Saturday, March 31, 2018

What's a Game Store Worth - Follow-up (Tradecraft)

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.

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):

Saturday, March 24, 2018

The Mature Business Plan (Tradecraft)

"So if you don't have an updated business plan, do you just look at the previous year and try to do better?"

"Well, ahh, yeah."

I had a business plan when I first started and it saved my life. My mantra was stick to the plan. As the business continued to prosper and evolve, the plan was always in the back of my mind, but eventually it became an artifact of our history, rather than a living document. It's so old, at the time I didn't even have the name of the store sorted out:

This is not to say I don't do businessy plan things. Every year I write an annual report for stockholders that does an industry analysis, looks at threats and opportunities, and includes those wonky financial reports that I've grown to love and hate. I handed those to a business broker this week who encouraged me to write a new plan.

Note they didn't say update my plan, because if it hasn't been updated in 14 years, I essentially don't have a plan. I don't intend to sell the business, but having a plan is integral to any sort of hand off, including if something were to happen to me along this journey. I also know no experienced retailer will ever believe their business is marketable, so they're all reading this with skepticism right now. I would have to actually sell before they believed it was possible.

When I first realized I needed a plan, there was quite a bit of pride and a tinge of resentment. I just wrote a damn book about the trade, and keeping my ego in check was never a strong suit. I fantasized my first paragraph would start:

Look here bitches....

A new business plan for a new store is a lot of research, industry analysis, a mission statement and financials that are more wishful thinking than likely outcomes. It's an endearing attempt to show you did your homework, and might be useful to convince a friend or close relative to invest. But an established business plan?

That challenges every aspect of my knowledge of the industry and my business. Where do I think the industry is going? What's likely to happen in the next five years with our current location? How do I truly feel about my management team? Or our ability (or inability) to manage? How do I handle marketing when social media, our primary method, is in turmoil? And those financials... How optimistic should I be and should I base it on past performance even though we're in new waters? Most importantly, and this has certainly changed along the way: What is my mission? I think all the anxiety surrounds that last question, because I'm certain I'm off course when it comes to my mission.

When I was in high school I spent half a semester in "bonehead english" due to a scheduling conflict. We had ridiculous writing assignments like: Describe the changes you would make if you were king of the world. I would go to town and draw on my D&D fantasies and write an elaborate treatise about how things would be if I were king. The other kids would kick back and pace themselves on this joke of an assignment. The meta of this, the point of the exercise, was to keep us busy while the wrestling coach read his magazines.* Who was the bonehead here?

An established business plan needs to keep the meta in mind, the point of the exercise. You have a business that's profitable, so no need to posture. Just describe how you'll make it better and more successful for the foreseeable future, for anyone who decides to become a stakeholder. Who knows, maybe the plan will become a guide. Maybe the mission will present itself, if you choose to accept it.

* Eventually I got moved to a regular english class and the teacher would publicly praise me for my adequate work, much to the irritation of my friends who knew I wasn't a (complete) bonehead. 

Friday, March 23, 2018

FLGS Distribution and Codes (Tradecraft)

Friendly Local Game Store is up for pre order by most game distributors as of today. I thought I would list all the distributors and their product codes and spend a few minutes telling you about product codes in the game trade.

Here's the list, with their product code, not including a bunch headed to Australia:

Let's talk about product codes. GPW is my publisher Gameplaywright, associated with Atlas Games (ATG). That's why you see GPW (if the distributor carries Gameplaywright) or a combination of GPW and ATG (GPW pickypacking on Atlas). 

Some distributors listed don't normally carry Gameplaywright, which publishes niche but important products like The White Box Essays, Things We Think About Games, Hamlet's Hit Points, and The Bones. It's the meta of game publishing. There are a total of six Gameplaywright products out now, so that's why FLGS is number six. When you see an ATG code, it usually means they stretched to bring it in under the Atlas Games umbrella, which is pretty cool. 

While I'm boring you talking product codes, let me point out that pesky space in the Alliance system. It's a space that has vexed me for years, as identical product codes between distributors wouldn't search if it had that space or if it lacked the space when searching with Alliance. Alliance recently changed their system to ignore spaces, which means you can now easily use other distributors codes when searching with Alliance. 

That's especially important for Alliance as they've gobbled up distributor sales from competitors, especially with their exclusives, Asmodee being the critical one that kneecapped everyone else. Alliance went from a once every other week distributor with me to a once a week distributor, and part of that is difficult things to find with other distributors are now going through Alliance.

