Friday, July 31, 2015

Setting Up Agreements (Tradecraft)

I've just spent the last couple of weeks working on our company shareholder agreement. Game stores don't have a lot of money, so most are likely one man, sole proprietorships. It's easy, simple to form and operate, and doesn't require complicated structures and fees. The down side is it's not set up for investors and offers no legal protection. It's the default.

Most stores that take the next step usually go LLC, since it offers legal protections (in theory), allows for distribution of profits to investors, is simple to understand "pass through" taxation, and requires minimal paperwork and meetings.

I say it offers you legal protection, but in reality, if you work in the business, you essentially give up protection. The investors are protected though, and nobody should give you a dime without an LLC or a corporation in place. Also, no bank or business will loan you money without your personal guarantee. All my leases have the corporation and me on it. Here's something else we've been working on recently:

Corporations are not much different (the federal government looks at LLCs as corps), but may have other benefits. Our state based LLC charges fees on gross, while corps tax on net. Game stores have a lot of gross and not much net, so converting to a corporation saved us thousands of dollars in state LLC fees. There is zero difference in how we operate day-to-day between the two structures.

These types of organizational structures are incredibly complex. You can form them on your own with various kits, but what you end up with is a hollow structure without agreements or protections within your business. Both types of structures usually require a minimum of one meeting a year, and beyond that, it could look like the Wild West in between. I'm always trying to get some sort of written documentation of our conversation in case we're audited.

Corporate structures also don't help you answer the big questions, like how to get people in and out of the corporation in a way everyone agrees upon. For example, you can form a corporation and legally decide upon the value of an initial share, but what happens when a shareholder wants to leave? Valuing shares isn't in any corporate documents, it's part of a possible side agreement (that shareholder agreement). If you've been in a company for a while and watched it grow, you certainly don't want new people coming in at your initial share value. You also don't expect to leave at that initial value, knowing the company has become more valuable over time.

What if a shareholder dies? Are you obligated to do business with their spouse or children? How much can I spend as the CEO without triggering a meeting? Am I violating that if I make a huge Magic purchase on release? What are the limits? What keeps my partner (or me) from opening a competing store in the same town and taking all my customers and know how and abandoning my business? What does shutting down the business look like? Who gets money when?

These are all in the shareholder agreement and the funny thing is, they are all logical, reasonable, with legal precedent for what's normal. It's a boring document to read. Really boring. At least that's true when you read these documents ahead of time. When you're the one trying to sell your shares or the spouse of a deceased shareholder, you might have very different ideas of what's normal and what you deserve. That's why you do these things early (we're in year eleven).

The main trigger for my shareholder agreement was the desire for the business to continue after I'm dead and to keep my family from having to deal with it. In most scenarios, there's a fire sale and your heirs come in and drive the business into the ground with a massive sell off.

In my scenario, there's a "key man" insurance policy on me. When I die the business gets the money, but that's only half the story. What I personally don't want is for my family to be burdened by this complicated business. I want to leave it to my management staff. That requires an agreement that investors get bought out (including my heirs) and the management team gets the business, along with some operating capital so they have time to figure it out, deal with suppliers who have no idea who they are, and keep the store moving with essentially no credit or understandings. The first half of that is part of the shareholder agreement. The second half, my intent to give it to management staff, is an estate plan (my next project).

In any case, you can see we're planning for a Black Diamond Games for many years to come. Once a business is successful, it just seems like the right thing to do, for your family, your employees, and your community.

Thursday, July 23, 2015

Delegation (Tradecraft)

Riffing off a good ICV2 article by Marcus King, I wanted to write about delegation. Delegation is a shift of tasks or authority to another person while maintaining responsibility for their work. You might think there's not much to delegate in a game store, but as you grow and add new tasks, there's no way to avoid this unless you want to be tied to the counter.

Delegation allows you to take days off. It allows you to give away tasks to those better suited to do them, either because of their skill set or because of their enthusiasm. Most importantly, delegation allows you to add more tasks, hire more people, and make more money.

The skill set of an individual is the key component. We may not be paid like rock stars, but we often have rock star skill sets. I have the skill set of a $50/hour employee (I don't actually make $50 an hour). Should I be cleaning bathrooms? If I am, it's a privilege of being the boss. I can do whatever I want. What I should be doing if I want to make money is higher level tasks that I'm uniquely qualified for and others are not. These are often more nebulous projects, like marketing, promotions and overall inventory schemes. I would delegate these tasks, if I could, but I can't.

What I've noticed in my new role as $50/hour guy, is my work has become more like what I remember from the corporate world. I do a lot of maintaining systems and new research with only the occasional punctuation of success. I might work for a week with the only thing to show for it being a $1000 savings on an insurance audit. Only one thing. That one thing is worth nearly a months net profit, so it's actually a solid win. However, it feels small, since it's one thing, especially after ten years of infinite, tiny daily victories. That's the job of the $50/hour guy.

