Thursday, November 8, 2007

Startup Costs

Someone interested in opening their own store asked me about startup costs. The first thing I must do is the obligatory discouragement. Small businesses fail at an alarming rate. The average retail business makes about a 7-8% annual return, while a stock market investment of that money will earn you about 10% over time and is vastly safer, albeit kind of boring. You'll work long hours for years making little money before there's anything resembling a payoff. My advice is if there's anything you could possibly do other than this to bring yourself happiness, do that, even if it's spending tens of thousands of dollars on an around-the-world multi-year tour. It will still be cheaper. Now let's take a look!

What you need depends on your costs and how much you want to make. The short answer is this will cost you between $60,000 at the low end to upwards of $100,000+ at the high end. To figure out what this number is for you, you have to figure some important numbers.

First, what are your fixed costs, aka monthly expenses? This includes rent, salary (always pay yourself, always), utilities, insurance, advertising, office supplies and regular expenses you think you'll accrue on a monthly basis. Now that you have that number, multiply it by 12 to get your annual expenses. Let's call it $8,000/month or $96,000/year.

Second, what one-time expenses are needed to get started? "FFE" stands for furniture, fixtures and equipment. You'll need a desk, a computer, gaming tables and chairs and various equipment to sell your games. Fixtures will be determined partly on your available space and your inventory (done next). Lumped into this category for simplicity is any build-out expenses you may have, such as carpet, paint, new walls, wiring, lighting, etc. This also will vary dramatically based on the size and condition of your space.

Third, inventory. How much do you need? Inventory is your economic engine. It's what creates the money needed to run the business. There are some very rough formulas to figure this out. First, take your annual monthly expense number. The sale of games needs to cover this number to break even. You don't get all that money, only 40%; 60% is your cost of goods, including credit card fees, shrinkage, etc. Then we'll assume you'll sell through that inventory a number of times per year. At first it will be slow, like two times, but your goal is four, with a likely scenario topping out at three. Let's plan on three. This sounds like gobblygook, so let me give you an example:

  1. Annual expenses: $96,000 (your monthly expenses multiplied)
  2. Annual gross sales needed to pay for this: $240,000 ($240,000 times .4)
  3. Inventory at cost needed to acquire $240,000 in gross sales at 3 turns: $40,000
    ($240,000 divided by 3, times .5)

Once you have your inventory number, based on your expenses and your aspirations, you can go back up and plot our your fixture numbers. Inventory will also determine the size of your store, which also ripples to fixtures and related expenses, such as rent and utilities. As a side note, you can't just plunk down $40-60,000 in inventory and be done with it. It has to be brought in gradually as you know your customers wants and needs. It's very different from store to store, otherwise people would be able to make it with game store chains. It's very nuanced.

As a last step, take your fixed costs, now that you've figured out the size of your store and have scouted several locations, and multiply them by six. These are your startup losses, money you'll piss away while trying to bring your store to profitability. It will likely take you 18 months to be profitable. That six months is a rough number that you'll spread over this period, graphing out your sales as they hit your magic profitability number. In our example, that's $48,000 that you've just lost. It's gone forever with the hopes that you'll pay it back with your profits later on.
In this example:

Startup losses: $48,000
Inventory: $40,000
FFE: $15,000
Total: $101,000

That's a California store, with California expenses with a decent salary for yourself. Don't have this much? First, consider if California is the place for this store. When I started I figured I could move to a nice town in the Midwest, buy my house with cash (based on my home value at the time) and have all the startup money I needed.

You can also tweak your expenses to lower your startup costs, such as a place with much cheaper rent, for example. One game store owner I know won't pay more than $1/sq ft/month for his space. His new store is in the middle of nowhere, but his daily break-even number is a quarter of mine.

Your salary is a big variable as well. Don't drop it out of the equation, but make sure you're not paying yourself too much, and make sure you can live off that for the length of your lease. Remember that this salary includes many, many hours of unpaid sweat equity. You can't decide in six months to hand your salary position over to someone else because they won't do those extra hours (and much more).

Fixtures are highly variable. This is a decent fixture budget, but you can save as much as 50-75% by going used or buying much cheaper ones. One option is to buy used fixtures and slowly upgrade them as you have available funds.

My guess is this $100,000 game store could be done for as little as $60,000 if you really worked on cutting costs. Done elsewhere, maybe much, much lower. Buying someone else's business is the best bet, especially some new guy who just made it to profitability but is burned out.


  1. Gary,

    Thanks for this great post. It is really awesome, and helpful for looking into the startup costs for a store in California.

  2. haha fool! Now i know your secrets! I will create my own army of tabletop gaming stores! we will over run you and steal your brains... not eat them because thats crazy... i shall dub the army of mediocre stores Offwhite Cubiczerconium Games... now... just need the money to start...