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Is Entertainment the Business for Me?

We get about a dozen inquiries a week from prospective LBE, FEC and other related LBL project developers.  Often, they ask us about site selection, feasibility studies, design or other aspects of our services.  We often end up discussing the pros and cons of developing and operating an LBL.  It is important to understand what it takes to develop and operate an LBL and to make sure it's a good match for your skills, abilities and lifestyle -- before diving in.  We'd rather talk people out of getting started down the road of development than have them later learn it isn't a good match for them or have them run into a road block that prevents their dream from becoming a reality.

So here's a quick synopsis of the good and the bad news.  First the good news:

1. LBLs can be a very satisfying business in that you are bringing fun and pleasure to your guests.
2. The annual returns can be anywhere from 15% to 25% of cost, if the project is well-located, designed and managed.  With some borrowing, returns on invested capital will be leveraged and even higher. 
3. There's not a lot of direct competition in most markets.
4. The barriers to entry are high, reducing the risk of new competition.

Now for the not so good news, most of which is the flip side of the high barrier of entry:

1. You work when everyone else plays.  It's not a 9 to 5 weekday business. It's a 70 to 100 hour a week business.
2. Today's LBLs cost a minimum of $2 million, and in most cases $3- to $8 million.
3. It is extremely difficult to raise money, and you can't finance a project 100%.  Banks, if they are interested, are usually willing to finance only about 70% of the value of the real estate if you own the land and building.  Banks are usually not interested in financing equipment (unless you have additional collateral or a rich uncle who will guarantee the loan).  There are some possible SBA programs, but you will not be able to borrow the entire project cost, probably no more than about 70%.
4. A large part of the financing will need to be raised from investors, and there is no marketplace to find them.  There are no start-up venture capitalists for LBLs.  It takes a lot of networking and work to find investors.  You will psychologically need to be able to handle a lot of "nos" and rejection.
5. It takes money to find money.  For both the banks and investors, you will need a credible and detailed business plan that includes a market feasibility study, detailed cost estimate and pro forma financial projections.  You will need a contract or option on a site.  For investors, you will need an offering memorandum that complies with state and federal securities laws and regulations.  Be prepared to spend anywhere from $30,000 to $100,000, depending on the size and type of project, to get all this done.
6. You will need to have your own capital to invest in the project.  Investors will want to see you have an investment in the project, probably 10% to 20% of all invested capital.
7. It's a complex and sophisticated business that requires a high degree of management expertise.  Investors and banks will be just as interested in your management ability as in the project's economics.  If you can't demonstrate management experience and ability, find a partner who will bring that to the table before going after financing. 

Of all the barriers, raising money is what usually stops most projects dead in their tracks.  It's a great business, but don't jump in unless you have some capital of your own, feel confident you can raise the financing and are psychologically prepared for the struggle to find the financing. 

And if you are prepared and still feel this is a business you what to be in, we are well experienced to help you through the entire process from site selection, concept development and feasibility, to full design and procurement, to training and start-up management.  Feel free to contact us.  And don't forget about Foundations Entertainment University.  See the next story for more details.

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