And finally, you'll see Atlas listed as AGG with PHD and ATG with other distributors. That's because the game trade has no universal standards for company product codes. WizKids might be WZK or WIZ or whatever the distributor felt like assigning that publisher on that day. There is no central authority to standardize codes. This is one of those horrible things that falls under "institutional knowledge," where only experienced people in my store know the various codes between distributors. We have several hundred of these codes we deal with on a daily basis and it's common for a junior employee to look up one code in one distributors system and erroneously put it in a point of sale field for another (a do over).

It gets worse too, the publisher can suggest codes for a product, which is welcome, but they or the distributor can also change codes. So you might be searching for a product WIZ1110 (or WZK1110) only to learn all the codes have been arbitrarily changed and it's now WIZ1111. If it's a marginal product, sometimes I just stop looking for it rather than trying to find it by name.

Finally, I want to encourage store owners to carry the book, rather than buying it just for themselves and staff. Most game store owners were once customers and this book diverts those customers to a more professional path, which benefits them, their competitors and the game trade in general.

Monday, March 19, 2018

Three Factors of Risk Management (Tradecraft)

I'm meticulous about vehicle maintenance and that's because I believe most accidents and mishaps happen when three negative factors are involved. For example, a vehicle in poor mechanical shape could be one factor, such as the overburdened shocks I just replaced. Weather or road conditions might be the second factor. The third factor could be a lapse of judgment or another driver making a dumb mistake. I've found when those three factors come together, events out of my control ensue and people get hurt. Since I have a Jeep with a solid front axle that tends to wander if I don't pay close attention, I'm always driving at the speed limit with great care, with one factor in effect at all times. So what does this have to do with business?

You can apply the three factors of risk management to businesses as well. I was reminded of this with the Toys R Us bankruptcy and immediately did a quick risk assessment of my own business. Now, to be fair, if you've got three factors on your mind, you're always looking for those three factors, which is both a strength and weakness. In the case of Toys R Us, their three factors were: Unsustainable debt, failure to cultivate and maintain a Unique/Useful Value Proposition (UVP), and a failure to prepare for coming demographic changes.

Any one of these three factors could kill a small business. Two of these factors can be survived by a market leader like Toys R Us. But all three of these? That's death and I'll tell you why. If you aren't doing your job now (UVP), and you aren't positioned to do your job in the future (coming demographic changes), why in the world would I want to invest in your debt ridden business to keep it going?  Toys R Us is a classic example of sunk costs with no future, a hole you find yourself at the bottom of with a shovel. Stop digging. But whatever, I'm really not qualified to analyze Toys R Us, but I do see how their case applies to my small business.

I've got debt from expansion, much like a Toys R Us at a smaller scale. I have a Useful Value Proposition I wish were more Unique, but I acquired debt to better my UVP. I feel I have strength in meeting future demographic changes, as we're able to pivot and invest towards the future of experiential retail.*

I could rate each of these issues on a scale of one to ten and decide if my business is worth saving, or in my actual case right now, re-investing. That's actually what I did recently before deciding if I should personally re-invest. I've got one factor in play and two moderately risky factors.

I would call my current risk moderate if it were someone else's business but as I believe in the management, I consider the risk low. I certainly have way more going for me than the $460 million dollar a year behemoth that was Toys R Us. Let that sink in a moment. Now, driving my Jeep back from the GAMA Trade Show in a blizzard? That was three factors of white knuckle driving all day long.

* The most important factor is I'm still profitable, unlike TRU with their debt load, but let's ignore that for now. 

Saturday, March 17, 2018

Subjective Decisions on Existential Matters (Tradecraft)

"Russians don't take a dump without a plan. And senior captains don't start something this dangerous without having thought the matter through."

--Admiral Josh Painter, Hunt for Red October

Policies and procedures are the heart of my business. It's what keeps it going the 85 hours a week the store is open, while I'm only there 24. We have policies and procedures about everything, which results in safety, quality (consistency of experience), and a focus on our Unique Value Proposition. So when a new law went into effect in California in January, forbidding me to have a policy, I raised an eyebrow. We have policies forbidding employees from wearing shorts, but I can't have a policy about hiring dangerous felons.

This came about because of our flawed criminal justice system and the fact those who have paid their debt to society were being screened out of jobs. With increased transparency in all aspects of life, we now know our criminal justice system is rather flawed, racist, classist and generally a brutal regime. I used to want to be part of it (dodged a bullet). With the unemployment rate at around 4%, non college grads are often screened from getting a job, so you can imagine what happens with applications where the "Have You Been Convicted of a Felony" box has been checked. This is a justified attempt to fix the bias against those who have paid their debt to society. However, not surprising with the government, the implementation is flawed.

