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.

Wednesday, October 4, 2017

Not In Need of Saving (Tradecraft)

It's the boom times when we ask the hard questions. If times were tough, complaints and introspection would just be complaining, so you keep quiet and put your nose to the grindstone. Revolution comes from the middle class, according to Marx, because they are the ones with the free time to explore such things. So we've got a lot of talk right now, because the game trade is booming.

The game trade has doubled in size in just a few years, if you believe ICV2 results (which you should seriously question). According to ICV2, the hobby game  trade has grown from $700M in 2014 to $1.4 billion in 2017. That's an astonishing growth rate.

Many brick and mortar hobby game stores are enjoying this success, as they should since they helped tremendously in creating it. It's not all a bed of roses. What I thought would happen is starting to happen, where large stores are better positioned to handle the consolidation in the industry, while there remains a steady stream of doomed, under capitalized clubhouses willing to risk their savings on poorly planned retail stores. There is an insanely low bar to entry in the game trade, so anyone can do it with almost no money. There are a lot more low end clubhouses than top tier stores, although you can find top tier stores in most regions of the country.

If your local retail environment is a sad shell of its former self, if it's been devalued by bottom feeders or your unemployment rate is stratospheric and you're not enjoying what's a solid economy for many, you probably see a lot more doomed clubhouse stores than you see top end stores. If you were to make a value judgment on game stores, it might not be very positive. You probably see distressed stores catering to a distressed market. However, as with the parable of the blind man and the elephant, your perception is incomplete.

The blind man walks up to the elephant and feels around, and the first thing he touches forms his perception of the creature. He walks up and touches a tiny tail and slips in piles of elephant shit. He thinks elephants are frightening tentacled, smelly creatures. The blind man is not wrong, it's just his information is incomplete. For many local markets, you wouldn't be wrong thinking game stores are the ass end of an elephant.

Who can blame you for thinking nothing good can come from the excrement you're experiencing? There certainly isn't much community being created, product champions evolving or new games being marketed in such a dismal, excremental place, right? You're not wrong.

However, if you open your eye, you'll discover great hobby game stores out there to be explored. I've taken amazing road trips across this country and if I do the research ahead of time, there are always great stores in every state I've visited. All game stores are great, due to my planning, and I might make the same mistake in reverse, thinking there are no ass end of an elephant game stores. I regularly visit clean, well lit stores with strong events, game demos, and a community of customers who spread the word and help build the hobby.

I know there are online folks who will believe their digital community has spontaneously arisen through gamer immaculate conception and that they drive the game trade forward, but everyone in the industry, those who pay their mortgages with game trade money, know it's simply not the case. They play a role, but meat space is where the critical work gets done.

Publishers put their money where their mouths reside, supporting brick and mortar game stores as an important marketing function of their business, referring to Internet only sellers as "free riders," as in they're not doing the necessary work to propel the market forward. Price protection schemes to protect publisher brand value comes out of these discussions, providing safe channels for the brick and mortar while punishing free riders. Price protection is not popular with free riders or their very noisy, insanely entitled customers, so we're seeing push back. I get that, but open your eyes folks. It's not an either or situation. You also might want to grab a shovel while you're at it.



Sunday, October 1, 2017

Working the Float (Tradecraft)

I paced the sales floor on Friday, a major release day for Magic. I was hoping it would result in a figurative pay day on what was also a literal pay day. So far, most of the the sales were paid with credit cards. I was looking for more cash as I was expecting the bank to call at any moment to tell me we were short with our payroll run. A midday deposit was on my mind. I had already raided our small cash reserves. A customer came in to sell Magic cards to my assistant manager and I had to go back to the office to hide my irritation. Cash out is not what I wanted.

Is this what failing looks like? I ask that sometime. As a veteran store owner, I know exactly the steps of failing. I've written about it in my Defcon article. I spend a lot of time avoiding taking that next step down the ladder, to the point of unnecessary risks and gambles, like working the float between bills and income on a payday. Working the float should be somewhere in my mission statement.

On the bright side, we had just passed a million dollars of sales over the last four quarters for the first time. A million dollars. I'm going to write it out, because this is new and exciting for me: $1,000,000.00. Our sales are up 16% for the year, which is a big accomplishment as we start year fourteen. Margins are good as we only sell in-store and our gross profits are strong. Net? Umm, let me tell you more gross things.

