How to Start a Bar

Overview

How to Start a Bar

Maybe you’ve worked as a bartender and are dreaming of having a bar of your own. Or maybe you know your town would really benefit from a new bar with a certain specialty. Whatever the reason, if you’re thinking of starting a bar, you may be looking at an exciting and profitable venture. But before you jump into this potential new business, take a few minutes to make sure that you fully understand everything that comes with starting a bar business of your own.

Business Overview

Bars specialize in serving alcoholic beverages and providing entertainment, whether that’s in the form of a spot to gather and watch sports on TV or to see live music and other acts. Every bar develops some sort of a specialty that allows them to focus on a certain target market. Some bars create affluent, upscale atmospheres with top-shelf liquors, while others might focus on becoming a sports junkie haven and others as a low-key neighborhood bar.

At its most basic, a bar is just that – a bar. Bartenders serve alcohol and mixed drinks, and the business serves as a socialization opportunity for customers. Some types of bars incorporate a small kitchen, too, offering a more basic menu than you’d find at a restaurant. Selling food can be an advantage since it can encourage customers to stay longer – and spend more on higher profit beverages.

Industry Summary

According to IBIS World, the bar and nightclub industry experienced a 2.9 percent annual growth from 2013 to 2018. During that time, the number of businesses grew to 70,382, and industry employment also increased to 422,875. In 2018, the industry brought in $28 million in revenue.

Much of that growth took place during the second half of that five-year period, driven by an improved economy. An increase in per capita disposable income has allowed consumers to spend more freely in terms of attending bars and nightclubs. As bars have identified and adapted to changing consumer preferences, more consumers have chosen to go out to bars.

Industry Trends

Many trends shape the bar industry, and according to Pour My Beer, hosting events can help bars to strategically position their brands while increasing their local audience exposure. Bars can partner with music festivals or marathons, and some opt to bring celebrities in for special events to help draw consumers.

Bars also need to accommodate the increasing health-conscious awareness that consumers are embracing. Offering gluten-free, vegetarian, and vegan menu items can help all consumers to feel welcome at a bar. People are also replacing large, unhealthy meals with smaller, healthier portions, so offering these smaller plates can work to a bar’s advantage.

The interest in specialty bar concepts where there is a focus around certain themes such as cigar bars or offering certain types of drinks like wine or martinis is increasing as well. These different types of bars tend to do better in heavily populated and trendy locations.

There’s also an opportunity for bars to adopt the sustainability focus. Most bars can easily institute policies of eliminating plastic straw use, increasing their use of reusable silverware and utensils, and implementing other eco-friendly changes.

Target Market

When starting a bar, it’s so important to focus on a target audience. One single bar trying to appeal to everyone will miss its mark and fail. Instead, focus on a niche that is currently unmet in the community. Maybe the town could use a great sports bar, or maybe the music scene would appreciate a bar with a heavy focus on a certain type of music entertainment. Once that concept is established, everything in the bar should support that concept, from the decor to the names of cocktails to the entertainment and events hosted.

Generally speaking, bars will market to adults ages 21 and up who enjoy drinking alcoholic beverages and who may want to enjoy a meal along with their drinks. Bars may focus on the locals living in a particular neighborhood or develop specialties that alter their target market. For instance, a sports bar will market to sports fans, while a bar that has a heavy focus on entertainment may market more toward music lovers. Some bars may stock premium and specialty alcohols, and their audience will be affluent alcohol connoisseurs.

Checklist for Starting a Bar

It’s a common misconception that running a bar is a job that’s full of fun, nightlife, and glamour. In truth, effectively running a bar is full of hard work. With dedication and focus, though, you can create a promising and profitable business that doesn’t just support you but also supports multiple employees.

While starting a bar can be an incredibly rewarding experience, you want to be prepared for the challenges ahead. Use this checklist to help get your business off right.