While I support reintegrating ex felons back into society, how we went about doing it in California was a bit ham fisted. Here's how it now works when I try to hire a new employee:

  • The candidate goes through an extensive hiring process.
  • The candidate is presented with a conditional job offer. 
  • Only then can I run a background check on the candidate (now required by Wizards of the Coast, but most employers don't do this at all -- which makes this a perfect crap storm for us).
  • If a criminal record is indicated, everything stops. We are forbidden from having a policy on what happens at this stage, forbidden from a policy on what constitutes a danger to our staff and customers. We're not allowed to say we can't have sex offenders in a room full of children, although businesses dealing with drugs can have a specific policy (they must have had stronger lobbyists).
  • We now have to make a subjective analysis of that candidate. We have to look at their criminal record on a case by case basis, despite having no experience in law, and decide if they should be disqualified from the job. We can't have a policy that says sexual predators won't be hired here. We have to look closer than that ... somehow. As my attorney wife asked, "What if a woman is convicted of murdering her abusive husband?" I'm somehow being asked to untangle questions like this.
  • Now we provide the candidate with a letter stating why we can't hire them with a copy of their background check within five days. Or, if there's no policy about what happens next, the junior person in the organization is given the ability to decide themselves if the candidate is a clear and present danger.  
  • The candidate can respond back within five days, with more information, and it goes round and round.
The result of this policy is hiring managers are now making life or death, subjective decisions on existential matters. Of course, this is not satisfactory to any business, so although you can't have a policy on what criminal convictions aren't acceptable in your organization, more than likely businesses will have a policy that the hiring train screeches to a halt when a conviction pops up. 

Every flagged candidate will have to be vetted by someone in the business authorized to make subjective decisions on existential matters, most likely officers of the corporation or at least senior directors. These are people who can stand behind a decision that could result in either a very thorny legal liability or the possibility of great harm coming to employees or customers. This decision must come within a very narrow window of time.

Should we hire this murderer? You've got five days to consult with a VP, an attorney, draft a letter and get everything squared away so your dishwasher or retail clerk can be hired, not hired or if you're late, bring a lawsuit. Or maybe just don't hire right now if the attorney is not in the budget. Or maybe hire in another state, if you've got multiple branches. I know this is hard for anyone not running a business to understand, but the risk of this being handled poorly is great physical harm or a lawsuit that could drive a company out of business.

As the quote says, "senior captains don't start something this dangerous without having thought the matter through." One does not simply hire someone in California without the entire organization prepared for battle. Whether you're a mega corporation or a corner store with five employees, you better be ready for battle with every new hire. So no shorts allowed, but murderers? Let's hear what they have to say.

Finally, this is another example of a law that small organizations will likely ignore, big companies will absorb as the cost of business in California, but medium sized companies will have difficulty with the implementation. Don't get stuck in the middle.

Thursday, March 15, 2018

The Magic Market

Imagine a stock market where companies regularly leaked financial information right before the announcement of quarterly results. Imagine individuals who sell questionable, unconfirmed rumors to investors in attempts to manipulate stock prices, while simultaneously offering to buy that same stock from them. Imagine investors who are told their stocks are just for entertainment purposes while investing in a market that knowingly manipulates stocks to increase or decrease value.

Imagine a market where conflict of interest is the ideal business model. Imagine an industry of brokers who know all this is happening, but also know it's vitally important to maintain the fiction of this model. Pointing out the inconsistencies and what would be obvious fraud in a regulated market, is inherent to the profit margin of this unregulated market. It's also a system where pointing out the fraud to investors only results in rebukes from investors. The Kool-Aid is strong with this crowd.

I'm not talking about Bitcoin, I'm talking about Magic: The Gathering, a game considered an investment by many of its players and the cornerstone of the billion dollar hobby game industry.  Most everyone in the industry relies on this game to keep the system afloat. Even Martin Shkreli. convicted of securities fraud once considered investing in the Magic market.

What eventually got Bitcoin and other crypto currencies on regulators radar was the sheer amount of money involved. It wasn't the rampant embezzlement, corruption, and money laundering, it was that there was beginning to be an awful lot of money being made without government oversight. Before regulation, Bitcoin buyers were called "enthusiasts," rather than investors. Sound familiar?