We're reaping the reward of expansion. Some departments are expanding rapidly, with RPGs and miniature games up in the 40% range. Our bid departments, areas where other stores are seeing a decline, board games and CCGs, are static, which is still a win for us. This is due to doubling our play space, doubling our events. My predictions of a modest sales increase from expansion were correct, and even a little understated, which I was hoping would be the case.

Friends asked if I was going to write a blog post about the million dollars. Ha! No way, people don't want to hear that. But then I thought I would put it in context with what comes along with the million dollars of sales. Much more stress. More hassle. Pacing and working the float. Work the float.

We are in the first year of an expansion. When you expand, you budget for the expansion. You plan ahead for unanticipated expenses. You acquire financing. If you're lucky, the expansion goes according to schedule, or maybe it went long by ten percent or so. Our six week expansion took six months, long enough that we were compensated for what were clearly some mistakes. I'm so grateful our customers supported us during this period, especially our miniatures players, the only department not to sink, despite not having room for them to play. One retailer suggested I have six months of cash reserve before doing such an expansion. If I had six months of cash reserves, I would retire. Or buy a building or five.

Right now we are lucky to be in business, to be entirely truthful, and even with free rent for a quarter, which in our case would buy you a new car, we were still severely over budget, due not only to construction but sales losses over that period. You survive or you don't in that situation and use all the resources at hand. Hopefully you have a line you won't cross where you won't borrow or hemorrhage cash any further. We're not losing money, we're just staying afloat. We're at the line, which can be characterized by turning down people who still want to loan us money, because the problem is not cash, it's cash flow.

I can write this on October 1st, because we've survived the first year after construction. We're still here! We're in the fourth quarter, where the money resides. We will work hard this quarter and pay off chunks of debt. We'll emerge in January like a colorful butterfly from a disgusting, debt ridden cocoon. Well, that's a bit overstated. We'll come out of this year slightly stronger, growing stronger each year for the next four years.

All of my personal financial hopes and dreams reside within the business as it stands right now. It's  underneath construction debt. For now I work the float. As we move forward, it's like removing the dust from a mirror, uncovering hidden potential.



Friday, September 15, 2017

The Magic (Tradecraft)

Back in my day... we bought booster packs or a starter deck. There was one deck, and you didn't need another one once you had your one. You had started. We had no idea what a booster "box" contained, how many packs or what it cost. Heck, boosters could have came in bags for all we knew. Booster bags.

There was also no World Wide Web, no Ebay and no "net decking" to tell you what to build. There were no well known Magic tournaments either. You played with your friends around a kitchen table, although tables were beginning to show up in game stores too. We lived in caves, subsisting on melted snow, dreaming of a time when we could spend hours a day arguing about nothing on the Internet (in a more pleasing graphic rich format). My lawn was just starting to bloom, so no need to ask folks to get off it. The year was 1994.

I mention this because I sell a ridiculous amount of Magic: The Gathering at my store and I had no idea how I was selling it until I recently ran the numbers. Sure, we sell singles. Even back in my day we would buy some out of the case. I was especially fond of French versions and I recall building a really cool French vampire deck so I could beat up my friends. We had been playing games like Dungeons & Dragons for years, but as young adults, we didn't have the huge blocks of time to devote to that game any longer. Magic filled that gap and kept us together as a group.

 At the store, we've only recently started getting more serious about singles, even selling them online , but I never expected them to be our best seller. My number one selling product in the store is used cards. I'm still trying to wrap my head around that.

Magic boxes are close behind, and if you ignore the few points of online sales of singles, boxes are the actual best seller. Our store strategy has always been to appeal to casual players. But what does it say when singles and box sales outstrip packs and casual products? I'm not sure if it means we've lost our casualness or if casual players are now more inclined to dip into the singles collection or gamble on boxes.

