The Business Model for Bars and Clubs

business modelIt’s amazing how new and even experienced entrepreneurs can often get tangled up in trying to define the business model for a club or bar when it can actually be very simple if you don’t over complicate it.

Revenue Model

In essence, the majority of bars and nightclub businesses make money by selling drinks. In addition, some also generate revenue by charging patrons to enter the establishment through ticket sales that may or may not include a first drink.

As such, there are a couple of revenue streams, each with a differing profit margin. In the case of drinks, the profitability will depend on the pricing and purchase cost of each product type. For front door charges that do not include a drink, the gross profit margin is technically a 100% unless there are any direct commissions given to sales agents. If the entry charge includes a first drink, then the margin will depend on the type of drink that is provided with the entry fee.

Direct Costs

There may also be special occasions when the club hires a famous DJ or performer to play for the night, paying thousands of dollars in fees to the celebrity and any other agents, as well as incurring additional marketing and advertising costs to promote the event. As a result, the tickets for these events will be significantly more than the usual entry fee, as it needs to make up for the artist’s professional fees and all the other costs involved. However, sponsors will often cover some of the expenses and the heftily priced tickets may generate a huge profit for the club owners.

The bulk of a club’s income is derived from selling drinks, where there is usually an average margin of about 50% to 80%, depending on the pricing, type of bar and purchasing power. Having said that, it is worth noting that the margin for some items could be well over 100% a lot of the time. For example, a beer that is sold for $10 may cost $6 to buy. In this case, the profit is $4 and the profit margin is $4 divided by $6, which comes to 66.66%. This should not to be confused with the Cost of Goods Sold (COGS) or Cost of Sale, which is $6 divided by $10 or 60%.

The revenue model for a club or bar is made up of the income streams that we’ve just looked at, and together, they produce the gross sales for the business. When we deduct the direct costs related to generating these sales, such as the purchase price of the beverage items, we are left with the Gross Profit.

Operating Costs

Next, comes the fixed expenses or operating overheads that need to be incurred even if there are no sales at all. These include the property’s rental, staff costs, utility bills and other expenditures required to run the club.

Profit Before Tax

This Operating Expense (or OPEX) needs to be deducted from the Gross Profit to arrive at the Net Profit (before taxation). To calculate the real profits that are made each month, you have to further deduct the tax that is payable on the profits to work out how much is left.

In a nutshell, this is the basic financial model for almost every bar and club all around the world.

Is it Profitable to Own & Operate a Bar

profitableCan bars make money for their shareholders? This is the question that almost all budding bar owners are trying to figure out before they take the plunge to open their own dream bar.

Unfortunately, there is no simple yes or no answer because it really depends on a number of factors that vary for different companies and ventures.

Can it vs Will it Make Profits

So if you want to know if you CAN make a profit by running a bar, the answer is yes, of course you can, since there wouldn’t be so many bars in existence if it wasn’t profitable for the people who own them.

However, if you’d like to know whether you WILL make lots of money by setting up the bar you have in mind, then the answer is that it is certainly possible, as long as you have all the knowledge, experience and a fair bit of luck on your side.

Profitable Cash based Business

The bottom line is that bars can be extremely profitable cash businesses that have very few bad debts from customers who owe them money, assuming you’re not foolish enough to give credit to your regulars.

It is one of those businesses where customers pay up front for a product even before it is consumed, and credit doesn’t have to be given, which means no collection problems. At the same time, if you play your cards right, your suppliers may give you 30 to 60 day (or more) payment terms to settle your purchases, so you’ve got the best of both worlds.

Possible to Consistently Make Money

If you have the right formula, location and team, it is possible to earn a lot of money every week, especially during the initial months when you’re the new and hip place in town. Even after this honeymoon period, if you know what you’re doing, you could be cash flow positive for a good few years or more, and end up making a huge return on the initial capital invested.

Unfortunately, while it is certainly possible to generate extraordinary amounts of profits from a bar, the majority of businesses end up loosing money. The ones that are successful tend to be owned and run by experienced operators who have normally been in the industry for many years and have learned the tricks of the trade from their past failures.

Therefore, the question that aspiring bar investors should be asking is, what does it take to own a profitable bar, or, how can new entrepreneurs set up and operate a bar that consistently makes profits.

How much does it Cost to Own a Bar?

Anyone who is thinking of opening a bar naturally wants to know how much it takes to setup the business in order to decide on whether it’s a feasible project to pursue.

In general, most bars are started up with a capital investment of somewhere between $125,000 and $500,000. Depending on the size, location and type of place you have in mind, some small bars can be opened with under $100,000 and large nightclubs in popular areas may require more than $1 million to be invested, but on the whole, small to medium sized outlets need about one or two hundred thousand dollars to get going.

Now, even if these seem like lofty numbers, you may not need to invest so much money if you have other partners and co-owners who will contribute their share of the startup capital.
Cost to Own a Bar
Less Money for a Minority Ownership

If you want to be a bar owner but you don’t have much money, you can always take a small stake in a venture. Technically speaking, if you invested $10,000 to own a 10% share in a Sports Bar that cost $100,000 to set up, you’re already a bar owner. Although your investment is significantly less than someone who owns 100% of a million dollar Nightclub, you’re both still bar owners all the same.

