Thoughts on taking out a loan to expand your studio

Thoughts on taking out a loan to expand your studio
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#1

Had someone ask about this, and I’m going to post here. Anyone else of course, is welcome to add thoughts or comments.

My first piece of advice to this person, is to skim through a few episodes of Shark Tank. Yes, as crazy and silly as that sounds, hopefully you’ll gain some surface level basics about what we call ‘business metrics’. Those are a quantifiable measure of numbers that reflect how a business is currently functioning, and what effect those numbers can have on decisions in the future.

I had an extensive chat with Russ Berger, one of the worlds leading studio designers and acousticians several years ago in Ft Wayne Indiana. This guy is involved in the building of studios, but also has a front row seat to watching some of the companies he constructs beaufitul facilities for crash and burn. He said one of the main reasons he sees substantial investments in a studio facility fail is because the individual grossly overestimated their future revenue. That or they started marketing as a premium studio and their buyer market decided they had the gear but didn’t have the chops. Usually their business plan is clear, but their projections are unrealistic.

In little venture buys myself, I almost always wait until companies have verifiable licensing outlets or purchase orders to invest. I wanna see the contract in place first, then lets talk about ramping up the tools fill the work order. My advice is to stay as small and efficient as possible. I believe the ‘show off’ studio model that touts gear as it primary competitive advantage is an inefficient operations model.

One thing to keep in mind when borrowing to invest in a studio is that under no circumstances do you EVER have a real estate upside. I don’t give a shit how much money you put into sound treatment, electricity, and embellishments, at the end of the day, you will have the same 2500 sq ft warehouse building or office block you started out with.

Speaking of real estate, my advice is to rent until a clear break-even point can be determined based on your finances. When that time comes see if you can find a building that used to be a studio, then see how well it was built. This sticks the previous owner with all of the depreciation of the facility buildout. You may be able to get a loan for this, as there is a collateral lean against physical property, and that property isn’t your mixer or your speakers.

Unless you’re seeking to borrow to full specific service contracts (like the stuff that I do), your loan should probably be positioned to acquire a facility, not gear to outfit it. Let that take care of itself, again unless you’re going into film and gaming. If you’re in music, let the building be the primary asset. You can record music with an entire glob of low end shit but if you have a pleasant building to work out of, and you’re good at using it, you can almost always get your clients results with some of the most humble gear you could imagine.


#2

I think its the same as any business .How well is it doing already etc. As you say you can record a band with gear and set up for probably less than £3000 and get good results .
I don’t think I would commit to buying buildings and big consoles unless I was already very established


#3

The real estate aspect is similar to other investments that require highly specialized buildings.

The valuation is pretty different though depending on the model. You either have a for rent facility, or you have whats similar to a movie studio or a video game studio. Or a company that makes plugins. In that case, the valuation of the company is going to end up being based on intellectual property assets.

I might buy one if I intended to live in it as well. I’m pretty sure that’s what most people on this site are doing.

I’d agree with you there…in staying away from it with one of two exceptions: 1 - you’re going for the wow factor. 2 - you’re cost of renting a room with a big board exceeds the long term cost of owning it…the assumption is obviously that you need it for certain projects.

Quick thought on the wow factor…it works. It is an effective method of setting yourself apart from other studios. And a noob client will experience an interaction differently than if you’re a guy with a laptop in a living room. Yes, we all recognize the wow factor is meaningless unless what comes out of the monitors meets the clients expectations. However, I believe that when 2 studios both meet the clients expectations sonically, the way they feel about the process of arriving at those expectations has tremendous weight on where they spend money in the future.

Lets face it. Its easier to advertise a studio with a huge console. But its not just about that. A usable $3000 mixer like a Midas Legend with stellar preamps like this thing currently for sale on Reverb.com is well worth the $3000 as an advertising expense alone. I think they’re great studio centerpieces for someone just getting going. Later on, you can always donate it to a church when you outgrow it.


#4

It seems to me like a really bad idea to take out a loan unless you already have an established base, and you know you need some help to step it up. If you are finding yourself slowing down or having to turn down work on a regular basis because you don’t have the gear/room to be able to do it correctly, then you might want to sit down and plan out what you would need, how much it would cost, and how much more valuable you would be if you had it.

But to take out a loan to buy some gear to go out and try to make a name for yourself? Terrible idea. Make the name for yourself first, then you can think about getting a loan.

I’m sort of anti-debt though. Aside from my mortgage, I have no debt, and my business has been 100% self funded from day one.


#5

this is a toss up, generally for a new business, a loan is better spent on customer acquisition, or acquistion of purchase orders, than infrastructure. If you have pending POs or a large interested base, you can present that information to any venture capitalist and they just might take it into consideration. I have done this process many times with several tech startups lol. While a dozen failed, one finally paid off.

If you can continue your operations with less than ideal infrastructure, then customer acquisition is primary.

Once that is built, infrastructure is next.

But as with any business, its hard to say what move will pay off as things arent always as clear.


#6

I totally see what you’re saying. This is where the business plan starts to make a difference. Not the written thing on paper, but the real direction of the business itself. And tremendously dependent on what phase the business is in.

When you say infrastructure are you talking about physical buildings, or operating income for staffing and administration?

If you’re talking about facility, what I was mainly talking about up top was the loan that goes into a mortgage or a buildout. I might dissent there on the grounds that interest is gonna be lower because there’s real estate as collateral. I would also probably shy away from PE hawks and VC’s because unless they’re intending to do a lot of work to help you grow the company, there’s virtually nothing they bring to the table that you can’t go get from a bank. Unless your credit is so bad and your company is so high risk that the only conceivable way to raise capital is by bartering equity.

If the loan is to finance CAC (customer acquisition costs), I’m not sure how a studio would even spend that money. Even if you’re first starting, you shouldn’t need a loan to incorporate, trademark, build a webpage, and create viral adds etc…

What did you have in mind for expenses toward customer acquisition?

…and I think there’s a lot of garbled data on how to accurately assess CAC. I’ve had a difficult time understanding this line item. It doesn’t seem very cut and dry to me.


#7

ah I see. If you are taking a loan to acquire a building then its a whole different story. Real estate speculations enter the territory as well. Its fairly safe.
I was talking mainly about leased buildings, hiring of staff, leasing of equipment etc.

as for the ‘CAC’ I am not sure how that would work for a studio, I guess its mostly going to be spent in personal customer outreach efforts, directed marketing, maybe a dedicated A&R connection effort etc etc