Small businesses these days are certainly having a tough time borrowing money for renovations, expansions and new start-ups. As much as this has affected traditional bowling centers and their attempts to modernize, it has also hurt start-up entertainment center models. This particular segment has been ravaged by denials from the lending world. The term ‘start-up’ has lenders shaking their heads ‘no’.
Obtaining financing is still possible, as long as you know the right steps to take. In fact, having bowling involved in your entertainment center as an anchor attraction can be quite helpful. Getting the financing is a lot like converting a ‘4-10 split’.
It takes a bit of knowledge and some practice to convert a 4-10 split. To have only one opportunity to make this spare means having all of your ducks in a row and the poise and confidence to aim and follow through. Just rolling the ball in the direction of the 4-pin and leaving your chances to ‘luck’ is not an advisable approach, nor should it be for your entertainment business.
Rules Of The Road
The new financial market fundamentals now require 20%-25% equity and perhaps as much as 30%. This is the new reality or the norm. Lenders want to see that you have ‘skin in the game’. For example, if you need $100,000, a lender may loan you $70,000 knowing that you are putting $30,000 into purchasing assets and they may feel comfortable (depending on what the assets are) in knowing that they can liquidate these assets for $70,000 with you losing all of your $30,000 (their cushion).
What Lenders Look For
The Basic Business Plan
The fundamental elements of a business plan that lenders/investors look for are as follows:
- Management expertise. Who is on the management team? Provide solid references. Which team members are full time and which are part-time? Which have an investment in the project or reasons to continue working even if situations should become challenging?
- Solid business case. We call this the business plan. It forms the basis for the project. It shows how well you understand the market opportunity. It includes balancing the capital budget to the marketplace and developing an operational plan that minimizes future competitive threats.
- Collateral. This includes personal guarantees, equity, and deep-pocket investors. Note that personal financial statements now ask additional questions. One pertains to all of the personal and business guarantees that currently exist.
This seems fairly simple but what are the pitfalls to avoid? Lenders do not generally feel comfortable if the borrower develops their own business plan. You are asking the lender to rely upon the information that you, the borrower, have developed. The first thing that comes to mind is ‘conflict of interest.’ Many lenders are now requiring as ‘Step #1’ a third party feasibility study and a business plan that is fully supported by the feasibility study.
Renovation/Expansion. When an expansion or renovation of an existing business is involved, a lender will feel more comfortable. The business has a performance track record. In other words, it has real financials that show real performance. Management expertise is present. In addition, the business has well-maintained assets and real value that can be used for collateral.
New Ground Up or Leasing Space. From a lender’s point of view, a new ground-up operation owned by an established bowling proprietor of entertainment center owner is favored over a start-up by someone just entering the industry. The prevailing belief is that 50% of al’ new business fail within their first 5 years, so the first step is to explain why the bowling or entertainment center industry should not be included in this overall statistic.
It should be noted that lenders in general do not have a great appetite to add more commercial inventory to a region’s portfolio. They are, however, interested in new projects that involve a purchase or tenant lease of an existing vacant space. Current commercial vacancy rates are running as high as 20%-25%. Several years ago, before the 2008 recession, this rate was as low as 7%-8%.
Let’s fact it, landlords want to rent all of their vacant space. The problem is that many landlords with vacant space do not have the financial strength to borrow money to lure tenants with large tenant improvement (TI) deals, so they just lower the rent or offer free rent for several initial months. In some cases a landlord may have a tenant who is way behind on rent payments and is looking for viable new tenant to take over the remaining term of the lease. Other landlords will try to maintain reasonable rents with some TI. Today, landlords and developers who have access to funds are willing to throw money into the ‘box’ for TI.
Every time you negotiate a lease, you should look for lease options and stipulate the terms of the lease that might include TI or where landlord pays for certain improvements. In almost every case the current HVAC is insufficient for a leisure center if the current space has been previously used as a warehouse. Warehouses need to maintain a temperature of 60 degrees while a bowling center or entertainment facility needs to be 72 degrees. Having the landlord upgrade the HVAC has a future value to the landlord, so be persistent.
