Thoughts on Selling Your Business

I was talking with friends about selling my business. I'm not looking to do this, to be clear, although there's always a price. There are a couple of scenarios. Let's peer down this rabbit hole (again):

My Business Has No Value. Not my scenario, but if you have an unprofitable business, you're in the category of needing a liquidation value. Some people don't believe in the myth of profitable retail and think all hobby game stores are in the liquidation category. The liquidation value of a business is pennies on the dollar. Ten cents on the dollar for inventory, furniture, fixture and equipment (IFFE) is about right. 

Most (former) store owners will dig in, keep their inventory and sell it online out of their garages for years into the future, in hopes of getting 20 cents on the dollar. They have never been good at figuring out the value of their time. I once bought a friends store for 20 cents on the dollar in consignment, and it nearly broke me. I wouldn't have done it, except I picked out his inventory.

Your Business Has Some Value. It's a little bit profitable. Let's look at sale multiples. Do 3-5x your net profits exceed your liquidation value? Let's say you have $10K a year in net profit. You have $50K in IFFE. Liquidation will get you $5K, $10K if you don't value your time. You could argue a 3-5 multiple of your $10K net for $30-50K. You can see here that being just a little bit profitable will vastly increase your payout. Even at that highest multiple though, you're just emerging barely alive. 

This scenario assumes your business is worth keeping rather than liquidating. Buying a business in this fashion is deciding, as a new buyer, that you want to personally run this business. This kind of business is a "buy a job." It has little potential. It's a place to park your life or maybe the life of a child who needs to find their place in the world. The new owner would expect to take your current salary, plus that $10K a year. Living the dream.

Your Business Has A LOT of Value. You're living off it. It's your retirement plan. You're in the groove and can do it until you go blind or die quietly in your bed. This is my scenario (although not my numbers). Let's say you do $100K a year in profit. You have $500K in IFFE. Liquidation might get you $50K, which is ridiculous in this scenario. However, treating it like a real business, you might attempt to get a multiple of your net profits. A 3-5 multiple of your net is $300-500K. However, we have a couple problems.

First, finding someone to pay you half a million dollars for your hobby game store is going to be difficult. It would be nice, but it would be unprecedented for a store that's probably doing (let's say a 5% net profit), $2 million dollars a year in gross sales. It's not unreasonable, just unlikely. I do think the world is changing and the odds are increasing.

Second, $500K really isn't enough money. If you're enjoying your perpetual $100K a year in profit, $500K isn't going to provide you that steady income you need in perpetuity. Let's assume you can get a long term return of 5% on your new $500K nest egg. That's only providing you $25K a year in income, a far cry from your current $100K. 

The amount of money you actually need to replace your $100K annual income is a payout of $2,000,000. I have to say a one year payout of your gross is a multiple that's thrown around, but it's way more than five years of your net. You better have a turn key operation and that key better be made of unobtainium. You aren't likely to find such a generous buyer. So clearly, a profitable business, providing you the money you need, is never going to be worth selling. However...

You Need Out. Nothing lasts forever. You've simply had enough and want to do the next thing. Or your health is failing. You are ready to retire. You have made some missteps. You need to sell it. In my case, I will eventually have social security income, retirement savings, and probably a small inheritance. I might decide I have enough and don't mind my $25K extra a year in exchange for my time back. You can also see that putting more money into this monster is probably the wrong choice when there are other retirement investments available.

There may come a time when I'm ready, but I might not be prepared. In fact, the longer I wait, the less likely I'll be prepared. This is very dangerous, because it not only takes time to sell a business, the reasons you might want to sell it, such as the business not doing so great because of your distractions, can greatly impact that business value. Drop down from highly profitable to break even and our pay day becomes a fire sale. 

My impression is that after decades of fostering the business, you have to get out while on top, but also at a time of your liking. You have to sell the cash cow while it's still in good health, not when it's forgotten out in the pasture. When you have to sell it, is when you look around at what's possible. A $500K graduated inventory reduction sale might be the payday you're looking for. 