Many, if not most game stores focus on single sales. I reluctantly followed suit, getting nervous every time my staff made a big buy. Then I ran the numbers. A solid turn rate, how many times a year I sell through inventory, is perhaps 4-5 for things like board games and RPGs. I ran the numbers for our singles collection. Then I ran the numbers again. That can't be right. 50. 50 turns a year. That's like taking our entire Magic singles library, and selling them to a dude (or dudette) nearly once a week. In reality there are cards that fly through our collection, selling as soon as they're received, while other cards have never sold at all. Our recent foray into online sales saw those leave us, with a nice sales bump.  But 50 turns... It's why we have backpack dealers and stores buying point of sale machines that handle Magic singles first and everything else second.

If I sound kind of ignorant as a store owner, that's because I've resisted the pull of Magic and especially singles. We are strongly diversified, enough so that Magic could fall off the planet and we would still be here (the game trade might implode though). The mercenary nature of a lot of players has made me reluctant to engage 100% with this subculture, and that's what it is, a full fledged subculture. It's an independent subculture where judges report to the mother ship, not me, and players see Magic product as a commodity, available instantly from the lowest bidder. It's a pretty sandy foundation on which to build a business.

Magic singles are the Bitcoin of the game trade. My landlord will take neither in payment for the rent, yet I'm supposed to believe a surplus of either makes me wealthy. As of a few years ago, I've handed Magic over to my expert employees to manage, following the money rather than my 1994 concept of how things should be. I've been happy with the results as they've doubled our Magic sales from just a few years ago. It's nothing like Magic-centric stores, but it's a wonder to watch.

I've also been happy to see the Magic community come together and support the store. Our expansion project, at least the money to get it started, was done with Magic money. When it was finally built, I approached the community with arms open. This is yours. You built this. As many events as you can maintain, we'll run those events. And they've managed it four nights a week. It has come a long way from those days around the kitchen table with my friends.


Thursday, September 14, 2017

Faith in Humanity

Before owning a store, there was such a thing as having "faith in humanity." Most people were generally good and kind and well meaning. Owning a store showed how easy it it was for supposedly good people to become so-called "bad people," to steal and lie when the opportunity presented itself. The line is perilously thin between honest and dishonest. It's not some colossal battle of wills between an angel and devil on each shoulder. It's just opportunity.

If you haven't owned a store, there's no way I'll convince you this is true. There's no way I'll budge your faith. I accept that. If you do own a store, you know what I'm talking about. The familiar knife in the back. The smiling regular who spends a fortune in your store who you still discover steals on the side. The employee you took into your home who robbed you blind. The guy, now this story is totally true, who you catch walking out of your store with two hundred dollar army boxes under each arm, who blames you because his in-store D&D group is now down a player because you banned him.

When owning a store, there is no longer faith in humanity. Faith is belief and you now have demonstrable proof. The vast majority of people will make the wrong choice if given the opportunity. It's about 90%, 10% who will always steal and 80% when given the opportunity. How you engage with this fact determines how you'll view people going forward and whether you'll be happy or not. You will give up your Faith for a philosophy of trust, but verify. It's easy to become bitter when coming to grips with daily betrayal. If you want to own a store, know this loss of faith, this change in philosophy, will be a psychological price far higher than your initial investment.

Tuesday, September 12, 2017

Is It Beachworthy?

I love my staff and my customers and my hobby, but the beating heart of my business is the processes and procedures that keep it running. The ultimate goal is for me to be able to sit on a beach and have my business run smoothly. The beach is a metaphor, because if you know anything about me, I would go nuts lying on an actual beach.

The beach represents my ability to run a second business, to go on vacation, to retire, to increase my operational prowess without being laden down by poor processes and procedures. It's being able to do all processes of my business at a time of my choosing and have smooth running procedures back home that don't create exceptions in the system.

The value of my business, it's worth to other people, will fundamentally be about its beachworthiness. If the business only operates with me in it, like so many game stores, the value of the business is what you could get in a weekend fire sale. If it requires me to periodically fight fires or uncover a missing invoice because they're hidden in a box, the value of my business is severely diminished. If it's profitable while I'm on the beach, we go from fire sale to a business valuation that looks like a healthy retirement portfolio.