Step 1: Write the Business Plan

After coming up with the idea, the next step in starting your business should be to write a business plan. In addition to obtaining funding, your bar’s business plan will help guide you through major decisions and help lay the groundwork and minimize costly mistakes. Most business plans will include sections like what makes your bar different, who your ideal clientele is, why your management team will successfully run the business, market analysis, marketing plan, sales projections, operating costs, profit margins, and more.

Not only will a bank or investors require you to have a business plan, but multiple studies have shown that a business plan helps increase the odds of starting a successful bar.

Related: How to write a business plan

Step 2: Name the Business

Finding the perfect name for a bar business can be challenging. Not only does the name have to resonate with your customers, but it also has to be available to use.

Related: Tips for naming a bar

Step 3: Form a Business Entity

A business entity refers to how a business is legally organized to operate. There are four primary business entities to choose from, which include the sole proprietorship, partnership, corporation, and Limited Liability Company (LLC). Each type of entity has its own pros and cons, such as liability exposure, costs, and administrative requirements.

When deciding on which business entity is best for a bar, it normally comes down to the sole proprietorship and Limited Liability Company.

A partnership opens the owners up to unnecessary personal liability because if a partner does something to get the business sued, or runs off with cash from the business, the other partners are personally liable to repay. The corporation can be a good choice because it separates the business assets from the owner’s assets. If the corporation is sued or certain business debts can’t be paid back, the owners aren’t personally responsible to repay them. The downside to the corporation is that it is more complicated than all the other entities, and requires more administration than the LLC. If you plan on raising a lot of investment though, the corporation is usually the better choice.

That leaves the sole proprietorship and LLC.

The sole proprietorship is the least expensive and easiest entity to start which is appealing. The downside is the owner is personally liable should anything happen to the business, which is an important consideration. The LLC offers the ability to operate as a sole proprietorship with the liability protection of a corporation. Depending on the state, the cost to form an LLC runs from $40 – $500, which is pretty inexpensive for protecting the owners from business-related lawsuits and certain debts.

Related: 3 steps to forming your LLC

Forming an LLC sounds complicated and expensive, but using an entity formation service guides you through the process so you know it was done right.


Some popular LLC formation services include:


IncFile - $0 plus state fees & free registered agent for 1 year!

IncAuthority - $0 plus state fees & free registered agent the first year!

ZenBusiness - $49 plus state fees & free registered agent for 1 year!

Step 4: Select your Location

Location is crucial when starting a bar, but properties in premium locations will also bring higher rent rates. Other factors will also affect rent, like the size of the property, the amount of parking available, and any renovations that may be necessary. Having a high-traffic location is generally better than one that doesn’t, but the price of rent has to be considered.

Related: Choosing a business location

Step 5: Find Suppliers

Research potential suppliers in your area. Getting a good relationship with a supplier can be valuable as they can give you local tips to success, help figure out the potential volume and which brands are trending.

Step 6: Obtain an EIN

The EIN or Employer Identification Number (also called a Federal Employer Identification Number, FEIN, or Federal Tax Identification Number) is a unique 9-digit tax identification number assigned to a business by the Internal Revenue Service (IRS). Similar to a social security number for an individual, the EIN identifies business entities for tax purposes. The EIN will be needed to hire employees, open a bank account, register for business licenses and permits, file federal and state taxes, and more.

There is no cost for the EIN when registering through the IRS. The number is available immediately when applying through the IRS website; however, you can also register by phone, fax, or mailing IRS Form SS-4.

Related: How to Apply for an EIN

Step 7: Apply for Business Licenses and Permits

Bars are heavily regulated and will need to obtain a local liquor license and federal license with the Alcohol and Tobacco Tax and Trade Bureau to sell alcohol. Many areas limit the number of liquor licenses, so be sure to investigate whether a license is available before spending a lot of time on starting your business. This can be a significant cost; Upserve states that full liquor licenses can cost anywhere from $12,000 to as much as $400,000, while a license for wine and beer alone starts at around $3,000.

Also, be aware of regulations on selling alcoholic drinks in your area, such as happy hour pricing, hours of operation, etc. If you plan to sell food, a food handling permit and food service license will likely be needed.

