I wanted to write this follow up to document the discussions we had on social media about the previous post. There were a variety of responses. Several store owners reported the example sale matched their experience pretty closely when selling their store. Several retailers thought such a store was vastly underpriced and a bargain all day long. Some would never buy a successful store because the barrier to entry and low costs made ramping up a new store to such income levels fairly easy - which I would concur if you have the experience. The exception was a "buy a job" to park a child in need of something to do, and I'm watching a store owners perform that painful hand off right now. For the most part, there was gnashing of teeth about the low value of the business.
I mentioned in the previous article it comes down to a kind of classification for the business. Game stores deal with this all the time with insurance. When we get business insurance, there is no "game store" classification, so we fight agents in how they classify us, usually a book store or a toy store. One classification is usually more expensive than the other, so we argue for the better one, because why not. If you didn't know this, you should go out right now and re-shop for insurance. In the case of business valuations, a game store has this same classification problem.
An example of a healthy retail store with healthy valuations is the hardware store. Hardware stores play an important role in communities, with its competitors usually being other hardware stores more than the Internet, unlike the game trade, where we compete against not only other stores, but Internet retailers, distributors and publishers! It's an appalling situation that horrifies other retailers. It should scare away anyone interested in the game trade.
The hardware store, lacking such horrors, has a strong valuation of 3-4x net (seller's discretionary earnings) plus inventory. If our example game store were valued as a hardware store, it might go for over $300,000 rather than the fire sale price of $62,000. When I asked other store owners what they thought the example store was worth, it was in this hardware store range.
Some thought the game store valuation overlooked inventory, but that wasn't the case. The game store valuation intentionally ignored inventory values, much like valuations of the most endangered business species on Earth, the lowly book store. Independent book stores have been thriving lately, as have game stores, but I doubt that has increased their valuation. Book stores are valued in the 1-2x net range with no consideration of inventory. Another valuation method is a percent of net, 15-20% plus inventory. Without comps available for game stores, it's not unreasonable to assume one should be sold like the book store.
The problem is we all know on the surface the game store is undervalued because we all know, as store owners, we could liquidate the example game store for more than this valuation. It likely has $75K-100K in inventory. However, because we have no records of sales, and no prospects for one, that's exactly what happens in most situations, a liquidation sale. If you've got experience in a liquidation sale, let me know what you would expect to gross from a well run, graduated sale of this level of inventory.
We are again back to the problem of selling the first house to a bunch of cave dwellers. Without comps we are simply shut out of the sellers market for our businesses in a chicken and egg scenario. It will take some sort of tectonic shift in the retail tier of the game trade before we see professionally run game stores sold for worthwhile valuations. You go first.
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