Monday, October 16, 2017

Selling Your Store (Tradecraft)

I have neither bought nor sold a (whole) game store before, so let me give you some advice on how I think it's done. Right? It's the Internet. You decide which orifice I'm speaking from. There are many stores closing right now and sometimes owners ask me how to value their businesses for sale. The truth of selling a store is somewhere around 70-80% won't sell, they'll just close and liquidate at pennies on the dollar. If you can't show value, this liquidation route is where you'll spend your time, and as you probably didn't value your time highly in the first place, you'll likely scoff at that pennies on the dollar and spend months selling it off yourself for twenty cents on the dollar. Let's work on a better outcome by understanding what work needs to be done.

The same value creation necessary to run a successful store is the same work it takes to create a sellable store. High value businesses don't sell often, because they don't need to. They can be run from a beach or passed on to family. Stores without that value are worth a tiny fraction of their furniture, fixtures, equipment and inventory.

Although I don't have direct experience selling, I run my business with the intent of one day selling, retiring, or otherwise spending time on that metaphorical beach, which might include starting another business. Creating value worth buying is not a thing you do when it's time to sell, it's a think you bake into your business from the beginning.  Selling a business comes down to three fundamentals: profitability, dispensability, and diversity, along with the end preparation for the sale, which I'm not going to cover here (buy the Nolo book).

Profitability is the tough one, since most business owners don't want to give up a clearly profitable business. I doubt many profitable store owners would use the word "clearly" though. With thin margins and high variability between years, many game stores are "sometimes" profitable. Profitability is also something solo owners avoid, since profit is taxable. I would like to see tax returns showing profitability, but there is the helpful term Seller's Discretionary Income (SDI), that can tease out profit where there is none, according to your tax forms.

Small business owners like their deductions, with books on how to take hundreds of them. This reduction in profitability lowers taxes, but also prevents you from getting a bank loan or selling to others. However, another experienced retailer can tease out the SDI, showing potential profit where there was none before. That cell phone expense, owners health insurance, "necessary" business travel to Essen, an inflated advertising budget, leased car, and your over market salary are all profit to a frugal buyer. The difference between showing profit and not showing profit is the difference between liquidation and selling at a multiple of your net income. If you can't show profitability with your tax forms, you sure better become familiar with calculating SDI.

Dispensability is how dependent the business is on you, the owner. If you've single handedly built this business from scratch, have all the processes and procedures perfectly nailed down in your head, and have personal relationships with all your customers, memorizing what they buy, how they buy and why they buy, you have failed in small business. You might be an amazing owner, but if you're hit by a bus on the way to work today, your business is done, your family in trouble. All the value has been smooshed on the pavement. You are indispensable, which is what you want to be, how we've trained you to be as a society, when you work for others. Indispensability is a trap in small business.

Being dispensable is a process like any other. It's layering processes and procedures and training staff to run the business in your place, as well as you. When I first hired people, I would come back after the weekend and the store would be a mess, tasks only I do would be undone and I would spend a couple hours every Monday morning fixing things. After developing better processes and procedures, I could leave for a trade show for a week without the place burning down, return the next week and fix things. Now I can leave for up to a month before my processes break down, mostly my owner processes that I now need to create (and maybe later, delegate). Next year I'll leave for six weeks, outside the country where some of my current processes and procedures will cease to work, so I'll be working hard over the next six months to streamline and improve processes so I can work (or not work) anywhere in the world.

The goal of dispensability is not to have a turn key business, the 4 Hour Work Week approach. The goal is to hire and train people in processes and procedures just as complex and service oriented as when you ran your store like a champ, maybe even better! There's a dispensability trap where you start turning your back on service because it's too complex to create into processes for others. To some extent this is necessary as you grow and delegate, and you will leave money on the table and opportunity for competitors, but the heavy streamlining approach in most business books is not suitable for a hobby game store. It's a persnickety business, a perfect expression of hobbyists within a ten minute drive time, which might be vastly different from a store just across town. Flexible policies and procedures and workers empowered to serve customers even when it goes against your P&P is key to running such a unique business.

In an ideal dispensability scenario, there is a process for outgoing management to train up new managers, or creation of a middle management level if you're big enough, so when key people decide to leave (or they get hit by a bus), you're not rushing back to rebuild your business. However, this is more a goal for keeping your business, rather than selling. If you've got management in place, and you're on a beach, that's good enough to show dispensability.

Diversity is the flexibility or brittleness of your business model. In a service business, you might not have a sellable business if a large chunk of your sales was one client. If making auto parts for Chrysler was 70% of your business, I would be wary of buying your business no matter how profitable you were. Where Chrysler goes, your business goes, and I don't speak Mandarin.

Likewise, if 70% of your business is selling Magic the Gathering (MTG), you're likely to only find a buyer that's equally evangelical as you about MTG. The more diverse your business, the more value it has to an outside buyer. As I run my business, I get nervous if I can't drop a department. I would ask myself, if MTG were to drop off the planet today, would my business survive? The answer two years ago was a definite yes. The answer today, with a heavy debt load from expansion, is a resounding no.

Anyway, those are my thoughts on selling. After you decide to sell, there's a huge amount of work to find a buyer and probably about as much work in selling your business, with legal documents and legwork as there was in opening in the first place. As most store owners are demoralized, burnt out, broke and otherwise at the end of their ropes during this stage of their business, it's no wonder they can't get this last part right and simply liquidate.

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