So, depending on whether you’re a sole proprietor, a major investor or a small shareholder, the cost of owning a bar business may range between $10,000 (for a minority partner in a small bar) to half a million or more (if you put up all the money yourself for a sizeable nightclub).

Example Breakdown of Bar Setup Costs

These are most of the major areas where the startup capital will need to be spent to set up a new bar. It includes placing deposits, investing in assets, purchasing inventory and incurring expenses before the bar is open for business, as well as budgeting for a few months of working capital to ensure there’s money in the bank to cover for any unforeseen events.

  • Company Setup & Professional Fees ($5,000)
  • Rental & Utility Deposits ($15,000)
  • 2.5 Months Rental ($10,000)
  • Pre-Launch Operational Costs ($10,000)
  • Liquor License & Business Permits ($20,000)
  • Renovation & Interior Design ($35,000)
  • Furniture, Fittings & Equipment ($85,000)
  • Bar Inventory & Other Supplies ($17,500)
  • Marketing & Advertising ($7,500)
  • Working Capital ($35,000)

Total ($340,000)

(Note: You can find out how each of these costs are broken down in What are the Costs of Setting Up a Bar Business)

The cost for your bar is unlikely to have exactly the same capital requirements, as it will depend on the type, concept and size of bar you’re opening. Some costs such as the liquor license will also vary depending on which state or country you’re operating in. In addition, rentals and rental deposit costs could also be significantly higher or lower depending on the location leased.

Hopefully, you have now got a better idea of the main costs involved in setting up a bar. The example discussed should have provided you with a framework to modify and use for the bar you have in mind.

As you can see, it takes quite a fair bit of money to start up a bar, so make sure you find out more about whether it is profitable to own a bar before you invest your hard earned cash.

What are the Pros and Cons of Owning a Bar?

There are different pros and cons to owning a bar for people with different mindsets, financial positions and industry experience.

This article will share a range of advantages and drawbacks of being a bar owner, where readers should adapt the tips to suit their individual profiles.

We will examine the strengths and weaknesses of the business from various perspectives including:

  • Finance & Investment
  • Social & Business Networking
  • Lifestyle & Working Hours

Financial Pros & Cons

From an investment angle, bar businesses offer a number of significant advantages for owners:

  1. Cash Business
  2. High Margin Sales
  3. Can be Very Profitable
  4. Potentially Short Payback Period

However, these benefits also come at a cost:

  1. Large Initial Investment
  2. Limited Business Lifespan
  3. High Operational Costs

Networking Pros & Cons

Customers at bars often want to know the owner, especially at successful bars.

For most people, this is a huge perk of owning a bar as it provides great opportunities to meet lots of new people for business and pleasure.

However, for people who value their privacy, being popular may actually be one of the downsides of being an owner.

Lifestyle Pros & Cons

People who run the bar as well owning it have the benefit of:

  1. Working in a fun and entertaining environment
  2. Earning a Living by doing what you love
  3. Getting out of a 9 to 5 desk job at an office

At the same time, there are also hazards to your lifestyle by operating a bar:

  1. Working in the Evenings
  2. Working on Weekends and Holidays
  3. Getting home late every night

How do I Open my Own Bar?

Open a BarBars are one of those retail businesses which have a relatively low barrier to entry for new startups to enter and compete in the market.

In other words, all you really need is money in order to open your own bar.

However, to remain profitable, you must have the knowledge to run it yourself or be able to hire an experienced team who will manage the business.

If you’re thinking about opening a bar, here’s a useful step by step guide on how to open a bar:

  1. Write a Detailed Business Plan
  2. Budget for the Required Startup Costs
  3. Budget for the Cost of Stocks and Bar Inventory
  4. Analyze the Overheads & Operating Costs
  5. Allow for a minimum of 3 months Working Capital
  6. Finalize the Total Capital Required
  7. Find the Money to Fund the Business
  8. Confirm a Name for the Bar and Company
  9. Incorporate a Company
  10. Open a Bank Account
  11. Deposit the Capital into the Bank
  12. Find a Location for the Bar
  13. Sign the Property Lease/Rental Agreement
  14. Register the Business with the Local Authorities
  15. Get all the Relevant Permits and Licenses
  16. Engage an Interior Designer & Contractor
  17. Renovate & Furnish the new Premises
  18. Purchase all Bar and Operations Equipment
  19. Hire the Management Team and Staff
  20. Train & Get Uniforms for all Team Members
  21. Confirm your Menu & Stock Requirements
  22. Enter Menu Items & Pricing into the POS system
  23. Negotiate Contracts & Terms with Suppliers
  24. Purchase all Inventory necessary to run the bar
  25. Test all Audio, Visual and Lighting Equipment
  26. Do a trial run with the entire operations team
  27. Open the Bar for Business

Okay, that’s just the broad outline. Now, you really need to think through the details within each point mentioned.

Unless you’ve run a similar business before, chances are that you may not understand some of the steps highlighted. Make sure you figure them out, as you should really try to know the business inside out before starting out.

In the meantime, click the following links to learn more about whether you can make money investing in a bar business and how much capital you need to open it.

A Guide to Owning and Operating a Bar

OwningABar.com (OAB) is a guide to owning and operating a bar or pub.

If you’re a bar owner or are thinking of opening your own bar, you’ll find useful information and resources in this site which will provide insights into bar ownership.

There are free articles on how to start a bar as well as tips on running and managing bars:


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