, don't do it until after midnight so your guests stay in your bar as late as possible. Promoting your bar can be fun and creative. During a promotion and after it's over, ask your customers and your employees for feedback and critiques. Of course, your sales will give you a lot of the information you're looking for, too.

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