Wednesday, March 28, 2018

What's a Game Store Worth? (Tradecraft)

I just got back from meeting with our business broker. We were curious how much the store was worth, considering we have people interested in buying shares from our investors. Our broker asked questions about our operation, making sure we had strong policies and procedures and I wasn't integral to the success of the business. If it can't function without me, it has no value. Someone has to have their hand on the wheel, but it doesn't need to be me. They looked over three years of financials, and went back to the office to do some research.

So what is a game store worth? Depends on what you can get for it, and unfortunately, there were no  records of game store sales, at least in California. I was told what I already knew, store owners tend to start a game store for fun, out of passion, without much concern for a return. Finding an owner is likely going to be finding a gamer with a dream.

Game stores tend to fold rather than sell or they quietly pass on to existing managers. It's an industry in which it sucks to sell a business because traditionally game stores don't sell. When you sell your house, you need comparable sales in your area, but trying to sell a game store is like selling the first house to people accustomed to living in caves. Therefore, creating a business valuation for a profitable game store required some guesswork.

It starts with a highly subjective weighted average, a multiple of net income over three years. The most recent year is obviously more valuable than the first year in that calculation. I would tell you those multiples, but again, it's highly subjective, PFA (Pulled From Ass) numbers.

This average is then multiplied by a magic number. That number is where research comes in. If you can find sales of similar businesses, it doesn't take much to divide their sale price by their net income. Like a turn rate, it's a subjective number that reflects what's normal in the marketplace.

An undesirable segment might have a multiple of one, as you attempt to sell your buggy whip retail operation. A desirable segment with high energy customer engagement might have a multiple of two. A crazy desirable business with a well known name (usually restaurants) could go as high as five. For a retail business with no data of comparable sales? The multiple they went with was 1.5.

When you look at net, we're assuming the owners salary is included, and if not, it's added back in, which is likely to kill your illusion of profitability. Pay yourself from day one is the advice everyone will give you. Any sort of bonus achieved through negotiation, guile, or witchcraft is also added back (like free rent for whatever reason).

All debt incurred by a business is on the original owner and plays no role in the calculations. So my construction debt is mine to keep after the sale, which means selling is something I would be loathe to do until it's gone. My accounts payable, which for my business is as high as $50K at any given time is also mine. Gift certificates are an exception as they are a debt that stays with the business, so that reduces the final value of the business. You could argue some of that ancient gift certificate money is not real, so maybe you negotiate a third of that isn't included.

Any discretionary spending is pulled out which increases your income, which for me was a key person insurance policy, half my cell phone bill (on a family plan) and travel, which I consider essential and is tax deductible, but is it really necessary? No. I know some business owners that have over 100 personal items reducing their taxable income included on their balance sheet. It's not something you can pull off with investors, but it's a positive when it comes time to sell.

The number I ended up with was not significantly higher than what I could have gotten with a well run liquidation sale. So could I sell my store? Yes. Would it take a long time to sell my store? Yes. Would it eventually be worth it? Well, I also need to reduce my sales number by a 12% broker fees, so probably not.

Finally, there were some ways to increase my valuation with stronger sales, better cost of goods management, and labor that would need to stop growing while these higher sales occured. At best it would increase my valuation by 20%, which would probably make it worthwhile.

In the future, if the retail tier steps up its professionalism and retailers run their stores like actual businesses, valuations could increase, but again, not by a lot.

To give you an idea of sales numbers (not my numbers):

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