Declination Letter Can Be Helpful. Whenever a lender declines a business loan, they are required to provide you with a declination letter giving up to three reasons. The most common are: a) lack of track record; b) insufficient capital, and c) insufficient business case (feasibility study/business plan is not convincing). Most start-ups get to see one or more of these letters, but you should learn from each one and improve your business plan documents and verbal presentation. In reality, the lender can provide one, two, or three reasons and they may all read like boiler-plate letters. It is recommended to go and speak to your loan officer and get as much real information you can. Also note that the banking industry knows each time you submit loan requests and who is checking your credit references. It is highly recommended that you apply to only one lender at a time, so they will at least feel important while they are considering your application.
Sources of Funding
- Family & Friends.
- Current bank as relationship is already in place.
- Broker LMA Account. If you have a stockbroker, this type of account lets you borrow up to 60% of your current portfolio value at an interest rate that is currently less than 3%. There is no principal amount due, just interest. As with any borrowing there are rules. If there is a drop in your portfolio value, then you would be required to bring your loan in line with the 60% loan balance maximum or the lender will sell off a portion your portfolio at their discretion to make up the difference.
- SBA (Small Business Administration). Provides direct loans and government guarantees to lenders to induce the lender to make loans. SBA can now provide up to 90% of a $5 million transaction and typically waves the points. There are some hurdles to be aware of, though. The SBA process adds another layer to the approval process. Two programs for the same transaction now have to go through the SBA offices and more time is involved. It usually takes 6-9 months from start to finish.
- Office of Small Business Development Centers (SBDC). Provides management assistance to current and prospective small business owners. SBDCs offer one-stop assistance to individuals and small businesses by providing a wide variety of information and guidance in central and easily accessible branch locations. The program is a cooperative effort of the private sector, the educational community and federal, state and local governments and is an integral component of Entrepreneurial Development’s network of training and counseling services.
- USDA (U.S. Department of Agriculture). Similar to SBA, USDA has both direct loan as well as government guarantees to lenders, but only supports certain areas of U.S. by zip code. Not all areas qualify. USDA can provide up to 85% of a $10 million transaction. USDA is more expensive than SBA and has more fees involved (typically 2 points). Both programs, SBA and USDA, have worked for our industry, but they serve different users.
- Private investors. The local small business owners who wish to be a part of a community based leisure entertainment center make good passive and perhaps active investors (contractors, lawyers, accountants, marketers), as they always want to market their business and generally like the idea of being associated with a bowling-anchored family entertainment center or hybrid. The interest rate offered is the rate of return that a project can afford to pay an investor without putting the project in harm’s way and is strong enough to get them involved. There are structured pay back models that are fair to both the project developer and the passive investors. In some parts of the country, brick and mortar investors feel more secure investing in a business that owns both the land and building and generally take a pass on investing in leased space.
- Vendor support. Vendors and suppliers may agree to lease, finance/purchase, or revenue-share a good part of the items required. These include games & related equipment, attractions, kitchen and bar equipment, furniture, perhaps some or all of the bowling equipment package, debit card system, prize and party merchandise, etc.
- Venture Capital. In general, venture capitalists may not have the same agenda as you do. Their goal is to turn around businesses and sell them off at a profit.
Back in 2010, one positive legislative action that was being discussed by both parties in Congress was increasing the SBA’s loan ceiling from $3 million to $5 million. This has happened and has opened the door for most of today’s new projects that fall at or slightly above that amount.
There are still so many bowling centers that are ripe to reinvent themselves to become traditional entertainment centers with the top main attraction-bowling. Currently there are two successful new bowling models—the adult boutique model with bowling food and alcohol and the hybrid model that includes the family segment known as a bowling-anchored FEC. The hybrid model most likely requires removing several lanes from an existing center to create the games and attractions space. In some instances adding just 40 games and two or three attractions can generate an additional $1 million in facility revenues. Most proprietors will come to the conclusion that the only way to increase revenues is to offer consumers more options.
Remember that 4-10 split? In today’s financial market getting that loan is very similar to making that seemingly difficult split. After you make the split and get the financing, it is time to aim for the ‘pocket’ and start rolling strikes!
Special thanks to Jerry Merola, Managing Partner of Amusement Entertainment Management (AEM) for his financial input to this article. www.AEMLLC.com.
Bowling Center Management – Entertainment Center News
Written By Frank ‘the Crank’ Seninsky
Amusement Entertainment Management