Considering buying a stripclub? If so, do you prefer existing construction or ground-up? In this article we'll discuss the merits and pitfalls of each.
One thing’s for sure: construction costs don’t stop at the building line. Welcome to Design Buzz! Today’s discussion involves the considerations an owner of a new stripclub makes when choosing between ground-up construction and existing inventory.
New sTRIPClub Locations: Existing Construction vs Ground-Up
I’m always surprised when a new client expresses the desire to construct a new building for a gentlemen’s club. To me, this is the cue that they’re new to the business. Why? After 10 years in this business and having dealt with hundreds of people, this discussion is so infrequent among veteran gentlemen’s club owners that it’s virtually nonexistent. Don’t get me wrong – new strip clubs are built on occasion, but new (referred to as “ground-up”) construction isn’t normally the first choice among seasoned club owners. In fact, I can only think of two obvious reasons why a veteran gentlemen’s club owner would even consider such a venture –
· Lack of inventory – all other zoning-compliant potential locations have been exhausted.
· They want to create a marquee club.
I know of two significant clubs that were built in recent years – Larry Flynt’s Hustler Club in Las Vegas and ELEVEN in Miami. Both clubs, built by people who’ve been in the industry for many years, were really the result of the latter reason. But how does the majority of industry veterans purchase adult night clubs? Some people may be surprised to know that, among strip club veterans, the lack of inventory generally doesn’t trigger an automatic response to build. The reality is they merely look elsewhere for a good deal on an existing club. In other words, veteran owners have a strong preference of existing clubs vs ground-up construction.
Why Veteran StripClub Owners Prefer Existing Construction vs Ground-Up
Certainly there is a case to be made for ground-up construction when considering a new gentlemen’s club. If you’re looking to open a new club and you perform a market analysis of existing clubs, there may be several that are well-run and several that are struggling. Well-run adult nightclubs can fetch a healthy price tag: anywhere from 3 – 4x net revenue. For instance, a club that nets $2 million annually may be able to attract as much as $6 – 8 million. This owner was crafty, assembled his staff and built his own brand; he’s entitled. The owner who ran his strip club into the ground has a tough road ahead when looking for a buyer, much like selling an old, beat-up used car. However, if the business includes a full liquor license, this could be a diamond-in-the-rough. Most importantly, the licenses – especially the adult use license – have great value. To prove my point, just go out and try to obtain one. Most municipalities don’t want any part in issuing a new adult use permit. At the end of the day, this is the most valuable commodity in the adult nightclub industry. Most veteran club owners recognize the value of the license(s) as the primary objective, and those with solid operating skills are looking for value when searching for new locations. In other words, they want to expand at the lowest cost and in the shortest timeframe, and purchasing existing inventory is their most logical (and affordable) approach. On the other hand, some of the large sophisticated ownership groups in the industry who have greater financial wherewithal often choose to purchase select, well-run clubs and are willing to pay the premium so they can forego the time element. If you’re among the group that has more time than money, there are a ton of deals out there today.
WHAT ARE The Pitfalls of STRIPClub Acquisitions?
Lately, I’ve been hearing about all kinds of deals for gentlemen’s clubs. Some of these owners are willing to let you take over payments, while others may even be willing to carry paper. Other clubs are being run into the ground with no obvious revenue and no capital improvements for about 100 years; you may happen to know that they’re having difficulty paying the rent, but the minute the owner senses interest he / she wants a ridiculous price. Many of these people have an absurd sense of their club’s value. The 3 – 4x revenue asking price may be relevant in the mind of the seller, and some may think it’s fashionable to ask $1 million – but there’s no substance. In reality, their club is only worth what someone is willing to pay and generally anyone of substance can pick-up a potentially-good club at a very reasonable price. But before rushing into any deals, be sure to consult a first amendment attorney; I’ve listed a few below. Ever-changing ordinances can leave you, the buyer, in a potentially-compromised situation unless you consult a true legal expert – one who knows the industry.
Whether you’re going to purchase an existing club or pursue ground-up construction, there are a few things to know:
Some small clubs can be purchased between $100,000 - $250,000. However, these clubs probably need between $250,000 - $500,000 to get them ready for business, so the message here is ‘Don’t be misled!” In other words, don’t fall into the trap of thinking you can do better previous owner without making substantial improvements.
· The best thing you can hope for in a rundown club is good “bones” – a good roof and solid mechanical, plumbing and electrical systems.
· The underbar equipment will likely need to be replaced. Please see my related blog post (below) about purchasing new bar equipment.
· If the bar has an existing ice maker it’s probably a walking liability. DO NOT purchase a new ice maker – instead, please read my related blog post (below) about ice machine subscriptions – the latest trend and best deal of all for club owners.
· As a new owner you’ll need to be compliant with ADA regulations by the time your improvements are complete. My blog post (below) discusses this topic.
Although ground-up construction isn’t commonplace it may be your only option. Site improvements (sewers, water, grading, fill, curbs, parking lots, retention ponds, etc.) alone can easily exceed $1 million. And that’s if everything goes according to plan. You’ll also encounter a host of engineering charges (civil, structural, mechanical and electrical). The construction can be managed by a general contractor who typically charges 15% overhead and 10% profit or by a contract manager (CM), who will often provide the same services for under 10%. A good budget, exclusive of land, should range from $250 - $300 per square foot.
Financing is the single largest lynchpin of any gentlemen’s club deal. If you don’t have substantial wealth, you’ll need to form a consortium, because SBA loans, bank financing and commercial lines of credit are off-limits to owners of strip clubs. The reality is that the world of finance doesn’t care about this industry.
If you want your endeavor into adult nightclub ownership to be a successful one, you’ll need to hire a first amendment attorney. Your local attorney may be respected for his or her expertise, but unless he / she has knowledge of first amendment law, there’s always a chance that your investment will not be fully protected. Several notable attorneys have significant industry knowledge, and here’s a short list:
· Clyde DeWitt (702) 386-1756
· Luke Lirot (727) 536-2100
· J. Michael Murray (216) 781-5245
· Brad Shafer (517) 886-6560
· H. Louis Sirkin (513) 721-4876
· John Weston (310) 442-0072
Realtors / Business Brokers
If you’re searching for a club, I’d like to introduce you to a personal friend, commercial realtor Winston Hines. Winston is a true professional and has been the leading business broker in the adult nightclub industry since 1997. He has numerous listings throughout the U.S. You can reach Winston at his office, HWH Properties, (864) 580-3826.
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I hope this has been helpful. Wishing you the best success!
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