With venture capital money flowing into Magic related companies, you might think enthusiasts might be on the brink of becoming investors. I doubt tens of millions of dollars is enough to get on the radar, with Bitcoin currently valued at 41 billion dollars. What's more likely, I think, is questioning this whole model as the Magic "market" declines. Nobody wants to kill the golden goose, but when it starts looking like a ragged chicken that poops on your front steps (I may have personal experience here), it might be time for some introspection.

Wednesday, March 7, 2018

Pathfinder: The Jeep of RPGs

Paizo just announced their playtest for version 2.0 of Pathfinder, their role playing game. As a retailer, I can say it's about time. I was against it before I was for it, but eventually I became a big Pathfinder supporter after not only becoming disenchanted with D&D 4 as a player, but I also realized the Pathfinder release cycle was going to blow D&D out of the water.

As a retailer, the Pathfinder formula was undeniably good, provided you could overcome the drag of Paizo direct to consumer subscriptions and the deep discounting all RPGs face online (many couldn't and there's animosity there). Paizo even sponsored me to teach other retailers how to stock Pathfinder. So I like Pathfinder and I'm glad we're finally getting a long awaited 2.0, and I will support the playtest at a deep level. But why is it like the Jeep?

I'm a Jeep fan, and Jeep fans have the same authenticity issues as Pathfinder fans. Pathfinder is essentially a 17 year old role playing game that's been updated a few times. At its core is the D20 system, which went through a 3.0, a 3.5, Pathfinder 1.0 and now Pathfinder 2.0 (it lives on in D&D 5, but that's another story). Fans love their D20 and are loathe to jump ship. If they haven't at this point, they've found their True System. Jeep also goes through versions, with die hard fans as well. Jeep fans are a bit nuts, with their slogan "It's a Jeep thing, you wouldn't understand" as their excuse for the completely irrational decision to own such an impractical, unsafe, uneconomical, and uncomfortable vehicle. But the heart wants what it wants.

With Jeep safety and economy improvements, fans lament the brand has lost its soul and authenticity, often despite it's ever improving off road prowess. Slant the windshield slightly or use aluminum where there was once steel and the sky will surely be falling with callbacks to the previous versions as the Last True Jeep. For Pathfinder, a new edition promises to be faster and more efficient, and of course, there are already those complaining about changes to the new edition. The similarities in fan bases is uncanny.

Of course, the reason why Jeep builds a new model are similar to why Paizo needs a Pathfinder 2.0. Everyone already has the old product. No matter how much you love it, use it every day, and swear you'll never change, a company can't continue making a product after ten years and hope to survive.  Paizo is in year 10 of Pathfinder 1.0 and likewise, Jeep is just now phasing out their JK Wrangler model introduced in 2007. Both were wildly successful, despite naysayers, and their new versions should remain so. Of course Paizo doesn't have government safety and economy standards to deal with, but they do have competitive forces that require they develop a faster, more streamlined system with modern design sensibilities (you know, like D&D 5).

So there you have it, an odd comparison nobody asked for, but one that's on my mind. You can expect a Pathfinder 2.0 to be very much like the new Jeep Wrangler JL. It should be evolutionary, not revolutionary. It should change where it needs to and not where it doesn't. It should be true to the spirit of the original, D20 to its core, and better where it can be. If you want a revolution, the door is on your right. It's a Pathfinder thing, you wouldn't understand.

Sunday, March 4, 2018

The Most Boring Blog Post In The World (Tradecraft)

Laziness? Fear? Arrogance? The fact this was a pain in the ass to make? Your pick of why I haven't posted the formulas for Open to Buy before now. There's an example in my book without formulas too, so I thought, what the heck, how hard could this be? Do the thing. I'll even name it The Most Boring Blog Post In The World so people can easily find it when they ask.

I once talked about Open to Buy at a trade show and a guy came up afterwards with a bunch of people surrounding me, and told me my example numbers were off. He was roundly criticized for bothering me with minor discrepancies from an example, but hey, examples should be correct. But that also meant I've been reluctant to start throwing around C2s-E2s because they would inevitably be wrong somewhere. If you do find a discrepancy, please let me know.

This example assumes you're starting with no money in your purchasing budget. On day one you have only your cost of goods to start with and your purchases to subtract from. Then we just add that balance going forward and voila, you've got a spreadsheet you'll live with for the rest of your professional life. Create a shortcut. Back that puppy up.

Here's a link to this example file.

You can copy and insert lines like this forever, especially once I discovered that +1 trick with the date. Mine is nearly 5,000 lines long and has a ton of columns, along with many financial charts that use this data (which I prefer to Quickbooks).