Getting my business beachworthy, unfortunately, requires my business partners, notably distributors and publishers, to have beachworthy processes and procedures. As my business grows, I tend to discard partners who are not beachworthy, or elements of their business that are not compatible with my very basic goals of reclining on a beach. So let's take a look at where my partners tend to fall short:

Invoicing. Is your invoicing, your fundamental process for getting paid, consistent with industry standards or are you behind or ahead of the curve? Both being behind, such as randomly tossing invoices in boxes, or being ahead, such as electronic invoices only, are painful exceptions for your beachworthy partners. 

Ask your finance people if they believe customers are paying on time and I'll bet you they'll say no. So maybe try an experiment. Maybe put your invoices in a flap outside of the first box. If you do that already, perhaps print invoices on pink paper so it stands out. If you're invoices are electronic only, compare your dating to before you became so sophisticated and see if perhaps you should go back. Can a minimum wage game store employee with six weeks of training spot and process your invoices or are they getting lost?

Sales. How does your customer, sitting on the beach, learn about new products to buy from you? Are you still sending paper? Did you get a request to forward that to the beach or is it sitting in a stack of old Uline catalogs? Are you relying on calling beachgoers to speak with them about things? Have you noticed how they avoid your calls? 

Beachworthy businesses have no time for these interruptions. Whatever it is they're doing, they're doing at their own pace, at their own chosen time. Find consistent ways to inform them of new releases. Follow up on the hits that are important for them to know, as a value add, rather than bombarding them with paid marketing messages from companies they have no interest in. 

Pre orders should be funneled to a website where that information is visible, changeable (to a particular date) with clear indications of shipment times. If you don't have this, the beachworthy business will be forced to move to someone who does. The more beachworthy, the more likelihood of switching. Beachworthy businesses have all the money, by the way.

Clear Processes. Beachworthy businesses have staff with assigned tasks. One of the biggest mistakes of a game supplier is expecting crossover. They envision the game store as a one person operation, rather than a bundle of processes and procedures spread across a large staff. If the person running events is asked to place orders, or the order person is asked to perform event related activities, you've crossed the streams of the beachworthy business and it's likely what you're asking won't reliably happen in that business. Know what you're asking and who you need to handle the task. 

Finally, be aware of who is beachworthy and who is not and find ways to add value to their businesses while they are on the beach. A strong partner will remind the beach goer of events, products, and even upcoming seasonal issues. They might be more flexible when the customer is close to the free freight requirements. This might sound like doing their job for them, but it's easy to lose focus when you're not physically present in your stores every day. There is likely a program worth developing for such stores, which are also likely to be your biggest accounts.

This may sound like special favors for big accounts, but all stores can become more beachworthy with better processes and procedures from distributors and publishers. Beachworthy is another word for valuable, after all, and removing your exceptions and idiosyncrasies from their operation directly contributes to that value.


Tuesday, September 5, 2017

Good Luck and Tight Lines

There's not enough capital.

Publishers underprint their products. They would like to print more, but they have limited resources and for the mid level publishers, perhaps too large a portfolio.

Like tired fish swimming up a narrow stream, there can only be so much product in the distribution channel. The channel itself is a bottleneck that restricts available fish. As fish enter the distribution stream, I need to decide on my catch of the day. How deeply do I want salmon? Will my supply of carp last through it's inevitable demand?

I could curse the river, and it's narrowness and how it tends to twist and turn giving advantage to some fish over others. If it were only wider, I curse. And maybe deeper. But the real problem is my own. Despite the shortcomings of the stream, the number of fish far outstrips my meager ability to catch what I need. If I only had another line, perhaps I could satisfy all the demand. My problem is I am also undercapitalized, so I have to pick winners and losers among an embarrassment of riches, and hope for the best.

The customer in my shop care nothing about concepts like capitalization, they just want their fish. Some even want exotic saltwater fish that don't enter the stream, but occasionally I'll be tricky and find a way to get those as well, direct from the deep sea fisherman. The most loyal customers will buy from me, if I have the fish they want, but will declare they're heading out to sea to find a catch of their own, if I can't provide.

I sadly nod and wish them well on their journeys. "Good luck and tight lines," I tell them. I want them to be satisfied with their catch, but I know eventually, if I send them out to sea enough times, they'll get a taste of that salt air and they'll stop buying fish from me. The secret to my trade is turning people into occasional fish buyers faster than I turn them into fishermen.