My manager is my $20/hour gal. We extend this logic down to her and ask what should she be doing with her $20/hour skill set to make or save the company money? These are often mid level promotions, event planning, signage, inventory management and stuff the average line employee can't do. I don't want my $20/hour skill set person to clean bathrooms or sort Magic cards, I have $10/hour people to do that. Again, she doesn't make $20/hour, but she has a $20/hour skill set.

The line employees, the $10/hour skill set people, can certainly work up. If you want to work on my website after you clean the bathrooms or troubleshoot my wireless network, you'll soon be considered in that $20/hour skill set. I make it a point to know all the tasks I delegate, so I might ask you to clean up the mess in aisle three, but you can be sure I've cleaned up my share of aisle three messes.

Delegation without abdication is hard work. It's a management skill. It requires both supervision and enough space to allow people to work on their own, and possibly fail. Many people are not willing to engage this process. They won't delegate, they'll micromanage, or they'll completely abdicate. I've had every one of those bosses and they're all frustrating in their own way. When everything is working, however, it's a beautiful thing, a well oiled machine.

Friday, July 10, 2015

Defining Success (Tradecraft)

As small business owners, we've spent a lot of time just trying to survive. A good percentage, 20% according to my recent research on small business credit, are late on their bills, probably just hoping to float rent or payroll. The struggle leads to a kind of PTSD, a traumatization that makes identifying success difficult to impossible. You don't know it when you're there and you don't believe it when you've got it.

Part of that not believing is success is a moving target. If you stopped for a year to admire your success, it would be gone. Small business is a shark, it must keep moving or die. A shark sitting still, admiring the scenery, is a shark about to suffocate. So you must always be growing, which entails a frustrating level of inefficiency. A lot of times it's action for the sake of action and you need to step back and measure, especially with things like advertising, employee hours and inventory that tends to move like lightning in good times, but clog your shark arteries when it's slow.

Defining success is a personal definition. For many, success means liberation from their day job. For those who've been working the counter for a while, success might mean liberation from being chained to the counter. For others, success might be breaking out from the single store model and finally stretching their owner legs with multiple stores. For a select few, it's scaling their multi store operation to integrate a middle management level for increased efficiency. Everyone has their definition, and that definition can change over time. It's then a question of enough.

When is it enough? How do you decide this right here is the correct incarnation of your business? How do you do that without the shark suffocating? How do you completely reinvent your business while maintaining personal enthusiasm for taking something good and making a different something good? How do you do this without screwing the whole thing up?

I was recently asked in a podcast about moving store locations. Imagine you worked at a company for seven years and you decided to leave your job for a new company. Imagine that if you failed at this new job, you couldn't work in that field again. That's the risks of just moving a store. You could lose everything. Part of that store owner PTSD is thinking perhaps you're just playing a press your luck game with the whole thing and it will come crashing down on your next turn. This is one more reason why you need a support network of like minded individuals. Who else can understand this stuff?

I don't have answers to these big questions. Those are answers each of us has to discover on our own. Definitely don't let anyone else tell you what success looks like, or how your business should be run. Also, these are winner questions. I don't want to sound smug, but these are known as the problems you want to have, the problems that come about because you did the thing and you did it right. These are likely problems you'll always have in business as well, which means if you were hoping to derive some personal happiness by mastering this stuff and solving all your problems, it ain't happening. If you revel in new problems, new scenarios in need of solving, you've found the right place.

Tuesday, June 30, 2015

The Question (Tradecraft)

Prudent prospective small business owners inevitably come to this core question:

How do I predict my revenue numbers?

In other words,  how do I know if people will come, if I can successfully advertise, if my business plan makes any sense at all? How do I know if it will work? This is a critical question that separates the entrepreneurs and small business owners from those who don't have the stomach for it. The answer, of course, is you don't know.

It's a leap of faith. You can research this leap, calculate the distance, the acceleration required to make it up your variously sized capital ramp, but in the end, it's a leap. Those who crash and burn sometimes have miscalculated but others were victims of variables that were unknown or changed faster than they could adapt. The public will call those people fools, public including your friends and family who might snicker behind your back.

Those who succeed at the leap are not applauded for having balls of steel or predictive powers. Nope. They got lucky. Perhaps they tapped into some American business cabal that allows them into the upper echelons of society. Because small business owners are rich, right? People don't know anything about your leap because they've never contemplated The Question. They also don't know you make more leaps, more calculated risks, all the time. After the first couple of volatile years, your chance of failure is level, but it's just as high in year four as it is in year fourteen.

