How to Start a Nightclub Business

The nightclub business is a high-risk and short lifespan business that continues to attract horde of entrepreneurs. It is an expensive venture with a high mortality rate; yet the attraction of a nightclub business continues to lure many startup entrepreneurs.

by Jenny FulbrightStaff Writer
August 30, 2004

The nightclub business is a high-risk and short lifespan business that continues to attract horde of entrepreneurs. It is an expensive venture with a high mortality rate; yet the attraction of a nightclub business continues to lure many startup entrepreneurs.

The nightclub business is tough, made even more difficult by today’s demanding and fickle marketplace. What is hot today maybe gone two years from now. Some are not even lucky to be open in six-months; others stay open but run consistently in the red. The nightclub business is too risky to learn by trial-and error – you may find that your funds have dwindled before you even have the chance to rectify your mistake.
Key Elements of a Nightclub
Nightclubs typically appeal to the following major market segments – the single professionals, young adults, tourists and business travelers, and college students. The most successful nightclubs are those that are able to attract multiple customer segments and provide crossover appeal.
The key elements of the Nightclub's concept are as follows:
Entertainment and Fun – Nightclubs have long been the purveyor of fun and entertainment in the evenings. The types of entertainment often provided by nightclub businesses include live bands, live national acts, DJ/Emcees, theme-based parties, and for the lower end, jukebox/coin-operated systems. Entertainment also includes gaming facilities such as pool table, darts, video games or pinball machines. Some nightclubs, particularly in Asian countries, even provide special rooms for karaoke singing.
Distinctive design features – The right dеcor spells the difference between a filled-to-the-brim nightspot and an empty one. The dйcor embodies the concept of the nightclub. It will set the tone as to the type of the club, clientele it is after, and even the menu. A mahogany and leather designed club maybe targeted to upper class patrons, while a mirror-and-smoke designed club may be after the young, hip and dance aficionados. Many clubs are also going for the high-tech look with video screens, as well as state-of-the-art lighting and lasers.
Layout of the club – A growing number of nightclubs are targeting various audiences, which requires different rooms and layout in the club. A nightclub can have an elaborate dance floor in the center with a DJ booth. Spectator seating are also provided that can accommodate anywhere from 30 to 500 guests depending on the size of the club. Many clubs also offer private party seating such as cordoned-off VIP areas or private rooms intended for special events. Nightclubs also have bars and dining room areas for those who prefer a more relaxing atmosphere.
Location – Location is extremely crucial to the success of a nightclub. It should be located in a place where huge traffic of potential nightclub goers is located. A nightclub located beside a church may attract a smaller clientele than one located besides a hip bar. Also check out the presence of competition in the area, and whether the location may be able to absorb the addition of another nightclub.
Exceptional service – Quality of service is a critical ingredient of every nightclub. Customers demand attention and friendly service, while feeling safe and protected inside your premises. If you want your club to be known for the quality of its service, you need to have an adequate-to-high ratio of service personnel to customers (1 service personnel to every 35 customers, or even better). You must also provide continuous training to your staff with regards to customer management and relationships.
Quality food – Food quality is also an important ingredient to the success of a nightclub. You can offer a simple menu with traditional bar appetizers such as nachos or wings while customers drink, dance or simply enjoy themselves. Some nightclubs even go as far as offering food similar to that found in conventional dining establishments.

