Starting from Scratch
Operators share important advice for those interested in entering the FEC business
by Mike Bederka
THESE TOUGHFINANCIAL TIMES probablymake even the most optimistic person wince at the thought of starting a new business.
That apprehension, though, may not be warranted. “An ugly economy doesn’t last forever,” reminds Jerry Merola, an ex-commercial banker and now chief financial officer of Amusement Entertainment Management LLC, in East Brunswick, New Jersey.
Developing a family entertainment center from scratch can be a long process. From initial preparation to the first guests riding go-karts could run from 18 months to two years, says John Gerner, managing director of the Richmond, Virginia- based Leisure Business Advisors LLC. “Anything planned now is hopefully opening during the next up cycle,” he notes.
In fact, some analysts believe the economy appears poised to rebound.
Experts in the real estate market expect 2009 to be a bounce-back year, Gerner says. That surge could spill over into the entertainment industry. “There’s always risk in starting a new business, but often risk goes in relation to reward,” he says. “Attractions, like FECs, when they’re done well and they’re popular, can be quite profitable.”
Feasibility Study
The key to obtaining the funds to build your dream facility starts with the feasibility report or study. Aimed at investors and lenders, this document prepared by an independent expert offers an objective look at a project’s potential. “The analysis will incorporate a clear understanding of really where the market opportunity exists, if an opportunity is there,” Merola says.
A feasibility report also provides background on the FEC business as some banks and third-party lenders (equity firms, and finance and insurance companies) may not be familiar with the industry, Gerner says. Other features of the study include: site selection, comparison to similar operations, forecasted attendance, and potential revenue, expenses, and profits. FEC owners can expect to pay between $8,000 and $20,000 for the study but should consider it money well spent, Gerner says. “There’s nothing to be lost and everything to be gained.”
Under- or unprepared FECs doing it alone often get shot down, Merola says: “In today’s world, lenders are willing to fund and support new business projects. Where they struggle is that in many cases they feel the developer has not done enough homework to understand truly where the opportunity is.”
Jon Sisler, co-owner of Blue Fusion Entertainment, worked with Merola on the feasibility report for his FEC in Marion, Ohio. He attributes the facility’s crisp August opening to the collaboration. “They can hone in on you quickly,” Sisler says. “[Without professional help], you can wallow around very easily.”
A Financial Plan
Sisler contacted several banks before going with one in his community. He says FECs should be patient and stay focused during this time. Merola seconds this take-it-slow strategy. Many developers make the mistake of waiting until the 11th hour to deal with financing. Then, they panic. He recommends planning six to nine months before the actual need for financing arises. “Not all lenders are created equal,” Merola says. “Identify all the possible sources in a local or regional marketplace and begin to understand the different elements that apply to each.”
For example, a commercial bank is more apt to understand the particulars of an operating business, he says. A savings and loan has a tendency to concentrate on mortgage-based financing.
To Partner or Not
Some developers won’t need a lender. They have the capital necessary or plan to work with partners. “Partnerships are a nice idea, but make sure you understand who you’re partnering with,” Merola warns. Partnerships formed by dissimilar individuals will likely fail, he says. Over time, the two parties will see the future as well as success differently. In some cases, one person wants to draw more funds from the business on an annual basis, while the other would rather reinvest in the facility. “This is a struggle,” he says.
Gerner also advises against partnering with family members because of the general risk involved and the potential for bad blood. Both Merola and Gerner agree the smarter business decision is to work with a lender. “The less dollars you personally contribute to a project, the greater your investment return is,” Merola explains.
He gave this example: Option No. 1 would be to take out $5 million from your own savings and pay for the project completely yourself. All your capital is at risk, and all your capital must generate a rate of return. Option No. 2 has you withdrawing just $1million from your savings and leveraging that with $4 million of debt from a lender. If your business generates $100,000 in clear profits, your investment return rate is 10 percent; with the first option, it’s only 2 percent.
Don’t Stress
People can feel overwhelmed when dealing with all these dollars signs. One way to help beat the stress: Join a trade association like IAAPA, says Gerner.
“You hear objective, independent information from somebody who’s not going to get anything from telling you differently,” he says. “And you have the opportunity to meet like-minded people.”
Situations to Avoid
Sometimes, developers find themselves struggling with their financing terms.
“Not to say the finance industry is predatory, but there are situations you should generally avoid,” says John Gerner, of Leisure Business Advisors LLC. They include: high interest rate, short-term loan period, or a balloon payment at the end that has to be refinanced, he says.
In addition, owners should be careful about guaranteeing business loans with personal assets. “If a financing institution is that uneasy about the business being able to pay back its loan, so should the owner be,” he says. |
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