You might start courting potential buyers years in advance. You may decide to hand it to your heir, who may require years of training and experience. At the moment I have a key man insurance policy that will give those around me a fighting chance at making the business work without me. So if you've got this profitable business, you're walking a knife edge here. Nobody can possibly give you what it's worth. Finding a buyer who will pay you less than it's worth is a time consuming challenge that seems foolish considering your current circumstances.

As a small business owner, it's just another thing you need to think about.

Why Turn Rates Lie (Tradecraft)

A friend noticed my comment yesterday about how my CCG turn rates went from 18 to 4, over the last several years. He lamented that must have been difficult to deal with. Yes and no. The problem with talking about turn rates is in the name, it is a measure of something happening. But what's happening?

Turn rates are the number of times in a year you turn over, or sell through your inventory. So we're dealing with two numbers here. We have the inventory value and the sales velocity. It's fine if your inventory is stable, but what happens when your inventory is expanding or shrinking? 

My inventory value of CCGs in 2023 is roughly three times what it was in 2020 (my sales are not three times higher, and we'll get into that). So maybe my 2023 turns should be a COVID adjusted 6, instead of 4 (18 divided by three). A turn rate is a nice data point, something to keep in mind, one variable among several. It can be deceptive though. 

I should mention we sell almost twice as much CCG product in 2023 than in 2020, which has transformed the store and my life. But as I mentioned we have three times the inventory, which is way too much.

Rather than look at turn rates, a more accurate view of what's going on is Gross Margin Return on Investment. GMROI was something I would rarely calculate before my new POS system, because it was cumbersome. However, my new reporting package crunches those numbers for me, without having to ask. GMROI says that for every dollar you spent, you got X dollars in return. 

The first time I crunched the GMROI numbers myself, I realized I was getting a 65 cent return on every dollar I spent on chess sets. That was a much clearer reason to dump that category from my store than say, a turn rate of 1.5. I now carry just a handful of chess sets. GMROI is a much clearer lost opportunity. 

My overall store GMROI is 2.92. This is alright, but not great. A good GMROI, according to articles I've found (because we don't talk about this number in the game trade) is 3.2 or higher. I don't know of a game trade specific value. 2.92 means we have room for improvement, and the biggest area for room is ... you guessed it, CCGs. 

My GMROI score for CCGs is a sad 2.17. Basically, all the same categories with poor margin (calculated in the last post) showed up with below average GMROI scores. However, CCGs is by far, the worst offender. Like a lot of stores (and distributors), I'm sitting on a ton of CCG product from the last three years. 

Because we're all in the same boat, with the same CCG product that needs to be dumped, there is little opportunity to quickly liquidate that product. It is often sold well below cost online. I'm primarily talking about Magic: The Gathering. The game has seen a shift in strategy, production volume, and product variety. Many stores are trying to unwind this experiment. 

What this means for a purchasing budget, meaning how stores spend, how distributors spend, and what happens to people trying to sell to stores and distributors games, is a slowdown. We will all slowly unwind this product, because there is no quick selling of a universally dead product, other than a dumpster fire. It is broadly recognized as trash (even when it's objectively good). 

Those of us who can't unwind their inventory might fail, and I'm certain some already have. It's one thing to personally over order and make a mistake, but when an industry over orders and makes a mistake, the effects will ripple outwards and it will gum up the works. I will buy less, distribution will buy less, and publishers of games, who having nothing to do with Magic: The Gathering, will feel the effect as orders decline. Even if we did get rid of this stuff, we have been left a little impoverished and gun shy as a result. And that's how the post COVID boom ended. 

Margins (Tradecraft)

Your sales are strong, but your profits aren't where you want them. Margin may be to blame. Strong POS reporting can help you determine weaknesses. Likewise, you may find yourself with a perplexing abundance of cash, and margin may get the nod for that success, once you identify it. I'm questioning margin this morning, so where do I look?