Businesses selling food and/or beverages will also need licensing and be subjected to regular inspections from the local health department will be needed. These inspections ensure the establishment complies with local health laws, typically related to food contamination prevention.

Don’t overlook getting a music license if you plan to play music in the bar, regardless of whether it’s live, recorded, or streamed. Fines from playing unlicensed music can be quite high, and bars are commonly checked to see that they are in compliance.

Besides bar-specific licenses, some general business licensing and registrations will vary depending on where the business is located, such as a sales tax permit, Employer Identification Number, and Occupancy Permit.

Related: What licenses does a bar need?

Step 8: Find Financing

Coming up with a good business idea and having the skills to run it are one thing, but getting the funding to start a bar is another. Funding to start a bar is very difficult as a lot of money will be used for building renovations and inventory. In order to get a loan, the borrower(s) will need to have good credit and be able to invest 15-25% of their money towards the total start-up costs.

Related: Finding the money to start a business

Step 9: Open a Business Bank Account

Keeping your business and personal finances in separate business bank and credit card accounts makes it easier to track the business’s income and expenses.

Step 10: Get your Marketing Plan in Place

Marketing is important in both starting and maintaining a profitable bar. Common marketing activities include maintaining an active social media presence on platforms like Facebook, Twitter, and Instagram. Social media can be highly effective as customers are typically more than willing to share your bar’s information when offered perks like free drinks and discounts, which will, in turn, provide word-of-mouth marketing.

There is also online advertising, profiles on review sites like Yelp, Facebook, or Google, print advertising, and even radio advertising.

Peak times for most bars are on the weekends and some weeknights. To expand when people visit your bar, consider having daily specials or find other ways to bring people in, such as having live entertainment, sporting events on the television, or tastings.

Related: Low-cost ideas to market a new business

One important marketing task is developing an online presence. A website developer may be out of the budget, but Wix makes it easy for non-technical people to get a website running quickly and affordably.

Step 11: Get Insurance

Bars need several types of insurance to be fully covered:

Dram shop insurance, also known as liquor liability insurance, is a type of liability insurance for businesses that serve, sell, or manufacture alcoholic beverages.
General liability insurance protects the bar if customers are injured while on the business’ property. This insurance can cover costs like legal fees and other expenses.
Commercial property insurance protects the bar against the financial loss of inventory and property after an event, like a fire.
Workman’s comp insurance helps to cover expenses like medical bills or lost wages if an employee is ever hurt while on the job.

The cost of these policies will vary depending on factors like the bar’s location, the value of the building and its equipment, and the number of employees on staff. To get an accurate idea of what insurance will cost, request quotes from multiple providers. Compare the quotes, and be sure to pay attention to variables like coverage limits and exclusions, premiums, and deductibles.

Related: What types of insurance does a bar need?

Step 12: Hire Employees

Payroll is the second largest expense for a bar after the cost of inventory. Even the smallest bar will need multiple staff. According to Payscale, bar attendants earn an average of $9.80 per hour. Payscale also reports that bar managers earn an average of $13.11 per hour. ZipRecruiter reports that bar cooks earn an average of $14 per hour.

In addition to budgeting for salary expenses, the payroll budget also needs to include workers’ compensation insurance, paid time off, and health insurance contributions to entice employees to stay long-term.

In addition to the challenges of getting and keeping good employees, bar owners also struggle with employees giving away drinks to friends or drinking on the job. Be sure to have policies in place and monitor employee activity.

Related: Hiring your first employee

Step 13: Set up an Accounting System

Setting up an accounting system for your bar is critical to the long-term success of your business.

To make your accounting more useful, look into industry-specific Point of Sale systems (POS). They can help track waste, which products sell better, the effects of promotions, and much more.

Staying on top of taxes not only keeps the business out of trouble with the government but the numbers can be used to track and monitor trends and cash flow in the business and maximize profits.

