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So You Want to Build a Recording Studio?

You have decided that your goal in life is to build your own recording studio and go into business for yourself. You think you know how to run a recording studio business better than anyone in town. You are certain that your way is the best way, and you just have to convince your banker/mother/investor to invest in your future. This is called a “start-up.” It is the organization and planning that determine if this business you are thinking about forming makes fiscal sense.

First, let's agree that you are a fanatic, you are crazy, you are a masochist, and you have decided that your goal in life is to work very hard at just staying alive, with only a very small chance for success. That being said, you are about to join a very dedicated group of nuts who live for recorded audio and are willing to take almost any chance to be a recording studio owner. Some people were meant to work for and with companies they do not own. Others must have their own businesses and will give up almost anything to get them. We like living on the edge. It's just part of our nature.

Whether it's putting a project studio into your basement or building an eight-studio facility from the ground up, the problems and solutions are basically the same. Much work will be necessary in order to decide if it is a viable venture, and you should approach this work with intelligence rather than emotion. You must create a business plan, and to do that you have to perform due diligence and a market study of your geographical area to determine what the competition for your venture is and what your chances are for success. The first part of doing your homework is to talk to everyone you know in the business before making a decision. You will find that a surprising number of your peers have already considered this problem or experienced the ramifications of making the wrong decision and will give you their advice for free. Free is definitely better. Doing your research and getting a referral is much less risky than using a blindfold and a dart board.

Some entrepreneurs are so cocky that they simply build the facility, open the doors, and believe: “If I build it they will come.” Take the story of Horatio Alger, the multimillionaire who early in the 1920s started in business by selling newspapers on a corner and eventually owned the newspaper company. Yes, it is true that this type of blind luck can happen. But it rarely does. Many recording studios have opened and closed their doors within a few months because they did not objectively analyze the marketplace and were mistaken about their chances for success in their chosen niche. The basic statistics show that approximately 80 percent of start-up businesses fail within the first year of operation. Most of these failures happened because the business was undercapitalized. The enterprise did not have enough money to survive through the start-up period and build a reputation that could have led to its eventual success.

Some of the fundamental points that you must initially address in this situation are:

•   Clients: Do you have enough of them who will follow you to your new facility to pay the anticipated bills? Are you sure they will come with you?

•   Skills: Which do you have, and which must you buy—such as accounting and legal?

•   Hours of operation: Are you willing to be there all the time?

•   Niche: What services can you offer that will make you better than your competitors, and that will be sufficient to make a decent living for yourself? How experienced are you in this industry at doing what you do better than the competition? Would it make more sense for you to work for someone else who will just leave you alone to do what you do and let you pick up that paycheck each week?

The real question here is: Are you ready for all the crap you must deal with if you own your business? Can you meet the capital requirements—for example, what is your cost for space? What about leasehold improvements, which means acoustical construction and interior design, that you will build into your location? Equipment? Licenses and permits? How many employees will you need? What prices can you charge for your services? How long will it take you (at least 6 months) to get your billings to the point where you can cover costs and perhaps make a small profit? How much cash or credit do you really need to start up this new business so you can at least have a good chance for survival? How much money can you afford to lose before you have a chance to win? How much money do you need to take from the business on a regular basis in order to live what little personal life you will have? The ideal answer to this last question is to keep your day job until your facility is ready to start billing for its services, so you don't have to take any money from the new business until absolutely necessary.

All of the above is called a “feasibility study” and is designed to prove to yourself and others that you should embark on this new venture. Now you are ready to do your business plan—the first document asked for by those responsible for advising you or investing a credit line or money in your venture. A business plan is a road map for your business. It tells a potential investor, banker, or business manager what, who, why, where, and how much it will cost to operate your business, where the revenue will come from, and who the competition is. It will include return on investment, which is revenue minus cost, expressed as an annual percentage of the investment made in the business. This return on investment should be compared with the interest rate you could earn by simply putting your money into some safe, conservative money fund at little or no risk. This is the benchmark your investors/bankers will use to see if your business makes sense as an investment.