The first thing is trends. My margin this month is no different than my three year average. I'm probably fine, or if I'm not fine, I'm no worse than average. If you don't have a fancy reporting package, you might have to crunch some numbers to get this data. I have this calculated on my Open to Buy spreadsheet as well.

Next is individual departments. I might be hitting my average when it comes to margin, but I feel like some of my departments are under performing. I feel a disturbance in The Force. Let's take a look:

In this case I've massaged my numbers and added some color. The green departments are doing pretty well, above average of around a 45% gross margin. Some of this is a lie. For example, my puzzles with a 51% gross margin don't include shipping charges, which are often part of purchasing. I offset those when possible. Dice include non inventoried loose dice with no cost associated with them, which can boost the reported margin. Statistics are lies, but if you know which ones you can and can't trust, they're still useful.

Of all the colors, the blue departments are most irksome. CCG Supplies should generally be a high margin department. However, we've had a bit of a purge, and with a clearance sale comes a hit to margin. Board games are in the same category, a perpetual cavalcade of clearance. The question there is should I order fewer board games? I decided several months ago I should be more cautious, but that's not reflected in the numbers yet. 

I have a strong FOMO instinct when it comes to board games, mostly because I'm not a board gamer and don't want to miss a chance. We sell 700 board games and none sell more than 100 copies in a year. I have a strong Bilbo Baggins feel about my board game.

Finally we have the red departments, the problem children. CCGs are commodity priced, so I see their low margin as systemic, part of the deal. I don't sell singles or lump "events" into this category, which could raise margins. This is systemic for many stores, part of their deal. I was also hurt by selling Commander Masters at market prices, which is pretty much a fire sale. CCG margin has held up pretty well, regardless, if you can accept those numbers. A diversified store is able to sell CCGs at a 35% margin all day long, but a card shop? You better have volume and low overhead.

Miniature Games are a bit vexing, as it feels like sales are primarily comprised of new releases and clearance items. Again, I've decided I should slow down on ordering some of these games, but that's not reflected in the numbers yet. We lack enough new players to keep these lines strong; they are somewhat static. We can't give away Games Workshop rulebooks. Despite a new 40K edition, there does not seem to be a lot of energy in the category. It's a tough category to crack with an uncertain economy, but that's probably just an excuse.

RPG miniatures have also seen a deep clearance of dead wood. I've dumped a huge amount of WizKids dead miniatures, while at the same time bringing in a ton of back orders that finally came back into production. The restocks aren't reflected in the numbers, but they offset the dump of dead plastic in sales.

To summarize, we want explanations, not excuses. We want action items, otherwise we're just wasting our time. What we don't want to see are perpetual low margin categories, if it can be avoided. What are some of my action items?

• Price Increases: Boost prices on snacks slightly to return to higher margins (50% at least)
• Diversification: Crack low margin CCG titles for singles. Commander Masters, for example
• Fine Tune Ordering: Order about 15-20% fewer board games, maybe when you're thinking about ordering 6, you order 5. The biggest change would be to order none rather than speculate.
• Stop Ordering Multipacks: Fine tune RPG Miniature ordering based on performance metrics, and not a sleeve of 6 of everything. I order a six pack of paints from one company that doesn't require me to, because Games Workshop trained me.

Low margin is a buying problem. You primarily have a low margin because you're an inattentive buyer (blaming myself here). Sure, marketing could be improved. You could demo board games better to not have to clearance them, but low margin generally comes from blowing out dead product. You have dead product, because you didn't forecast demand properly. Be better at forecasting. Build a more robust supply chain so you can re-embrace just-in-time ordering. Get your sales team to promote fewer titles at higher volume, rather than a shotgun approach. Easier said than done!

Gross margin is also just one metric. If I look at a seemingly healthy department, like puzzles, what do I really see in sales? My staff despise puzzles, and they've been a thorn in my side, but they've been managed since COVID and have a turn rate of four for the year, which is really good. My 3.14 GMROI is slightly above average too. If puzzles were sitting on the shelf at full margin with a turn rate of one or two, that would be a problem. Margin won't tell you about those shortcomings.

