I have a friend that has a somewhat small/medium back yard. Several years ago, he installed a swimming pool and completely did away with the lawn (all concrete and landscaping).
When he did that, he converted his "garden shed" into a man cave. It was really more like one of those buildings that you see for decent prices on up at the home depot parking lot.
While not a "theater", he did do 5 channel surround and a TV, slot machine, game room.
It actually worked out pretty dang good!
Just be sure it is insulated from the elements, and you may want sound isolation too. And, if it were far from my main house, I might be concerned about it getting broken into and burglarized.
Personally, that looks like it might be a good approach, especially if your house is small and you don't want the hassle of building onto it and dealing with permits.
As I told my friend when I saw his man cave: "If you're gonna be in the doghouse, you might as well have a NICE doghouse"