Startup Requirements

Any new business requires extensive start-up operations, more so for a nightclub business where investments can be sizeable. You will need to collect demographic information to ensure that your target market matches with the demographic profile of your location, especially if you are investing in a building (constructing your own building and not just leasing).
You also need to understand and fulfill all the licensing and regulatory requirements. Be prepared to devote considerable time (and money) to getting the licenses you need. Getting a liquor license is often a very lengthy paperwork process. You need to have all your financial and development plans in order. Check with your government or county licensing offices; some will help walk you through the process.
Above all, you need to be able to provide comprehensive financial data if you want to invite and convince investors your nightclub business is a good idea. Getting financing for a nightclub business will be very difficult. For one, it is a very, very risky venture. Even if you consider your nightclub concept as “hot”, this is one business that banks normally shun, or are extremely conservative in their lending approach. If you are to be successful, you are going to have to prove a number of things to them:
That you have successful experience in this field. You need to show to banks, other lending institutions and even potential investors that you have a strong management team in place that knows how to operate and run a nightclub business profitably. If you have limited or no experience, then find someone who has strong credentials and bring them on board.
Banks may bankroll your business, but you will need to provide a significant amount of your own equity (may range from 35% to 50%). Plus, you will need sufficiently strong personal guarantees.
Unfortunately for those looking for free money, grant monies whether from federal or private organizations are not available for this type of business.
A nightclub is a pricey undertaking with a high failure rate. Getting an alcohol license for a nightclub operating in Washington DC alone may cost you anywhere from $1,500 to $4,500 depending on capacity, while a permit costs around $3,000 annually. This is definitely not a business that you can start on a shoestring budget of $5,000 or less.
How much does it cost to start a nightclub business? There are no hard and fast rules in setting the price tag of a nightclub business. Your start-ups costs will be influenced by the following factors:
Size (seating capacity, dance floor area, etc.)
Location
Target market (targeting the college students will be cheaper than targeting celebrities and socialites)
Type and features
Concept and design of the establishment.
Given the factors above, the price tag can be anywhere from $25,000 if you’re buying a club to as much as several million dollars!
Below is an estimate of a potential range of start-up cost you might possibly incur for your nightclub business based on our interviews with nightclub owners. The actual cost may be lower or higher than these numbers, depending on the elements and features of your club. Note that these numbers assume you will not incur the cost of constructing the nightclub building structure:
Type of Expense
Rent (security deposit & first month) $3,000-$12,000
Leasehold improvements (heating/air conditioning, electrical, plumbing, painting, carpentry, kitchen upgrade, restroom upgrade, flooring, smoke detectors) $25,000-$150,000
Interior Design and Refurbishing (including tables, chairs) $15,000-$45,000
Equipment/Fixtures (audio/lighting lease payment, DJ sound system, bar equipment, lasers, smoke machines, stage sets, mirror objects, other equipment) $35,000-$125,000
Kitchen Equipment (draft dispenser, microbrew equipment, commercial kitchen, hand sinks, concession equipment, etc.) $10,000-$40,000
Cash Reserves $50,000-$150,000
Signage (exterior, exit signs, etc.) $5,000-$15,000
Legal Fees, Licenses and Permits $18,000-$40,000
Point of Sales systems (including merchant accounts, credit card terminals, etc.) $10,000-$35,000
Fire Fighting Enterprises (fire sprinkler systems, fire alarm, fire extinguishers, etc.) $15,000-$30,000
Beginning Inventory (bar supplies, food) $15,000-$40,000
Opening Salaries Deposits $15,000-$50,000
Insurance $500-$4,000
Grand Opening Marketing $1,000-$25,000
Other Expenses Add 10% of total

TOTAL START-UP EXPENSE $239,250 - $837,100

The key is to research carefully the cost of the nightclub of your dreams. You may get to own a night club at far less than the low-end estimate, particularly if you are buying one from entrepreneurs in a hurry to sell of their club. Or you may start a nightclub from scratch and find that the required investment is so much higher than our high-end estimate.
Where will your revenue come from? There are three main sources of revenue for a nightclub business:
Admission sales
Food sales
Beverage sales
To more accurately predict your daily revenue, you need to know the following metrics: average drinks per person, average food sales per guest, average beverage sales per guest, average rotation of seating space, among other metrics.

Marketing Your Nightclub

Marketing is the lifeblood of a nightclub business. If you expect 5,000 customers at your door in one night, you need to find ways to promote your business, increase the level of awareness about your nightspot, and reach new customers while keeping the regulars.
Some of the most common marketing strategies employed by other nightclub owners include:
Advertising and promotions. Nightclubs owners commonly use advertising to promote their business. Radio advertising has proven to be a potent tool for bringing customers to nightclubs, as well as local newspaper advertising. If college students form a big part of your market, advertise in school publications (if allowed) or sponsor school radio programs.
Brand awareness can also be enhanced with promotional materials (e.g. flyers and brochures) that can be distributed to patrons, radio listeners, among others.
Grand opening. Many new nightclub owners invest a significant portion of their marketing budgets in making a big splash for the opening event. The public relations activity as well as advertising work towards creating excitement about the new night spot. Some owners even sponsor contests giving away VIP passes in radio stations in order to create awareness about the nightclub.
Events marketing. Club events organized by themes have become essential marketing tool for nightclub facilities. Events typically bring up the entertainment factor in the club a notch, more so if the event features celebrities. Imagine the publicity your club will generate if you are able to bring in Paris Hilton or any of the hip-hop royalties to attend your event! Your club can host large-scale, indoor/outdoor events, frequent concert-style shows, product release parties, etc.
B2B Marketing. If you are targeting travelers and businessmen visiting the area, you need to have a presence where they go and stay. Travelers are often on the lookout for places to hang out at night to relax, unwind, and check out the hottest spots in the area. Reach marketing partnership deals with hotels in order that you may place your brochures in their lobbies, or better yet, guest rooms. Buy some ad space in airports.
Word of mouth. The hip factor, quality of service and overall reputation of a nightclub can fuel positive word of mouth. Coupled with other marketing efforts, word of mouth is an essential crowd drawer in the nightclub business. For example, people are more willing to check out a club highly recommended by their friends, peers, or relatives, more so if word spreads around that the club is where the hottest celebrities hang out at night.
Web site. A web site is becoming to be an integral element in nightclub marketing. Web sites can be an effective tool for raising awareness and catching attention. Make sure your site is listed in regional directories.