Turn Rate

GMROI

Then again, my CCG turn rate is currently four, but before COVID it was 18. Somewhere between 4 and 18 would be better. You have to have a grasp on what's normal and what you're trying to accomplish. Four is actually up from two at the beginning of the year, so I'm not complaining too loudly.

Finally, this is dynamic. I can't think of a time where all departments were firing at 100%. There is always a problem child. Try to not make it the same kid every time.

Off The Road Recovery

I'm spending time recovering from four months on the road. I'm not doing a long trip any time soon, but here are things that need addressing. I imagine you could get into a recovery routine, if you do this enough. Or maybe include them in your trip. Some of them could take some time:

• Healthcare. This includes a much delayed trip to the dentist and a trip to my new doctor for a checkup. I'm getting older and with that comes some issues that need adressing.
• Truck Maintenance. Ford called me on our way out of town to tell me a windshield part was ready. I had informed them they needed to get it before I left. They've been holding the part for four months. I also need maintenance like fluid changes. Since I did a lot of towing in the heat, I'm putting the truck on the severe duty maintenance schedule, which means some expensive maintenance like differential fluid changes.
• Trailer Repairs. I had the trailer washed last week and before that the underbelly repairs were finally done properly. There are about 10 repair items for the professionals, and they might keep the trailer a day or six weeks. The worst problem is my refrigerator really isn't attached to anything. I'm taking the trailer to a reputable service center in Lodi, even paying for some items out of pocket that are under warranty. I want repairs done right. I want them done timely. The next trip is mid December. They may keep it until then. Who knows.
• Trailer Storage. After repairs, I'll be looking for a new home for the trailer, hopefully close by. Most places are full. The ones that aren't full are expensive. I'm on some wait lists. I may store it far away while I wait for my name to be called. 
• Reset Finances. I spent more money than expected on the road and at home. I need a full reset. I went from project mode, spending way too much money, to travel mode, spending way too much money. That must stop. I'm saving for a Spanish intensive trip using frequent flyer miles, but mostly money is going to the truck and trailer reset.
• Re-engage with Friends. I missed my friends terribly and realized they are the glue that keeps my life in place. I'm visiting with friends, starting a new D&D campaign, and trying to get my social life re-started. I'm looking to see if any friends might want to join me for the next adventure, since Rocco will likely be in school. Besides a trip to SoCal in December, I fantasize about a slow drive down the 395.
• What About the Store? I stopped by and had two pieces of mail to pick up and a short meeting. As I've mentioned, working from the road isn't much different than working from home.

I have some culture shock, especially things like the cost of gas and eating out. Gas was actually more expensive in Mexico, but between liters and pesos, I didn't think much about it. I've noticed a lot of empty restaurants, as others are probably in the same boat. We had lunch at our old haunt in Concord today, Spaghetti Factory, where my old waitress told me they had only one waitress during the week days, down from three before COVID. People are still working from home. 

I was building a trailer for a year before I left, so I'm back without a project. That might be for the best while I reset. 

Our next Mexico trip is distant, probably 18 months away. We want to start where we left off, include the Yucatan and maybe Belize. Perhaps Guatemala, although there are no RV parks there. We also want to do it during the winter. Summer is brutal.

I'm taking my son to visit relatives and spend a couple days at Disneyland over Christmas. We'll take the RV and make it an RV centric vacation. The plan was to do five RV trips to Mexico over five years, but I think we'll do two big trips to Mexico and as many smaller trips as I can manage. After the five year mark, I'll decide whether to sell the trailer and truck or continue on this path in some fashion. I have other travel ideas as well, including dreams of driving the Trans America Trail. 

