Which is better for you?

The Choices

You might be interested in this industry because you have the opportunity to purchase an existing game store. If you have read my introduction to this column, you know that’s how I found myself a retailer. I had considered opening a game store for several years, so when a chance came along for me to jump in, I took it. I never regretted it.

If the opportunity to buy a store comes your way while you’re planning your entry into the industry, I recommend that you seriously consider a purchase before you commit to opening your own store from scratch. With planning and awareness, you can overcome most of the negative points to buying an existing store, leaving you with nothing but the good side.

This discussion is a comparison showing how buying and opening differ. It doesn’t discuss due diligence, partnerships, analyzing sales records or other issues. That subject’s not even on the schedule at present, but it might be worth adding. You tell me.

Advantages

Opening a store offers only a few advantages, but those benefits are fundamental and significant.

Cash-Flow

The main advantage is money. While purchase prices vary, you can often purchase a store for not much more than the cost to open a new one. You still need a capital reserve to remain open, but you have an advantage.

When opening a new store, you might have several months pass between signing your lease (and thus paying rent and repaying a loan) before you open your doors and begin collecting sales. When you buy, you can open your door the same day. That puts money in your pocket sooner, and that saves you interest on your loans and lets you get maximum use out of that lease.

Furthermore, sales levels at an existing store are likely to be significantly higher than a brand-new store, even if the existing store has suffered a loss of sales over time. You might reach your break-even in 3 months instead of a year. The difference could reduce your need capital reserve by tens of thousands of dollars.

Easier Financing

It might be easier to obtain financing to purchase an existing business, especially if the business you’re buying has a good credit history. Also, the seller might be willing to finance the purchase. If he does, you merely have to meet his credit requirements, and those are likely to be more lenient than a bank’s requirements.

Business Relationships

You’ll already have accounts in place for utilities, credit card processing, and other business needs. In the case of most of these accounts, you’ll be able to simply notify the company of the new information. Nearly all they care about is making sure they have your name and billing information.

Unfortunately, the largest and most important accounts—your game distributors—will treat your account as totally new. You’ll have to reapply for credit and most of them will insist on putting you on a COD basis until you establish a history. You can compensate somewhat if you have a business credit card, which will allow you to defer payment and avoid COD charges.

Despite this paperwork difficulty, the distributor knows your store. Your sales reps can make purchasing recommendations based on previous sales history. Learn to tell which sales reps you can trust and which are simply out to make a sales goal.

Staff

The store might have staff you wish to keep. Even if you choose not to retain any of the old crew, you might already have volunteers in place to promote various game lines. It’s possible that you can negotiate for the old owner to work for a time as part of the purchase agreement. Having the former owner around could make the adjustment easier for the customers.

Disadvantages

The disadvantages of opening your own store are more numerous than the advantages. One thing common to most of these disadvantages is a restricted range of choices. Opening is definitely the better choice if you want total and immediate control over your store.

Location

At least initially, you’re stuck with the seller’s choice of location. You can bypass that restriction by not agreeing to a lease assignment (in which the seller essentially has you take over the lease for him) or by timing the purchase to coincide with the end of a lease. If you choose this route, you must have your new location up and ready to go or you’ll lose considerable sales and customer confidence during the down time.

Along with the location comes the existing lease. The seller could have signed a horrible lease, and you don’t want to find that out the hard way when the landlord asks you for $6,000 in CAM charges at the end of the year. If you do accept a lease assignment, scrutinize the lease carefully. It might be better for you to approach the landlord independently and ask for a new lease.

Reputation

Until you build your own reputation among the customer base, you’re stuck with all the good and bad reputation the previous owner established. If the store has a reputation for cheating players, you have it now. If customers associate it with bad customer service, you’re stuck with that poor image. It might take a year or more for you to establish a different reputation.

Image

Until you deliberately make changes, you’re using another owner’s selection for your fixtures, uniforms, paint scheme, signage, etc. If you have to change all of these things to make them the way you want them, you might not have saved as much money as you thought. Making changes immediately might alienate some of the existing customers.

Product Selection

The existing store might have product lines you don’t plan to support. Liquidating those lines might cost you some of your existing customers. The liquidation will also take time away from other projects.

Buying a store isn’t easy by a long shot. Easier than opening a new one—maybe.

Finding Startup Capital

I’ve advised many people on opening game stores. A few have opened their doors. Most have not. The largest single cause for not making the jump from the asking-questions stage to the opening-the-door stage is an inability to finance the business.

I refer to a couple of terms from last week’s article, so if you haven’t read that, go read How Much Do I need?

The primary sources of opening money are a) you and your family, b) private investors, and c) bank loans.

You and Your Family

It helps to build up as much cash as possible before you begin, so you’ll probably want to use at least some of your own money no matter what. Cash helps in three ways. First, you don’t have to apply for it. It’s yours. It’s not contingent on a business plan or a credit check.

Two, you don’t have to pay it back. By deleting the line item called “Loan Repayment” from your break-even analysis, you reach positive cash-flow sooner. By starting with money, you’re not repaying interest on your startup capital. Depending on how much you start with, the lack of interest alone could save you $10,000 or more.

Three, cash can help you get a loan. A bank will be more eager to lend to you if they see that you’re taking a risk. It’s far easier to get a loan for $80,000 if you’re putting up $20,000 of your own than it is to get a loan for $100,000 with no cash out of pocket.

I recommend that anyone thinking about opening a store get a second job, preferably in retail, for the six months or year it might take you to open your doors. You get used to working long hours, you learn some valuable skills, and you have a chance to bank up some cash. If the hours are not manageable because of family demands or health reasons, you can quit without losing a six-figure investment.