The nightclub business is not as simple as selling alcohol, counting the cash, or just dreaming up the “next hip idea.” It is a complex business that requires a tremendous amount of personal and financial investment. Success in this business depends on what your goals are and what you think you can execute to make the guests extremely happy, have a great time and come back to patronize your club.

1. Understand why people come and give it to them. Success in the nightclub business entails an acute understanding of people. Your understanding of what customers’ want will form the basis of your concept, your layout, your operational policies and others.
It is important to remember that different markets patronize nightclubs for different purposes. Some customers go to clubs to be seen at a hip and cool spot. Some come to dance and enjoy, while others love the exceptional service. Some come to find a relaxing place to unwind. Some go to meet people, while some check out the great drinks and food. If you are planning on generating a high-volume business, your nightclub needs to focus on themes that have mass appeal. The key is to understand why customers would come to your club, and then give it to them.
2. Have a clear understanding of the nightclub business. You need to have a realistic understanding of the inner workings of the nightclub business. Many nightclub businesses fail because their owners simply thought that a nightclub would be a cool business to earn lots of money, without understanding the complex requirements this business needs. You need to have the financial smarts and a thorough understanding of its logistics – things that you can only gain from totally immersing yourself in the business. Some business owners even apprentice or work in a nightclub business (not just go to the club regularly), while others surround themselves with people who actually know the business.
3. Provide exceptional service. To be successful, you must provide exceptional service that leaves positive impression to your customers. There must be adequate service employee to customer ratios, including wait staff for the dining area, beverage servers, bussing personnel, and valet staff (if provided). Quality service is a result of various strategies, including continuous service training to all employees (even managers), employee recognition program (e.g. employee of the month, etc.), and higher service employee to customer ratios (e.g. separate beverage servers & bussing personnel, adequate table count for each wait staff, etc.).
4. The right looks for the right market. Decor plays a large role in determining who the clientele will be; the target market should be one of the first considerations when deciding the decor of a nightclub. You need to consider your location, the number of people in the town, and demographics of your neighborhood. If you live in a low-income neighborhood, a ritzy five-star nightclub will be beyond the reach of the immediate market; and upper class folks may not be too willing to travel and party in a low-income neighborhood.
5. Consistent entertainment atmosphere and product quality. You need to ask yourself what the target market can afford and what they want in terms of food, beverage and entertainment – then consistently give them the same kind of quality (or better yet, keep on improving) every single day. The nightclub business is very affected by fashion, so you'll need a good sense for how to make your club "the" place to be.
6. Safeguard money handling and operations. One of your biggest concerns as a nightclub owner is “who is and who is not handling the money.” Theft is always a concern in this business with cash on hand. To minimize your loss percentage, it is essential that you trust your money handlers, if you cannot personally oversee this aspect of the operation (although many nightclub owners prefer to handle money issues personally themselves).
7. Smart financial sense. A nightclub business demand adroitness in managing internal finances and cash flow to meet daily operations and attain capital growth. Your role therefore includes understanding the business side of things. Spend time learning the basics of accounting and bookkeeping in order to understand where your money is coming from. You will be more equipped to manage cash flows, control inventory, and make financial decisions that affects your business. It is critical that you are able to maximize your sources of revenues (e.g. is your biggest slice of income coming from events or bar charges?) and minimize the costs. It is important to maintain strict control of all costs, at all times, without exception, the first step of which is to set targets for food costs and total beverage costs.
8. Flexibility and proper space planning. You can maximize your nightclub’s potential by creating different atmospheres to attract varied clientele. Through proper space planning, your club can be a restaurant by day and a club by night. At night, you can transform part of the unused diner’s area to a dance floor. You can further subdivide the floor plan by creating a quaint mezzanine where customers can relax, underneath of which bars and DJ booths can be created. A section can be cordoned off for a VIP area.
9. Security and safety. Maintaining security and safety is paramount to the successful operation of any nightclub. Your management team and staff should be keen to explore any methods that create the safest environment possible for customers to continue to enjoy their nights out. Make sure that your facility is in accordance with fire ordinances in your area, including number and size of exits. Do not wait for a tragedy such as fire resulting in the death of your patrons to occur before making a thorough evaluation of the safety of your premises. It is also your role to ensure that assaults and other crimes do not occur in your premises involving your customers. To tackle anti-social behavior, a major nightclub in Scotland even went so far to introduce plastic beer bottles in a bid to cut down on violent assaults.