8,640 miles driven on the last trip

Least Adventurous Adventurers

I work in adventure gaming. I think that best describes a trade where we sell games about exploring dungeons, fighting space bugs, battling wizards, and settling imaginary lands (my four store categories). We sell adventure, but we sell it as fantasy. Most of our customers are not going on adventures; most people don't go on adventures. Actual adventure is a bit repulsive to quite a few of my peers. Retailers seem least likely to go, due to constraints of time and money, and deep immersion into the games we sell. Adventure is often the trip to the next trade show.

My retailer peers fit into a couple fitness groups, those whose health you worry about: obese men, mostly, who you see at trade shows, huffing and puffing as they make their way to the next presentation. I have been known to huff or puff on occasion at a trade show. We worry greatly about these folks, and when they pass at a young age, we are sad but not surprised.

We also have those who devote significant energy into not being in the first group, including some fitness gurus who you'll find at the hotel gym at 6am. It's a sedentary hobby, and rebelling against an early grave is natural. We are chained to a counter and eat whatever (often cold, often fast) food we have available. I did this for nine years before I broke the chain. I use the example of the baby circus elephant, where they put a dinky chain on its leg and it learns it can't pull against it. When it's an adult, it's conditioned not to try. I needed someone to tell me I could break the chain before I could free myself.

I've struggled to keep weight off for years, to the point of hurting myself exercising. After I had the store recovered from COVID, I time where I hand delivered games to customers doors and worked long hours as the sole employee (an adventure for sure), I became an overweight, sedentary slob. I had a mental shut down and was just done for a while. I had no time to process worldwide pandemic, the death of friends and relatives and the imminent demise of my business, at the time it was happening. At my lowest point, I hurt my back from just sleeping wrong and struggled to get out of bed. 

My response was to throw myself into a fitness program, deciding I would get in shape, even if it killed me; and it nearly did. I lost 30 pounds the first year, but then hurt my back. I have a friend who did the same recently, and we both struggle with back injuries because of our over exuberance working out. At middle age, you need to be more careful when it comes to these things. We need more calculated, gradual fitness improvement, probably with professional assistance. But fitness or death, is not an unusual response at middle age it seems. Our self images are not easily discarded. Being told you're not fit to go on the adventure is not acceptable.

Our characters are exploring continents, while we struggle to move our bodies a minimal amount. They wield broad sword, while my arms get sore from wrenching on my trailer. This came into clearer focus on my recent trip. We were gone for four months, so a lifestyle emerged. I should mention for someone with a more active lifestyle, like my buddy, this was nothing, but for me, it was nothing short of an adventure.

While in Mexico, I failed to hit my "step goal" most day. This bothered me for a while, until I realized I was losing weight and getting stronger. Our life of adventure, setting up camp, tearing down, cooking and cleaning, and exploring 35 towns, a couple mega cities, and a dozen ruins, didn't conform to my exercise regimen. I did a lot of store work on my laptop, but it seemed every other moment of the day was about preparing for the next thing. The food wasn't always great, but it rarely left me feeling awful like the food back home. It didn't seem healthier, often just simple ingredients, but my health seemed to be improving. I wasn't the only one.

However, my son was not happy during much of this trip, as it dragged him away from his adventure gaming online. His online adventures were taking a back seat to climbing Aztec pyramids and exploring 3,000 year old villages. He has his own health and fitness struggles, so he preferred his adventure in a darkened room with friends.

My realization this morning is all these artificial fitness and exercise routines are, for me, about being prepared for real world adventure. I don't always climb Aztec pyramids, but when I do, I want to be able to without having to ramp up my fitness before I go. The oddity of being upset because I was missing my fitness goals while doing the thing, was lost on me until recently. I was hitting the fitness goals in order to go on the adventure. 

I now have to put up or shut up. I continue that lifestyle or I fall back into "training mode." I don't want to become the retailer slug of the past. Lacking another town to explore, I plot out my step goals for the day. I look around and wonder where the next adventure will come from, the elusive active lifestyle. I wonder when I can hook up that trailer again and head off into the unknown, to regain that lifestyle again. The goal is to take a wonderful experience like this and use it to transform your life. Until then, I've got a new D&D campaign to prepare for.