How to Start a Bar and Lounge

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The nightlife industry is growing, but it’s really competitive. In 2018, total revenues soared to $28 billion, with 65,000 bar establishments operating in the United States. It’s not an easy business to start, but the rewards can be enormous. Plus, not many people can say their job is other people’s leisure time.

The bar and lounge industry is highly regulated, making it one of the more difficult sectors in which to get a start. Fortunately, you don’t need a lengthy education when you're starting a lounge. You just need some prior experience, some business smarts and a strong checklist for opening a bar.

Find Your Niche

There are a lot of different bars and lounges out there. Each one has a different startup cost and a different kind of clientele. Before starting a lounge, consider what kind of business you want to run. Who is your specific customer?

Some options you might want to run through are a brewpub or beer lounge. Beer does, after all, count for 42% of sales in the bar, tavern and nightclub industry. A sports bar is an American classic, but so is a cocktail or specialty bar that focuses on one specific kind of drink. Distilled spirits hold 31% of the market share.

Other options include a cigar or hookah lounge, a dance club, a cafe-style lounge or a bar that doubles as a concert venue. It’s easier to launch a tiny corner bar than it is a large dance club, but you stand to make more profit with a larger space that holds special events.

Location Is Key When Starting a Lounge

Location is an important factor in a bar or lounge’s success. In suburbs and cities, bars generally thrive in places with lots of foot traffic or good public transportation since people can’t consume alcohol and drive. This changes slightly if your bar becomes a concert venue.

It’s also important to consider the liquor laws of a location before you set up shop because it might just bankrupt you before you get off the ground. For example, some parts of New Jersey offer only a limited number of liquor licenses per county, so you may not even be able to successfully open a lounge that sells alcohol in some areas.

Create Your Budget and Find the Funding

The first order of business on your opening-a-bar checklist should be creating a solid business plan with a detailed estimated budget. This business plan will help you when you approach a bank for a loan. Unless you’re independently wealthy, you’ll probably need to get a business loan because starting a lounge or opening a bar is really, really expensive.

The cost of opening a bar and lounge varies based on the business model. It is possible to take over an already-existing business for as little as $25,000, but starting from scratch will cost you. Are you opening a large, multilevel dance club? Do you plan to invest in a tiny neighbor joint instead? Even your run-of-the-mill sports bar with limited menu options and a few TVs can get really pricey.

Ultimately, it can cost anywhere between $110,000 to $550,000 to start a lounge or bar that leases its location. If you plan to buy a place and pay a mortgage, the average startup costs increase to around $175,000 to $850,000. Work this into your business plan and weigh it against your estimated profits before you take it to the bank and start purchasing supplies.

Get a Liquor License

The second order of business on your opening-a-bar checklist should be obtaining a liquor license. Your bar and lounge won’t be very profitable if you can’t sell alcohol, but liquor licensing is ultra tricky and completely differs among states and counties. The type of license you need depends on what kind of alcohol you plan to sell and is typically determined by your local Alcohol Beverage Control Board.

A beer and wine license can cost as little as $3,000, while a full liquor license can cost between $12,000 and $400,000. More specifically, you’ll probably want to go for a tavern license because your business will probably profit more from alcohol than food.

Music Licensing Is a Must

Music licensing is a tricky beast, but an eerily quiet lounge can turn off potential customers. Some hangouts, like the British chain Wetherspoons, do thrive with a no-music policy, but generally, you’re going to want at least some background tunes. In order to legally play music, you have to get a license from a performing rights organization or risk a potential lawsuit.

The three major performing rights organizations (BMI, ASCAP and SESAC) base the cost of a license on square footage and the number of speakers in your establishment. This typically costs between $250 to $500 for simple background music (i.e., no dancing — yes, the "Footloose" laws apply if you don’t want a $750 to $30,000 fine). If you want to have live performers, a dance floor or charge a cover fee, the cost increases from there.

If you don’t want to purchase a full-on license from a performing rights organization, you might be able to avoid it with a business subscription to a streaming service like Spotify, Pandora or Sirius XM. This is usually allowed as long as customers aren’t specifically paying to hear the music, and you’re not charging a cover.

Do You Need Additional Licensing or Permits?

Odds are you’ll need more than just a liquor license and a music license to start a lounge or bar. Every state is different, but you’ll probably also need:

  •  A sign permit: An illuminated sign permit might also be required if you plan to advertise your bar with a sign that lights up. Even if you don’t, you might want to consider it because the busiest hours for a bar and lounge are usually after dark. Your city or state’s website should have an application and additional information.

  • A food service license: If your lounge plans to serve food, it will have to be inspected by the health department to make sure it complies with restaurant food safety regulations. After you pass an inspection, you’ll be able to obtain a food service license. You can apply for this through your local health department. The regulations are listed on the Food and Drug Administration website.

  • A food handler’s permit: Any employees who come in contact with food at your lounge will need a food handlers' permit. They’ll have to pass a short test. You can also apply for this online.

  • A pool table license: This seems like a strange one, but some states and counties charge around $10 to $15 a year to allow a bar or lounge to have pool tables.

  • A dumpster permit: This lets you have a state dumpster to dispose of food waste. Costs vary based on bar location, dumpster size and dumpster placement.

  • A brewpub license: You'll need a specific license to brew your own beer.

Handle the Rest of the Legal Requirements

In addition to any permits listed above, you’ll also need a business license. This requires some insurance, which ranges from general liability coverage to workers' compensation if you plan to have employees. It’s also a good move to pick up a liquor liability insurance plan since alcohol is known to cause accidents, and special event coverage if you’re planning to occasionally host live concerts (even if it’s just a local bar band).

At this stage, you’ll also have to decide on your company’s business structure. Most bars opt for an LLC or S corp, which basically tells the IRS how you’re paying taxes and who has the financial liability. You can form an LLC or S corp online for a couple hundred dollars with a service like LegalZoom. Make sure to also get your employer identification number from the IRS.

Get Your Name Out There

After you have your business in order and have hired some employees, the final step is getting the name of your lounge out there. Enact a solid marketing plan, get on social media and sign up for Yelp.