Selling your club?

winston-new-1_Page_1Here’s five “bad ideas” you should avoid at all costs!

The most obvious, common and pertinent question a business broker gets asked on a regular basis is, “How much is my club really worth?” Here are some “bad” issues you need to consider. 

Bad idea #1: The “one-times” rule.

I continually get hit with this line, or variations of it, all the time: “We are only going to pay one-times gross sales!” Consider this little scenario:
Club A                            Club B
Gross Sales:     $1,000,000              $1,000,000    
Net Earnings:  $200,000                      $375,000
Asking Price:    $1,000,000              $1,000,000

So which one are you going to buy? If you need a hint, stop reading, and go get a lap dance—your money will be better spent!
The stumbling block on any formula is that there will always be some exception to whatever rule someone concocts. The “one-times” rule as illustrated above is no exception, but I hear it repeated over and over by both buyers, and a lot of the time, by sellers. The seller hears this formula, jumps onto it and clings to it with all the tenacity of a drowning man hanging onto that proverbial straw. So then I come along and tell club owner A that he is not going to get five times net earnings, and the seller is now not happy.
But here is where some exceptions come into play for this scenario: Perhaps club seller A is the only game in town in a fairly serious demographic area, with a locked-in position in an adult use ordinance in a grandfather-clause state. Suddenly, that net earnings number might not be so much of deal killer after all.

Bad idea #2: Holding back some of your club’s earnings.

Three or four years back I spoke on an EXPO panel with Jerry Westlund of the Fantasy Showclubs chain and realtor Pat Burnside on valuing clubs. We all launched in on one particular topic; specifically, the overriding concern that every seller has is how his or her club’s operation looks to an outsider, especially if there has been a practice of what we call “Creative Accounting 101.”
My problem is not what you tell your accountant, or the revenuers, it’s what your operation looks like when it comes time to sell. If you’ve “held back” some earnings and not reported them for whatever reason, it sure as hell is going to be a bit harder when a qualified buyer is looking over your operation. So now our hypothetical club A is out of consideration, although the club really was making over $350,000. Ultimately, the question every owner has to consider is what is reported, how well, by whom and for what purpose.

Bad Idea # 3: Giving information to a buyer that your accountant prepared for tax reports, or even prepared by yourself.

If you put an accountant in a headlock, he or she will admit that one of his or her prime goals, as well as your own, is to lower your tax liability. The trap comes when you load up all those expenses—your Maserati you use to transport liquor to the club every week, your three ne’er do well nephews who each have $50,000-per-year salaries for taking out the trash, the membership to the country club you use to recruit customers through the pro shop, the janitorial services that also include your home, and on and on.
So you and your accountant have almost zeroed out the club for the year, and you hand over your tax returns: Wrong! First of all, tax reports are only turned over during a due diligence period, after an accepted ROI (return on investment), to verify that you have paid some taxes.
Secondly, this is where any experienced business broker, such as yours truly, comes in. It’s called “recasting.” In short, a good broker will “recast” your income and expense numbers to as accurately as possible reflect the true “net earnings” of that club, cleaning out all those overloaded, extraneous, atypical expenses. And here is why this is so damned important: your buyer is usually not just looking at your club alone. Instead, he or she is probably looking at a bunch of clubs, and the more solidly you present the real net earnings of your club, the better your chances are of your club selling. Recasting that income and expense report is critical in letting a buyer see what that ROI really is, or what it can be. I will devote a later, more in-depth article on what recasting entails.

Bad Idea # 4: Don’t ever use a real estate broker, either commercial or residential, to sell your club.

This might seem obvious, but I see it happen over and over. If they do not know how to knowledgeably value, as well as market, your club, you really are not helping yourself. I am honestly trying to not denigrate another professional, but a real estate broker does not have the skill set, experience or the knowledge to handle your club.
Use an experienced business broker. Contact for a referral to a business broker in your town or area who is experienced—if not in adult clubs, at least in bars and/or nightclubs.

Bad Idea #5: Do not use your divorce (or whatever) attorney to handle either your purchase or your sale!

There are two parts to this section: (1.) Every ED issue is loaded with legal references. The First Amendment Lawyers Association (FALA) provides a database of adult-friendly, competent and comfortable attorneys that provide representation and advice. But another aspect of the organization is that it is a shortcut to someone in your particular region who can either handle one side or the other in a transaction. Not every attorney will have the adult industry-specific knowledge to manage a sale or closing on an adult club. (2.) Alternatively, if you do use a local attorney, get him or her to consult with a FALA attorney to make sure that there are pertinent clauses in that buy/sell agreement that protect both the seller and/or buyer.
There’s a lot more to go over on this aspect of the industry.  Either you as a buyer, or you as a seller, are going to invest or have invested a big pile of moolah, time and effort in that club. My next article will delve into why “recasting” is so important, and why it helps both the buyer and seller. Thanks, drop by my EXPO Tradeshow booth or call me at the Expo, and let me know any questions you have.

Winston Hines, Broker in Charge of HWH Properties, is a licensed commercial Realtor and Business Broker, specializing in the purchase and sale of adult nightclubs throughout the U.S. for over 15 years. He can be contacted at either (864) 580-3826 or updaze@aol.

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