Related: Setting up the accounting for your business

The thought of accounting can be intimidating for a lot of new entrepreneurs. There are a number of ways of handling bookkeeping, from DIY to hiring a bookkeeper. These include:

- Pen and paper - Low expense, but difficult to track.
- Spreadsheet - Low expense, but easy to make errors.
- Accounting software - Medium expense, but owner typically inputs expenses. Some great accounting software programs include Freshbooks or Wave Accounting.
- Hire a bookkeeper - Higher expense, though very affordable at $100-$200 per month in most cases. A dedicated bookkeeper will probably save money because, in addition to handling all of the bookkeeping (so you can focus on the business), they also provide personalized tax advice and ensure the business is in compliance.

Find bookkeepers in your local area or use a service like 800Accountant.

How much does it cost to start a bar?

Depending on the extent of renovation costs, equipment, licensing, and the initial cost of inventory, plan to spend a minimum of $125,000 to start a bar according to 2ndKitchen.

Common startup costs include:
– Inventory
– Equipment such as bartending supplies, kitchen equipment, coolers, keg storage, beer taps, registers, glass washer, POS systems (Point of Sale system)
– Supplies, like glasses and utensils
– Furniture and TVs
– Signage
– First few months of rent and utilities
– Advertising budget for the grand opening

How profitable is a bar?

The markup on alcohol makes a bar a very interesting business. According to BinWise, the average profit margin for a bar is between 70% & 80%! Compared to a traditional retail business where profit margins are usually at most 50%, a bar can be a very lucrative business.

A bar’s income depends on many factors, including its location, the amount of time it’s been in business, and how well it’s managed. Investopedia estimates that, on average, a bar with weekly revenues of $25,000 will have about $20,000 of expenses, leaving a profit of $5,000 per week, or $20,000 per month.

Bars that serve food will typically be more profitable, as this encourages people to stay (and drink) longer. Also selling higher-priced alcohol such as mixed drinks and craft beer will increase average ticket sales and bring in a wider audience.

Another way to increase profitability is to purchase alcohol in bulk as distributors typically provide price breaks to larger quantity sales. The risk to the bar owner is that you overspend on inventory that is hard to sell.

Are there grants to start a bar?

It’s extremely rare to find a grant to start a bar. If you search for small business grants, you will come across a lot of scams and misinformation. Occasionally an organization will offer grants to start a business, however, be skeptical and don’t provide any sensitive personal information or pay money to get more information.

Legitimate federal grants can be found at Grants.gov and you can check on your state’s economic development office to see if they have any grants available.

What skills are needed to run a bar?

There’s no need for a business degree to start a bar, but certain skills and experiences can make the process of starting up this business smoother.

Bartending experience. Previous bartending experience will give a bar owner insight into what makes a good bar, good service, and good drinks, and what can make all of those elements bad. If a bar owner has worked in a bar before, he or she will also understand some of the obstacles that bartenders face, and he or she will be able to plan out the business to avoid or minimize some of those challenges.

Foodservice experience. In a similar vein, a bar owner who has worked in the food service industry will better understand the challenges that servers face and may have some insight into ways to ensure that food service goes smoothly.

Customer service skills. Great customer service skills are a must in this industry. A bar owner with an engaging personality and the ability to make people feel understood and valued can greatly contribute to a bar’s success.

Problem-solving skills. Things can get heated in a bar environment, and a bar owner who can quickly yet calmly think on their feet will be an asset to the business.

Management experience. Any bar will require multiple employees, and an owner will need to know how to hire, train, and supervise those employees.

What is the NAICS code for a bar?

The NAICS code for a bar is 722410, which is the listing for Drinking Places (Alcoholic Beverages). This includes all drinking establishments from bars, lounges, nightclubs, taprooms, and taverns.

The NAICS Code (North American Industry Classification System) is a federal system to classify different types of businesses for the collection and reporting of statistical data.

Resources:
American Nightlife Association
International Association of Professional Bar Owners
National Restaurant Association
Nightclub & Bar Magazine

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