#5: Game Store Business Valuation

[RPGnet Columns]

http://www.rpg.net/columns/businessofgamingretail/businessofgamingretail5.phtml

Summary:

How much to pay when buying a store.

Go to the column (http://www.rpg.net/columns/businessofgamingretail/businessofgamingretail5.phtml) for more information.

[LBrownIII]

In this month’s article, I mentioned that I plan to workshop the offer-calculating decision for a store I recently saw on the market. Here’s the skinny.

The store was near the outskirts of a large metropolitan area. The store had roughly 200,000 people within 20 minutes’ drive. It was on a busy street (daily traffic count about 26,000) in a new shopping center, facing the road, with plenty of parking. The shopping center had a sandwich shop (a national franchise), an accountant, and other reputable neighbors. It was a good location.

It had been in business for 10 years and had recently moved to a larger, newer location. Said new location brought with it new slatwall, new carpeting, a nice game room with custom tables, and some nice freestanding fixtures. Having moved from a smaller location, the retail part of the store looked a little vacant, but it wasn’t unattractive. The storefront also had a brand new channel can sign.

The store carried new and used RPGs, some CCGs, miniatures, and board games. Most of his sales came from the miniatures category, then RPGs, then CCGs and finally board games bringing up the tail. Strangely, CCGs were probably less than 10% of sale, but more on that later.

The store showed seven years of decreasing sales, with the previous year’s sales ending at $140,000. Conversation with the owner yielded figures that, when plugged into my break-even spreadsheet, showed a break-even amount of about $13,700/month before adding in a loan repayment, so the store was clearly operating at a substantial loss, even if the owner wasn’t drawing a salary.

The inventory amount was listed as $30,000. The owner, having long experience in a small location, had iron discipline concerning clearing out old product, so it was nearly all current inventory, except for a couple of boxes that didn’t take up floor space anyway. My estimate of his annual COGS gave me a turn rate of 2.6—not bad.

Now let me tell you a secret I didn’t mention in the article. I don’t look for strength in a business I’m evaluating. I look for weakness. I look for things the owner is doing poorly that, when corrected, could turn a cash-poor business into a cash-rich business. Examples include

•Underpricing accessories
•Poor merchandising
•An unattractive customer viewpoint
•No POS system
•Inventory level too high
•No website

Unfortunately, this owner was doing most of these things well. I believe a large part of his sales loss was due to his nearest full-line competitor showing consistent sales increases over the same time period.

The primary opportunity this store presented was weak CCG sales. The store’s immediate market (3-5 miles) was infested with discount CCG sellers that had undoubtedly taken their toll on sales in that category. I believe that strong management could have increased sales in that category by creating new customers rather than competing for the price-conscious tournament-playing crowd. New customers wouldn’t have known about the discounters because they weren’t tuned into that network of players.

Another opportunity this store presented included a lack of regular customer communication. It had, at one time, sent out regular mailings to its customer base. A consistent schedule of e-mails by customer group would have repaired that lost connection. The store’s handling of special requests also showed room for improvement.

The store had one employee other than the owner. The employee certainly contributed to lost sales. He wasn’t stealing (that I could see, but I didn't specifically investigate that possibility), but he was inattentive. He didn’t upsell, didn’t make an effort to interact with customers, and let customers stand at the counter for an unreasonable amount of time before getting up to ring them up (that is, any time at all).

There were other factors, but I don’t wish to give away the identity of the store, so I won’t mention those. I will say they were positive and counted for a significant part of my valuation.

I estimated that it would have cost about $30,000 to $40,000 in additional capital to make the store profitable again. Most of that would go to additional product lines, a small amount to advertising, and the remainder to additional labor expenses—specifically, a new crew of at least two, plus training time by the owner or manager to make them outstanding salesmen. This need for substantial additional capital put an impenetrable ceiling on the amount I would have offered.

All in all, I figured the owner wanted a way out of a business he saw as failing. He still had debt from a refinancing a few years ago and would probably have taken a figure as low as $15,000 to cover his debts and cut loose. That’s my estimate of his minimum figure, and if I had made an offer, it probably would have begun there.

My maximum estimate of this store’s value was $35,000. That was the maximum amount beyond the estimated further cash investment of $40,000 (using my highest estimate for these purposes) that the store could afford to repay at commonly available loan terms. An existing store owner might not have paid that much. Many not-yet-store owners would pay more, because an existing store has greater value to them than it does to me.

The final sale price: $35,000.

[SiddGames]

Hi Lloyd,

Great column as always. One thing of particular interest stood out for me (as someone who probably won't buy an existing store):

I believe that strong management could have increased sales in that category by creating new customers rather than competing for the price-conscious tournament-playing crowd. New customers wouldn’t have known about the discounters because they weren’t tuned into that network of players.

I'd be very interested in a future column about how to create new (boardgame) customers. This is something that I see as key to my marketing strategy. I don't want to compete with other game stores (and online) for existing gamers... I want to create new gamers out of the thousands of families that live in my area. Not only are they an untapped market, but I believe word of mouth is strong among them and that once they are customers, they can help create even more new customers.

Anyway, I have various ideas about it, but it sounds like you have done this kind of marketing, so I'm interested in your perspective.

Cheers,
Mike

[LBrownIII]

Do a demo to everyone who walks in the door.

If you have a sidewalk, do a demo to everyone who walks *by* the door.

Demo at conventions. Demo at tradeshows. When you've taught 10,000 people how to play Fluxx, you will have sold 1,500 copies of Fluxx and opened their eyes to a whole new way to have fun that doesn't involve a console or popcorn or stuffing dollar bills into places.

Total cost to you: one copy of Fluxx, and lots of time.

[LBrownIII]

Recently, I have seen two game stores that earned their money primarily from board games close. These stores were well-financed, run by experienced businessmen, and had significant sales. They still closed.

Board gamers spend less money per year than miniatures players, CCG players, and even RPG players. In other words, a CCG player might be worth 10 times as much as a board game player. In other words, for every CCG player my advertising brings in, I'd have to bring in 10 board game players to make as much money.

At some point, you realize that the amount you're spending advertising to this crowd does not justify the sales you earn from them.

That doesn't mean that you can't make money from board gamers. Board games are a great adjuct to more profitable product lines. They add sales volume without requiring additional staff, equipment, or variable costs. You have to spend some time educating your staff and in-store time hosting tournaments or demos, but that's it. You can often rely on manufacturers to help support your marketing efforts with demo games or other materials, so you don't have to eat all of that cost.

When I had a LARP in the store, I made more money off coke & snacks than I did from board games, and my "board game" category included non-collectible card games like Fluxx and Lunch Money.

[warbossgamestempe]

Geez, where were you 2.5 years ago???? LOL, I have found these columns to be most informative, and it has helped me see what I have done right and wrong, and hopefully corrected the wrongs.

[LBrownIII]

Actually, I was here. You weren't. I was just starting my RPG Freelancing column, I think, but I was responding to every retailer thread in the Gaming Industry folder.

However, I have been on Delphi's Game Industry Network and Game Store Resource Forum since their inception. Are you on those forums?

And I'm glad you're finding them helpful. Even veterans might get something useful out of later columns. Right now I'm going through the opening stages.