Once you start a business, successful or not, people will see you as a cow to be milked, an ever present source of money to be given back to society, since you didn't really earn it anyway, due to your lucky stunt ramp. Every school will see you as a potential donor, the state will insist on fees and taxes the public is unaware of, some of which they just created, and the federal government will hold you to a tax rate big business would scoff at. Especially in the beginning, every one of the people asking you for money probably makes more money than you do, including government employees, teachers and enlisted military personnel. All of them.

My original point though, is there are those who will have a crazed glee in calculating the ramp angle and those who will shake their head, dismissing the insanity. Know which one you are. Crazy ramp angle calculators need people to help construct ramps too. If you're stuck in a job, doodling ramp calculations, make the jump. You'll never stop doodling, ever, even if you fail.  If you're working a job and just can't wrap your brain around the lunacy of these people, let it go. It's as crazy as you think.

Sunday, June 14, 2015

The Problem (Tradecraft)

You know what the problem is. As a business owner, you know.

Yet we're inundated with customer feedback forms, requests to speak about our "incident." Tell us where the bad company touched you on this doll. Initially this strategy felt like people were listening. Companies were being pro-active in tackling customer complaints. They really cared.

Nowadays, absolutely everybody does it and most requests for customer feedback are ignored.  It feels like they just want us to touch their creepy doll. They're going through the motions. They know what the problem is and: a) don't want to fix it, b) lack the power internally to fix it, or c) they're measuring whether their bad behavior is annoying enough people to have a financial impact, like General Motors with dead customers. But not knowing? They know what the problem is. They know.

The helpful part:

If you don't know, find out. Before you go out and annoy your customers with one more survey, do some house cleaning. Make a list of all the problems you know about in-house. Lines too long. Clutter and cleanliness, your windows clogged with old Pokemon posters, That Rude Guy (TRD), the things that have kind of bothered you but not enough to impede operations or keep you up at night. Work on all those things first. Then ask the question and ask it publicly.

Open it up to mass criticism and accept your suckitude. At this point, in stage two, you've already decided you're about fixing what's broke, you've already done a lot of work to improve your business, as opposed to willful neglect, the usual small business approach to problems. After you've completed all your known improvement projects, you should welcome customer feedback and more projects for improving your business. Also, customers will notice your efforts and will be more likely to add problems into the hopper, because they know you'll do the work. But don't ask just to ask.

Add all these things to your list and never stop improving. Eventually these "dumb" things that weren't big enough to annoy you will go away and you'll be working on process improvements that delight customers and make you money. But you'll never get there until you take down those old Pokemon posters first.

Tuesday, June 2, 2015

Credit (Tradecraft)

This is a bit of a rambling post about credit.

We are told early on to make sure our personal finances and our business finances are separate. Commingling is the term to describe the grave offense of mixing your personal monies with those of your business. The basic advice for building business credit applies to us: incorporate (including LLCs), acquire an EIN number, a business bank account, and business credit cards.

After these basic steps, I highly recommend you draw a business salary so you can separate your personal day-to-day finances from the worries of the business. I can tell you there have been several personal financial crises over the years that would have been far worse if the business was in trouble, and the reverse as well. However, when it comes to credit, separating out personal from business is much harder.

There is the myth that once you establish your business and form a corporation, your business will be on the hook for future debts and not you personally. The truth is there is no creditor that I know of who will allow your small business to take on risk without your personal guarantee. This means your personal credit is always a factor with business credit. If you have personal credit problems, you have business credit problems. Worse, it's a double standard, which I'll get to a little later.

Working with creditors in the game trade will help your business, but there is no building up of a business credit history as with your personal credit. Alliance and ACD don't report to Experian that you paid your bills on time in May. My business credit report (yes, that exists) has three creditors on it, despite having over a dozen actual accounts open that would show payment histories of many hundreds of thousands of dollars a year.

This formal credit report is generally ignored by everyone, and in the game trade, your Dun & Bradstreet (DUNS) number is also not considered.  The information on my business credit report is vastly incomplete with the data about annual sales and employees probably reported at various times through our history, the income when I first opened and the number of employees probably seven years ago (we have six now).

My incredibly incomplete and inaccurate business credit report from Experian 

The reason to open business specific accounts is really for separation purposes from your personal credit. Although they'll all require you co-sign on a loan or line of credit, you want to quickly establish business specific lines to keep your personal credit clean. These won't show up on your personal credit report. In fact, they often don't show up anywhere, at least while they're current. The double standard I mentioned is that often your business debts, if they're on your personal credit report, will be judged against your personal ability to pay them back, impacting your personal ability to take out credit.

