What are the Costs of Setting Up a Bar Business

In the article on “How much does it Cost to Own a Bar” we have already explored how the ball park figure needed to open a bar can range between a few hundred thousand dollars all the way into the millions. Now let’s take a closer look into the breakdown of the costs involved.

To open up a moderately sized bar, we’ll be considering an example where the investment capital required is $305,000 with an additional $35,000 for working capital.

If you’re wondering where all the money goes and how it’s used, you should have a much better idea after reading this detailed guide.

Company Setup & Professional Fees ($5,000)

Inexperienced entrepreneurs normally underestimate the administration and finance related costs in a new business. These include legal, accounting, tax and costs related to forming a company and abiding to all the requirements that are related to it.

The costs of setting up a limited liability company varies from state to state and country to country. In general, they can be formed for under $1,000 depending on which state you intend to open your bar, but there may be recurring annual fees and taxes, or other costs such as the requirement to publish the notice of formation in two (county) newspapers for startups in New York.

Although professional fees for on-going accounting, tax and legal services needed should be classified as an operating expense rather than a start up costs, it is advisable to budget a few thousand dollars to account for matters relating to opening the business. This includes legal services for the lease agreement, any joint venture or shareholders agreement, tax planning and countless other accounting related systems to give you the necessary edge to run an efficient business.

Rental & Other Deposits ($15,000)

The business premises for a bar is one of the most important financial costs for startup capital requirements and recurring monthly rental costs. A lot of people are aware of the need to pay rent each month, but overlook the 2 or 3 month rental deposit that’s required in the lease agreement.

So, if you’re renting a place that costs $4,000 a month, you may have to place a $12,000 deposit with the landlord to secure the lease. There are also other deposits (ie utilities) that are needed but these are notably less than the rental deposit, and a few thousand dollars should be more than enough to cover them.

2.5 Months Rental ($10,000)

Apart from the rental deposit, you will have to pay at least 1 month’s rent in advance. In addition, it may be 2 months or more (for the entire build out) from the time you take vacant possession of the premises (ie. the time when the rental costs start running) until you finally open up when you can begin to generate sales.

So, it’s probably safe to budget for two and a half (2.5x) months worth of additional rental costs to cover for this. If your monthly rental is $4,000 a month, this means adding another $10,000 to the list.

Pre-Launch Operational Costs ($10,000)

Similar to the rental, in the month or two before you actually open the bar to customers, you will need to pay for some staff costs and any other related expenses when you’re not even earning any money.

Although you can keep payroll to a minimum by hiring part timers who are only paid when the business is running, you’ll have key team members who will be important in the initial setup phase to plan the operational systems, marketing strategies and how the whole bar will be run. At the same time, every member of staff will need to be trained and properly prepped before opening.

These pre-launch costs will depend on the size of the bar and the size of the team, as well as the make up of the team members. For example, if there are not many highly paid managers and lots of freelance part timers, this cost will be significantly lower than a setup that has numerous managers and permanent staff who need to be onboard before the bar is open.

If you’re unsure of what these costs may be, it’s safer to over budget and put aside 2.5 x your rental costs, which turns out to be $10,000 for our example of a bar with $4,000 rental costs per month.

Liquor License & Business Permits ($20,000)

It is imperative that you do thorough research about all the business permits and alcohol licensing requirements for the state and country where you intend to open up a bar or nightclub. The laws vary significantly and it may take some time to get your application approved, so plan meticulously and try to get these permits and licenses resolved before incurring hefty overheads.

Research the licensing requirements for your area carefully as there may be separate licenses needed to serve beer and wine, and a separate one for hard liquor. In some places, it may be necessary to get a permit for live entertainment as well, so do your homework and find out all the costs diligently before opening up.

The cost of alcohol licenses range widely from under $10,000 for a beer and wine license in some state’s towns to over $200,000 for a full liquor license in a major city like Boston. Evidently, liquor licensing could be one of the largest costs to start and operate a bar, so make sure you’ve considered all your options in detail and incorporate licensing considerations into your bar’s business plan.

In addition to the fee paid to the state’s alcoholic beverage commission for this license, you may also need to pay for a ‘Late Hours Permit Fee’ if you intend to open for business into the early hours of the morning.

Renovation & Interior Design ($35,000)

The build-out costs can also vary greatly and it is one of the largest costs of starting a bar. Construction cost overruns can bankrupt new bar ventures even before they’re open, and they commonly drain bars of their startup capital to the point that many other areas such as marketing are insufficiently funded to the point of causing the business to fail.

