Becoming a Proprietor: How to Make Your First Bar Deal Happen
David Kaplan does not have a business degree. The partner of Proprietors, LLC, has a fine arts background and the drive to be a successful entrepreneur. Kaplan would likely say that he doesn't even have a business background but with Death & Co. reaching their tenth year in operation, we would beg to differ. He would also say that he's only an expert in what has worked for him, that there are a million ways to approach the opening of a bar. At an industry conference that took place this year he gave insight into his first bar deal, a deal that has led to the opening of many more successful bars.
If you're planning to open a bar you'll want to come up with a business plan, also known as a prospectus. While many people have been trained to think of the prospectus as a way to entice investors into funding their business, Kaplan sees it as a tool for the hopeful bar owner. In his eyes, the business plan is a resource that allows the person seeking funds to know their business backwards and forwards; it's a valuable road map that lays out the what, the how, the why, and the money needed.
There isn't any hard and fast rule for a prospectus but Kaplan shared a business plan that consisted of an overview, a section on atmosphere, one on offerings, the layout, the location, the neighborhood, competitive set, demographics, transportation, why the concept works, the money, projections, and a thank you at the end. While some of those sections may seem self-explanatory, Kaplan explained others. Because our industry is a visual one, the atmosphere section should contain anything that contributues to the overall vibe. View the prospectus as a passion play intended to get investors excited and share your passion. An offerings section explains what will be on your menus. The layout is obvious but Kaplan shared some very valuable information in securing a space while explaining this section. It's likely that you'll need to offer your first investor a sweetheart deal in order to get them to give you the money to lock in the space you want to occupy. While it isn't always possible, try try to get the landlord involved in the deal to help secure your ideal location. You can also look for new development deals because they're likely, according to Kaplan, 6 to 8 to maybe 12 months out, which gives you the time to stockpile investors and capital. If you have the means, which usually means having already opened a few bars, create a nightlife fund by gathering many investors so you'll have the capital on hand to accomplish several projects in rapid succession. In terms of the neighborhood section, know the neighborhood in which you plan to operate because you will be investing in it in terms of time and money; become part of the community. When explaining why your concept works, share personal accolades, tell investors why you're the right person for this project, and what other success projects you have under your belt. You'll need to break down exactly what the money is for and how much you need, plus what type of corporation you plan to form. Now, projections can be overwhelming and boring, so Kaplan suggests finding a way to get into them. To do this, find an easy point of reference. If you already work in a bar, you should know some numbers that can get you started, and you probably know people in the industry who can help you. Consider this section a very well-informed best guess.
"You will need to lawyer up at some point," added Kaplan. He has two attorneys. One is an alcohol attorney and one specializes in general business. As Alba Huerta, owner of Julep, said of her ownership experience, it's more expensive to not have a lawyer than to have one.
Valuing Your Time
You're in business to make money, and that means being compensated for your time. Know how you want to be compensated: an ownership stake and/or payroll. Define your roles and responsibilities. Will you be fundraising? Creating the cocktail program? Will your role be administrative? Know what you bring to the table so that you can calculate your value: Time + Skill Set + Contribution = Value. Keep in mind that in some states it's against the law for management to be involved with a tip pool.
Some operators, for whatever reason, adopt an "us versus them" stance when it comes to investors. Kaplan believes this is a mistake. He cautions against being disingenuine. Instead, make sure that your interests and the interests of your investors are aligned. Communicate and work with your investors.
Kaplan's first deal was as follows:
- 85/15 flip to 30/70 at 115%
If that made sense to you, fantastic! If not, don't worry about because not many people would see that as anything but gibberish. Let's break it down:
- 85%: Investor pool
- 15%: Sweat equity
- 30%: Investor pool
- 70%: Sweat equity
- 115%: When the flip occurs. Example: If investors put in $100,000, when they are paid back $115,000 the deal flips from 85/15, investor/sweat equity to 30/70 investor/sweat equity.
The deal Kaplan entered into is just one example of many, many types of deals. You will have to decide what works for you, whether it be identical to the one above, a 50/50 no flip deal, or something else. Your focus should be on striking a deal that benefits you, makes your investors happy, and helps you to repay them within 3 to 5 years. A great way to come to understand any deal is to model it out. This will show you what you'll be making over the course of several years, and Kaplan models his deals out for a period of 10 years; be mindful of the deals you're taking. Bear in mind that investors expect a return on investment (ROI) better than what they can achieve by playing the stockmarket. Why? Because of the risk involved in investing in you rather than a stock. If something goes wrong with a stock an investor picks, they can pull their money out. Once they've invested in your bar or nightclub, they no longer have access to their money.
Talking to Investors
It may take you some time to learn how to speak with potential investors. If you've never done it before or only done it once or twice it can be an intimidating task. Kaplan himself admitted that he did just about everything you're not supposed to do when he was trying to make his first bar deal.
- get defensive,
- ignore the competition,
- avoid questions,
- seem desperate,
- be unresponsive,
- oversell or be dishonest,
- or fail to do your research.
- show your passion,
- be communicative,
- be honest,
- and be professional.
You will probably break some of these "rules." You will hear the word no. Don't panic.
David Kaplan's Pro Tips
- Tell a story. Be human because investors aren't just investing in numbers, they're investing in you.
- Play to human emotions and interest.
- Show enough, but not everything.
- Have a dialogue, not a monologue. This is a conversation.
- Speaking of conversation, adapt the conversation
- Know that investors are sheepish.
- Track who you're talking to so you know who to go to for next deal, particularly if you did very well and they missed out because they said no to your first project.
- No doesn't always mean no. Sometimes it means they're just not ready yet.
- Instill the fear of missing out FOMO. Investors live and die by FOMO.
- Have discussions about everything.
- Spell out benefits for investors, and include everything in contracts.
- Investors will want special treatment but be careful about giving them too much. If you don't want them coming into the bar or nightclub and getting comps for themselves and friends, lay that out in the contract.
- Don't expect venture capitalists (VCs) to invest because they like huge deals like those offered in the tech world. Instead, look for medium-sized investors as they are are the most common. They're not ultra rich but they make a couple hundred grand per year, are worth a million dollars or close to it, and are able to easily invest $25K to $50K in a project.
In this industry, we all know connectors, those people who seem to know everyone. Utilize these nodes of connection to find investors.