A Partnership Formed and Dissolved

A while ago, a prospective store owner contacted me about advice. That happens all the time, especially right after each column goes up. What made this contact noteworthy was that it was somebody local. We quickly arranged a personal meeting and discussed her plans for opening a store.

The Partner

I was impressed. She was high-energy, with a personality that would draw customers in and keep them there. She owned her own business already, and had people and procedures in place for it to continue without her full attention for a while. We can call her Vicky, because I just Googled a random name generator and that’s what it gave me. Vicky had done some homework already.

When she mentioned that she had to go to look at a potential location for the store, I offered to go with her. She welcomed the help. We met there, I brought up some helpful points, and we had a productive meeting with the landlord.

In other words, the first meeting went over very well.

The business Vicky proposed looked at lot like how I would do things if I were starting from scratch. She wasn’t scared of the numbers involved and seemed to have reasonable expectations of sales.

On the down side, she wasn’t familiar with gaming overall. She played D&D, but she wasn’t familiar with other product lines, even those that supported D&D. She had never heard of KoDT, for example. No biggie. I didn’t have much broader experience when I started.

By the second meeting, I had prepared an offer of partnership—my experience, sweat equity, and network for a share of ownership. I prepared a 28-point bullet list of things I brought to the partnership and clearly outlined what I offered and what I expected in terms of salary and profits. Vicky’s dialogue during this meeting suggested that she would be amenable to such a proposal. Sure enough, before we were done, she flat-out asked what it would take for me to join the partnership. I outlined the points and e-mailed her the complete list. We had an agreement.

During that meeting, I had referred back to this column, asking if she’d read it. She hadn’t. I had specifically pointed out during our previous meeting that the column answered a lot of the questions she was asking. No problem. We talked over most of the necessary items.

The Plan

I did mention to her that the plan we were discussing was not something I’d recommend to most people. The inventory was too light, and the location choices we were considering were too low in visibility and traffic count. I was counting on a connection to the gaming community to be able to recover customers from my previous store, and a higher budget spent on advertising to make up the difference. Inventory management would be crucial—that would be one of my primary jobs. Marketing and advertising would be one that we discussed together, but I expected some leeway with strategic direction.

The plan was to attract investors for financing. I had opening costs down to a mere $43,000. [Stop right there! Do not use that for your own figures. It’s insanely low for most start-ups.] Private investors look at the people involved with a business plan and their track record. With Vicky’s personality and my experience, we’d be a shoe-in for private funding. Back to that figure in a minute.

What we were discussing required our unique situation. It required experience. It required a way to overcome some of the common obstacles. It also needed at least two years of reinvesting capital, mostly into building inventory to a sustainable level (or a very persuasive person continuing to gain investments after opening). She and I could do that because we both have outside sources of income. Our job duties allowed us to continue earning that income while helping the store grow.

Say What?

Vicky never realized what I wasn’t offering—cash. My clearly-delineated terms were apparently not as clear as I’d thought. Or, more likely, unread. When she finally brought up the question of how much cash I was putting in, I had to point out that it wasn’t part of our agreement. That she had agreed to. Already.

I mentioned that with her as majority partner, she could indebt the company (and me) without my approval or even knowledge, and that there was no way I was going to allow that kind of power with anybody who had never even worked in a game store before. I didn’t know if she’d ever been in a game store. She certainly hadn’t been a customer of mine.

The lack of cash contribution was why I was asking for a fractional ownership instead of half or more. The only things she brought to the table were sweat equity, personality, and a small amount of cash. Any fair distribution of ownership—assuming we split the cash outlay–would have put me at 75% or more.

She wasn’t amenable to that. In her mind, partnership = cash. I made arguments—none of which she could deny—but the result never changed. She said she could do most of the things I planned to do. I said she could, but there would still be a learning curve, and while she did that, she couldn’t be out of the store building sales, which was going to be her main job in the partnership. I asked her which would be more beneficial to the company: a $20,000 cash investment, but a loss of $20,000 annually due to inefficiency, or no cash up front and an improvement in profitability each year? She seemed to get the point, but her predisposition wouldn’t let her change her stance.

So it fizzled.

As an aside, we did not have a written agreement yet. I was still drafting that. Things were going very quickly. However, it wouldn’t have worked out any better if we did. As the majority owner, she could just buy me out—any formula for the value of the company would have been zero before we actually opened.

I was a little miffed. I had already invested a great deal of time and advice. I had a business plan in, checklists, vendor lists, a timeline—essentially a step-by-step guideline on how to open a game store. I had mentioned how to obtain vendor aid, how to contact volunteers, etc. If she took the advice I gave her during our tour of the commercial suite we visited, I saved her several thousand dollars—things that she exclaimed at the time that she never would have thought of. I wrote an article for this column about choosing partners, and the readers agreed with me on all counts: choose partners for their skills. People with cash only should be investors, not partners.

Vicky Goes on Alone

Sometime around here, Vicky mentioned that she had taken out a small personal loan. I immediately thought “What?” We had discussed the liabilities of taking out multiple loans already. If you borrow $2,000 here and $5,000 there, then you have multiple payments over a shorter term. Instead of one payment amortized over 5-7 years, you might have 5 payments due over 1-2 years. A monthly repayment of $1,042 turns into $3,442. The difference can strangle you.

Also, incurring a new debt would skew her debt-to-income ratio, making it harder to get other loans. While we had planned on going with investors anyway, this slashing reduction in options was confusing.

Before I could figure that one out, she announced that she had a location.

Wow!

That’s…extraordinary. One of two things happened. Either a) she came up with $43,000+ in about three weeks, or b) she signed a commercial lease without full capitalization. If a)’s the case, no number of mistakes could faze her. She can always generate more cash to compensate for any deficiency in sales or profitability. We had already determined that she didn’t have enough personal credit to launch the store by herself, and banks wouldn’t touch a venture like this as an unsecured loan. I can’t even consider that she got a bank loan for this amount that quickly.

If b) happened, then I don’t even want to contemplate how foolish that is, and I could not have gotten away fast enough. Given that the store’s Facebook page has not announced the acquisition of any loans or financing, I had to wonder.

Next Stages

I’m not sure what’s going to happen next. I provided her with a lot of tools. Startup sales figures for other stores. Floor plans. Fixture and display suggestions. An initial inventory outline. An exact dialogue for requesting aid from vendors. Convention strategies. /sigh.

Vicky could survive, despite her errors to date. She’ll do well at keeping the customers she gets. She might be able to hang on long enough to repay initial investors. However, I’m afraid she won’t be able to bootstrap the business to the point where it’ll pay her a salary.

Relate This to Me and Wrap It Up, Brown

If you consider a partnership, look for a partner with complementary skills. If you have never worked retail before, you might choose a partner who has experience in merchandising and creating displays. If you know D&D and Magic well, you might look for somebody who plays Games Workshop games.

Make sure these points are clear:

Duties and obligations. Include a number of hours worked and chores that need to be done.
Cash and asset contribution. Cash has a value, but it’s not the only thing of worth. A good credit rating has value. Skill and experience have value. A Level II Magic judge who brings in 100 weekly tournament players has value.
Goals. What does each partner expect out of the store? If one wants to work the store as long as he lives and another wants to expand all across the state, you have a conflict.
Payment. Whether reimbursement is hourly, salaried or a strict divided payout, make it clear to all parties.
A buyout formula in case things go wrong. Make it fair—you don’t know which side you might be on.