Unless you’re from the construction or interior design industry, or you’re experienced in setting up similar retail outlets, you should place very close attention to how you’re going to build your bar and appoint trustworthy consultants to help you out.

There is tremendous room for overspending on designing and kitting out your bar, and the sky is literally the limit, so it’s imperative to work to your budget as tightly as possible. If you have experienced designers and builders working with you, you’ll be able to save a lot of money, but if you engage unscrupulous contractors, you could be in for a tough ride as they take advantage of your inexperience and squeeze as much as they can out of you.

For the purposes of our example, we have a budget with an upper limit of $35,000 for the build out.

Furniture, Fittings & Equipment ($85,000)

The cost for a bar’s furniture and fittings may be incorporated into the build out costs if there’s a main contractor that is handling it all. Or, you may be billed from various sources if you’re actively managing the project and dealing with various suppliers.

From lighting, decorative items, and bar stools, to wall features and the bar itself, every inch of the premises will need your attention and money to solve. Your decisions are critical in ensuring that you get the best value for every dollar spent.

For example, if you’re buying 100 bar stools, and you spend an extra $30 each, that means that there will be an additional cost of $3,000. But if you try to save that three grand at the outset and end up with poorly designed products that need to be completely replaced after a few months, it could cost you much more than the initial savings.

When it comes to bar, audio-visual, point-of-sale (POS) and all the other equipment needed in a bar, it’s safe to say that if you’re a first time bar owner, you’ve never purchased these items before. If you’ve worked in a bar previously, you may have some knowledge of using some of the equipment, which gives you an added advantage, but you’ll still be in the dark for all the others.

There are lots of areas where you can potentially make very costly mistakes because you’ve never set up a bar before. Try to read as much as you can, talk to as many experienced people as you can and pay for professional advice to avoid the countless potholes you’ll have to avoid.

In our example, we’ve budgeted $85,000 here, which makes a total of $120,000 for the entire build out and all the furniture and equipment needed in the bar.

Bar Inventory & Other Supplies ($17,500)

The amount of money needed to buy stock inventory depends on the scope of your menu, your anticipated sales volumes, your negotiated purchase prices and the payment terms offered by your suppliers.

If you only serve the popular beers and a limited range of wines, you won’t have to purchase as many stock items compared to a full bar that has a broad range of beers, an extensive wine cellar and a comprehensive choice of liquors offered for sale.

This range of stock items has a big impact on the total cost of your inventory, as it can all really add up if you try to cover all the potential brands for each type of beverage.

In addition, once you’ve confirmed the number of different stock items you intend to have in your inventory, you need to decide on how many units of each to stock. This is when your inventory costs start to balloon enormously if you havn’t controlled the range of drinks listed in your menu.

To decide on the quantity of each stock item to buy, you need to project your anticipated sales and the turnover of each stock item, as well as the frequency that you intend to replace your stock. All these factors will directly affect your purchasing pattern and how much money you need to invest in your inventory.

Naturally, if you can get attractive pricing and good payment terms from vendors, you’ll need to invest less capital in the inventory, but for most new bars without any track record, you’ll probably have to pay in cash until you’ve established a solid relationship with your suppliers.

We’ve budgeted $17,500 for the bar in our example, which is probably on the low side if you’re opening a fully stocked bar for a big nightclub, but it should be more than enough for a local watering hole where beer is the main seller.

Marketing & Advertising ($7,500)

Once you’ve got your bar set up, you need to let your target market know that it’s the place to be. Money needs to be allocated for a huge launch party, placing ads in local media, conducting public relations exercises, spending on marketing activities and investing in brand building.

A bar or nightclub’s marketing plan is extremely crucial, as it will ultimately determine the fate of the business. Successful bars will normally attract patrons via an effective word-of-mouth strategy that is much cheaper than paid advertisements. If you can’t get people to talk about your bar and bring friends along, you’re going to have a tough time getting the critical mass that you need to make some serious money.

A great marketing and branding strategy doesn’t necessarily need a lot of money to make it work. However, if you have an awful plan, no amount of money is going to build your brand equity and continually bring paying customers into your outlet.

Assuming that you have an innovative approach to engage your targeted clientele and a frugal promotions plan, $7,500 should be sufficient to cover for all marketing materials and any launch party activities, especially if you know how to tap on vendors to help sponsor the costs of the marketing blitz.