Is an LBL the Business for Me? & Frequently Asked Questions

We receive about a dozen inquiries a week from prospective location-based entertainment (LBE) project developers. Often, they ask us about site selection, feasibility studies, design or other aspects of our services. We often end up discussing the pros, cons and challenges of developing and operating an LBE. Before diving in with your time and money, it is important to understand what it takes to develop and operate an LBE and to make sure it’s a good match for your skills, abilities and lifestyle. We’d rather talk people out of getting started down the road of development than have them later learn it isn’t a good match for them or have them run into a roadblock that prevents their dream from becoming a reality.

So here’s a quick synopsis of the good and the bad news. First the good news:

  1. LBEs can be a very satisfying business in that you are bringing fun and pleasure to your guests.
  2. The annual returns can be anywhere from 15% to 30% of total development cost if the project is well located, designed and managed. With some borrowing, returns on invested capital will be leveraged and be even higher.
  3. There’s not a lot of direct competition in most markets.
  4. The barriers to entry are high, reducing the risk of new competition.

Now for the not so good news, most of which is the flip side of the above good news:

  • Lack of competition does not assure success.
  • You work when everyone else plays. It’s not a 9 to 5 weekday business. It’s a 70- to 100-hour a week business.
  • Today’s LBLs cost $3 to $10 million or more to develop. Smaller concepts like play cafes can cost $1.0 million and more.
  • It is extremely difficult to raise money, and you can’t finance a project 100%. Since the Great Recession, it has become even more difficult. Banks, if they are interested (few are), are usually willing to finance at the most about 70% of the value of the real estate if you own the land and building. Banks are usually not interested in financing equipment and soft costs (unless you have additional collateral or a rich uncle who will guarantee the loan). There are some possible SBA and Department of Agriculture guarantee programs, but you will not be able to borrow the entire project cost, probably no more than about 80% (leveraging the project with that much debt is very risky, as there is little if any leeway for error. A mix of 50% capital and 50% debt is much more prudent funding formula).
  • A large part of the funding will need to be raised from investors, and there is no marketplace to find them. There are no venture capitalists for start-up LBEs. It takes a lot of networking and work to find investors. You will psychologically need to be able to handle a lot of “nos” and rejections.
  • It takes money to find money. For both the banks and investors, you will need a credible and detailed business plan that includes a market feasibility study, detailed cost estimate and pro forma financial projections, most likely prepared independently by an industry expert. You will need a contract or option on a site. For investors, you will probably need an offering memorandum that complies with state and federal securities laws and regulations. Be prepared to spend anywhere from $50,000 to $100,000, depending on the size and type of project, to get all this done and be in a position to start begging for the money. For smaller projects like play cafes, you will still need at least $25,000.
  • You will need to have your own capital to invest in the project. Investors will want to see you have an investment in the project, probably 10% to 20% of all invested capital.
  • It’s a complex and sophisticated business that requires a high degree of management expertise. This is not a business for novices. Investors and banks will be just as, if not more interested in your management ability as in the project’s economics. If you can’t demonstrate management experience and ability, find a partner who will bring that to the table before going after financing.
  • Quality food and beverage is essential to success. Again, this is not an area for novices. If you don’t have experience in the restaurant industry, find a partner who does.

Of all the barriers, raising money is what usually stops most projects dead in their tracks. It’s a great business, but don’t jump in unless you have some capital of your own, feel confident you can raise the financing (meaning you already have some solid avenues you know you will be able to pursue) and are psychologically prepared for the struggle to find the financing when you will be turned down by dozens and dozens of prospects.

Before getting started, you should consider attending the 3-day Foundations Entertainment University (www.foundationsuniversity.com), held three times each year, which will give you an overview of all aspects of developing and managing an LBL business.

Frequently Asked Questions  

Q. I am planning to open a new facility. When should I consider retaining your firm?

A. The earlier the better. The biggest, and often irreversible or fatal mistakes are made the earliest in the development process. Critical success factors include site selection, the mix of attractions, layout and design, and realistic pro forma projections and development budgets. Many aspects of LBLs are totally counterintuitive, meaning the correct approach is often just the opposite of what intuition tells you. Our extensive experience and knowledge can help you make the best decisions to assure your success.