Your budget is how much revenue you project from your marketplace and the amount you must spend to get it. Your cash flow is a 12-month chart showing when you will receive your revenue and how you will spend it during your fiscal year. Your fiscal year is the 12-month period that you choose as the beginning and end for your business “year,” after which you must file all year-end income tax reports. With all this in place, you will be able to analyze what chance you have to succeed, on the basis of your conservative estimates of revenue and cost, plus how many people you will have to hire. Now you must decide if it is really worth it to go into business for yourself.

Your business plan is designed to guide you through the creation and management of your new venture. It is the road map to the business: what the business is, who the players are, projections for profit and cash flow, who the clients will be and how much billing each of them is expected to contribute to the venture, what your marketing strategy for reaching new clients will be, and so on. One book that I recommend, Building a Profitable Business, by Greg Straughn and Charles Chickadel, breaks down the business plan into the following sections:

1.  Introductory Items for Outside Readers

2.  Business Development

3.  Marketing

4.  Operations

5.  Administration

6.  Finance

For assistance in this complex undertaking, I suggest that you go to the Internet and take advantage of the many resources available to you with the click of your mouse. Some examples are: www.toolkit.cch.com (Small Business Publishers), www.sbaonline.sba.gov (federal Small Business Administration), and www.score.org (Service Corps of Retired Executives). These general locations should provide you with links to other sites oriented to your particular needs. The book I mentioned above, Building a Profitable Business, is available at www.adamsmedia.com, and I also recommend studio owner Jim Mandell's The Studio Business Book, available through Mix magazine (Mix Books, Emeryville, CA).

Beware of business plan software. Most of it is very general and will not apply to a recording studio. Instead, go to the largest bookstore in your area or Amazon.com and browse the shelves on business plans. Also, if you have a college in your area that has an MBA program, see if there are any weekend seminars you can take on the subject. Investigate the possibility of hiring an MBA candidate to help you. These people have been focusing on feasibility studies and business plans since they entered graduate school and will be eager (at relatively low cost to you) to work on a real-life situation (your venture) to demonstrate their newfound knowledge. Your job will be to teach them to understand how our industry differs from other corporate endeavors.

Once you decide to take the plunge into the sea of professional entrepreneurship, you will need some outside experts to help in time of need. If you have a business manager, he or she will take you to a banker; if not, ask for banking referrals from your fellow studio owners. The first things your banker is going to ask to see are the business plan, the budget, and your personal financial statement. The way you present this information will make all the difference in the way he or she perceives you and your chances for success. What you want from the bank is a line of credit that you can “take down” on those rainy days when your cash flow lets you down.

When you prepare a personal financial statement for your banker/creditor, make sure you emphasize your assets and minimize your liabilities. Tell the truth, and try to have it prepared by an accountant/bookkeeper, but realistically recognize that the maximum amount your lenders will advance you in credit or cash is usually 60–70 percent of the net worth of your combined business and personal assets. Expect to personally guarantee any debt you incur—it's a fact of small business life.

Remember that studios are a cash flow business. That means that in your new business's cash flow projections, you list all operating revenue first and all direct costs second, and the difference is your “operating profit” or “positive cash flow.” This is what the lender will look at—how much extra cash you have to pay off loans and leases and/or to invest in making your business better. Before he or she lends you money, you must prove your ability to pay back the loan. Positive cash flow is the proof.

You also need to get referrals from your friends in the industry to find your lawyer and your accountant or bookkeeper. Again, these experts must be familiar with the recording studio business. If they are not, the training you will have to give them is usually not worth the effort.

Our industry is a small, tightly knit clique. Everybody should know who the “movers and shakers” are in the club. Networking with them to find the least expensive way to accomplish these strange business functions is mandatory if you are not to be cheated, overcharged, and generally taken advantage of. Consult a studio organization such as SPARS for assistance from their regional VP in your area. That person should be able to give you the proper referrals to help you out.

If it were easy to launch a profitable audio business, everybody would do it. If you are addicted to the recording studio business, as most successful owners are, you will make it happen. If you do your homework properly and have sufficient faith in your talents as an entrepreneur, your chances for success will be greatly increased. If you don't bet, you can't win. When you bet and it works, there is nothing I've found that can provide you with as much personal satisfaction as beating the odds and becoming a successful recording studio owner. Just be careful what you wish for—you might get it!