For example, I have a construction loan that landed on my personal credit report. It's about the size of my mortgage payment and based on my personal income alone, it's impossible for me to make all my payments. I'm an average income individual with essentially two mortgages! Logic plays no role in this, banks just assume that I'm hyper leveraged, since they won't include the businesses ability to make payments. When you've commingled your credit like this, you've done yourself a grave disservice (I'm working to fix this).

Likewise, when I was disputing a fraudulent equipment lease with a credit card processor, my personal credit was dragged through the mud while we came to a settlement. A $45 lease payment by my business grossing hundreds of thousands of dollars a year was hurting my personal credit. The stupidity of that is how many big companies get small businesses to put up with their shenanigans.

The only time I've been asked for my business incomes ability to repay a loan was during the mortgage crisis, when the bank wanted me to have a larger income than I was reporting so they didn't have to consider me for a government sponsored repayment program. They took my business statements and tax forms and showed they had absolutely no idea how to value a business or what a reasonable profit margin looked like. I was wealthy in their eyes, making about three times my actual income. Three times my income wasn't a bad guess if I were working in financial services, as they were. This lack of even a basic understanding of how small business works is probably why banks rarely consider your business success when you're looking for credit.

This puts you in the incredibly frustrating place of having a business income in the hundred of thousands of dollars, yet when you apply for a loan, being treated like you've got the income of a store manager schmo.

It's a common complaint across all small business, and my guess is it has a lot to do with small business default rates. According to my credit report,  the late payment rate in my industry is roughly 20%. That construction loan I mentioned is from a community funding non profit with a default rate of a staggering 10%. That is an enormous number! Credit cards, in general, average 2-3%.

So keep your personal and business credit separate. Keep your nose clean or both will be impacted. Your best bet if you need money is to amass the cash.

Thursday, May 21, 2015

Can You Take It? (Tradecraft)

Yesterday was the most expensive purchasing day since I opened my store. Modern Masters II shipped, with $15,000 of invoices. Many stores are scrambling to pay for this order. Some have been pre-selling it like mad, at prices lower than necessary, because they don't have the money. Many stores don't buy on credit, so this $15,000 or larger hit (some stores claim orders easily twice as big), needs to be paid up front.

In the long run, this is losing them money. This is a product that has a current street value 30% higher than the MSRP. That's based on retailers opening boxes they received early and valuing cards. Although speculators will try to lowball estimates so they can buy low from fools, retailers now know better.

Yet, many retailers still sell below MSRP.  I will admit, we sold a small amount of ours early at a small discount while we gauged demand, but now? Now this is a limited product with a known high value with a pretty final supply number. Our main concern now is selling it too quickly. If I show up Monday morning and it's all gone, I've made a different mistake.

So what do you do if you don't have enough credit? Ask for it.

Call your distributors and ask for terms. Get a credit application and take what they'll give you. I've got 30 day terms with every supplier who offers them. Some started at 7 day terms, the financial equivalent of training wheels. Some started with ridiculously low credit limits (which we mutually ignored). Over time you can boost the term period or the limit.

Once you get them, pay invoices religiously. Getting terms gives you time to sell things appropriately. You can make sales projections, instead of hoarding cash and starving your store for something that hasn't been released yet. Then, if your projections are wrong, you can liquidate unsold product at the tail of the market, rather than gumming up the works and devaluing it in the beginning. This is to everyones benefit as you act like a business person and less like a scavenger.

Rather than scrambling to pre sell enough product at a discount to come up with a COD order, you now order enough to sell through your finance period. Can I sell $15,000 worth of Modern Masters II in the next 30 days? Can I ever! The best thing is I only need to sell a little over half to pay the invoice. The rest can be sold over time, the store supported by other products that were bought on time.

If you've got a credit card, ask for a credit limit increase. They can only say no. If they say yes, your credit score is likely to go up as your utilization rate drops. You're penalized on the percentage of credit you're using, so using a lower overall percentage of that type of credit only helps you.

"Businessman, see? Roots in the community. 
You're just a scavenger."
If you don't believe credit cards are good things and you can't possibly be responsible enough, I invite you to reconsider. You are a business person now. You are a professional. Roots in the community.  If you're in year three or year five of your retail business, you have grown as a person. You have proven yourself responsible. Business is managed risk and maybe it's time you step up and manage it.

You will make more money this way. If you get 100 boxes of Modern Masters II and you have to sell half to raise cash for your COD order at an 8% discount (the current Ebay discount), you've lost nearly $1,000 by not selling in store at MSRP.  You've lost a whopping $4,500 based on projected street values.

You want to be treated like a professional and not a scavenger. Here's where you live up to your side of the bargain. Step up, get your finances straightened out, make the money. Diamonds the size of testicles.