Q. Isn't a market feasibility study just going to give me a tool to get financing?

A. With some consulting firms-yes. However, the White Hutchinson Leisure & Learning Group prides itself in telling our clients the way it is. We tell our clients not what they want to hear, but rather what they often do not want to hear. If a project is not feasible or could have serious long-term competitive problems, or other mistakes are being made, we will tell you so. We would just as well tell you not to proceed as to proceed. Our philosophy is to help our clients make the best possible business decisions from their perspective. Sometimes that means not proceeding with a particular project at a particular site or with an LBE at all.

Q. What do your services cost?

A. That is complex question to answer, as all projects are different and clients' needs vary. Market feasibility studies normally cost 1/2% to 1.5% or so of total project cost. Full market and economic feasibility, which includes concept plans, typically runs about 1 to 2.5% of total cost and higher for more complex or unusual projects. Comprehensive production/design and consulting services, including storyline and mascot development, themed architecture and interior design, management start-up assistance, training, etc., is usually in the range of 6% to 14% of total development cost. Other more limited services vary widely depending on the project and client’s needs.

Q. I am not sure how to proceed with my project or what I need. How can you help me?

A. Most of our clients retain us for an initial one-day consultation/charrette to review and discuss their plans, inspect sites, conduct a preliminary market analysis, discuss all aspects of development and the industry and generally help them get focused on a plan of action. Based upon that trip, we can then give you a definitive proposal for any additional services you need.

Q. What does that initial one-day consultation/charrette with Randy White cost?

A. $3,000* plus travel expenses. Randy White, CEO of our firm, usually flies in the night before and leaves as late the next day as possible or the next morning to assure a more than eight hours consultation. He usually wears our clients out before he leaves. We travel frugally as if it was coming out of our own pockets (otherwise we are not representing your best interests).

*International projects normally require longer initial visits and travel times, so fees will vary.

Q. Do you charge just to discuss my project over the phone?

A. No. Call us at +1.816.931-1040 (or e-mail randy@whitehutchinson.com). Randy White, our CEO, will be glad to discuss your project and answer any of your questions. On a number of occasions he has explained to prospective clients why their projects were not feasible. We trade on our integrity and reputation, not on trying to generate work for ourselves.

Q. Can an independent operator compete with the chains?

A. Absolutely. Independents can knock the socks off the chains if they pursue a market/guest driven program of excellence in design and operations. In fact, the majority of family, children's and recreation centers are owned by sole entrepreneurs.

Q. Is your company affiliated with any suppliers?

A. Absolutely not. We have no ownership, nor will we accept any commissions, rebates or other compensation from suppliers. We have no conflict of interest in our advice to you. We often recommend particular equipment or suppliers, but only because we believe they are the best choice for you.

Q. How long will it take to open my new center?

A. Assuming a good property is available for renovation, realistically about 15 to 18 months when lease negotiations and financing are factored in. For projects to be developed from the ground up, 20 to 36 months from the start of feasibility studies to opening.

Q. Can White Hutchinson help me with more than just design?

A. Yes. Unlike most leisure/entertainment companies that specialize in only one discipline of development, such as architecture, feasibility studies, interior design, or training, the White Hutchinson Leisure & Learning Group takes a comprehensive, multi-disciplinary approach to our work. In the entertainment industry, we are referred to as "producers." As such, we oversee a production team that includes all the disciplines of feasibility, design, development, marketing and management of a center. Our production team includes the pure design disciplines such as architects, interior designers, landscape architects and civil engineers. Unlike design firms, it also includes market feasibility experts, financial experts, trainers and business experts plus many other disciplines that the typical development process ignores, but are really essential to developing a successful project, such as acoustical design, wayfinding, child development and education, storyline and theme development, menu and food service design, horticultural design and safety experts, to list a few. Our comprehensive approach not only deals with the physical facility and its design, but more importantly with the entire guest experience, which includes helping you start up your management. Rather than think of the development process as just the design of a physical facility, we approach a facility's development as the design of an entire business.

White Hutchinson Leisure & Learning Group
White Hutchinson Leisure & Learning Group
4036 Baltimore
Kansas City, Missouri, USA
voice: +1.816.931-1040, fax: +1.816.756-5058
e-mail: randy@whitehutchinson.com
website: www.whitehutchinson.com

© White Hutchinson Leisure & Learning Group, Inc.