If you consider family money, I recommend treating prospective family members just like unknown investors. Show them a business plan. Write up an agreement, including your repayment schedule and penalties for late payments. Your professionalism will reassure them and your attention to detail might prevent an unpleasant family dispute later.

Private Investors

Whether you meet them through your current job or through a newspaper or magazine ad, or seek out angel investors online, investors will want to see many of the same things a bank will. Usually, though, they’ll look at the viability of your plan more closely than they will your personal financials.

Although you might find a single investor willing to finance the whole business, it’s more likely that you’ll have to seek out more than one, each contributing a certain amount in exchange for partial ownership. You can set up these “shares” for investments of $5,000 or $10,000, or any amount you wish to establish. You will almost certainly want to include buy-out options for your investors so that you don’t have to pay them indefinitely.

You might wish to involve a different kind of investor, one who brings talent and labor in addition to cash. This investor would be an active partner in the business (as opposed to a silent partner, who provides only financing). When you consider a partner, you have to consider more than just how much cash he brings with him. You’ll want to compare skill sets; if he knows the Warhammer 40k line and you know collectible card games, you’re a good match. Ideally, you want someone whose knowledge and experience complement yours. If you wish to have a partner, you need a clear delineation of duties, expectations, percentage of ownership and rewards.

If you involve investors, the relationship will probably dictate your business structure to some degree. Business format is a huge decision and one size does not fit all. Talk to your lawyer about exactly which structure best fits your needs.

Bank Loans

As a small business owner, you are the business. The bank is interested in ruffling through your business plan and making sure the numbers don’t contradict each other, but what they really want to see is your personal credit. They’ll run a credit check on you. They’ll want your personal income tax records for the past 2 or 3 years. Your loan application will have your personal name on it.

The bank’s reasoning is that when (not if) you fail, you’ll return to the field you’re in now. They want to see how well you can repay them doing what you’re currently doing. That second job comes in handy here, too. If you didn’t spend all that money, then you’ve built up a nice income. That higher income figure should improve your debt-to-income ratio substantially.

If you’re thinking about opening a store, go get a copy of your credit report today. Fix any errors on it. Address any legitimate issues on it. Talk to your banker about whether you should open any new lines of credit or close some off. Between now and the time you apply for a loan, make sure you pay every single bill on time. If you have something bad in the past that’s due to fall off the credit report, don’t apply for a loan until then.

Subtract your cash on hand from your pre-opening capital, because that’s the segment on which you’ll pay the greater interest (in dollar amount, not percentage). If your pre-opening capital is $50,000 and you’ve saved up $8,000, you need a term loan for $42,000. The difference is $425 off your monthly break-even and a total of $2,200 in your pocket over the life of the loan.

How about terms for that loan? You might not have much to say about the interest rate, but you can negotiate the repayment term. If your banker doesn’t offer it up front, ask about a balloon payment. Banks are often willing to calculate the payment rate based on a 7-10 year term but write the loan as a shorter term (3-7 years) with a balloon payment equal to the balanced owed at the end of the term. They have no expectations that you’ll pay the balloon; they assume that you’ll refinance it. That could cut your loan payment almost in half, lowering your break-even by another $840 per month.

Your best bet, in terms of likelihood of approval and interest rate, is a home equity loan. If that’s what you end up applying for, you might want to use the extra cash you make with your part-time job to pay down your mortgage instead. At the interest rate you’ll get from a home equity loan, the relative value of cash goes down.

What about the capital reserve? You prefer a line of credit for that. It can be a BLOC (business line of credit), HELOC (home equity line of credit) or some other option; ask your banker which option works best for you. The advantage here is that you’re not paying interest on funds you haven’t withdrawn yet. In your first month of operation, you might only withdraw $5,000 from your LOC, as with our sample store from last month. That means you’ll make a payment on $5,000 ($200) in month 2 when you withdraw another $5,000. If you took out a loan for your entire $60,000 burn amount, the interest element alone of your first payment would be $500—that’s almost 60% of the payment! The interest rate is often higher on the LOC, but the dollar amount you pay will be much less.

Loan Application Tip

To a bank, loans have a cost associated with them, which mostly represents the amount of labor that goes into generating and maintaining your loan. Because of this cost, banks don’t like small loans. It’s strange, but they’d rather loan you more money than less. If your loan request is close to an even dollar threshold (say, $94,000), round it up. If they only approve you for a lower dollar amount, you’re still covered.

Other Loan-Related Issues

While we’re on this topic, let’s answer some of the immediate follow-up questions.

What about the Small Business Administration?

Here’s a shocker—the SBA doesn’t make loans. You hear about “SBA loans” all the time, but here’s how that works: the SBA guarantees a certain percentage of a loan made by an approved lender if that lender meets certain guidelines in investigating and processing the loan.

A bank originates the loan, but the bank is more likely to lend you money if you meet the SBA’s criteria, because they know that if you default they can still recover most of the loss from the United States government.

How about Venture Capitalists?

Sorry, Charlie. VCs want high-yield returns with an unlimited cap. They prefer for you to take your company to an IPO within a few years. If your business plan doesn’t have the figure “$20,000,000” on it anywhere (and, barring a typo, it won’t), they’re not interested.

That should answer the basic questions about where and how to find starting money. If you have specific questions, drop us a line. Next week we’re going to compare opening a new store to buying an existing store.

This article is one of the most math-intensive I’m going to write for this column. It’s not that the math is complicated; there’s just a fair bit of it to do. Fortunately, I’ve provided a couple of aids you’ll be able to download.

Also, please understand that I’m making certain assumptions about your business model. If you want to argue why my 60% cost of goods figure doesn’t seem to jibe with distributors offering you a 47% discount, or other details of the math, I’ll be happy to discuss it in the forum.
The amount of money you need is composed of two elements: your opening expenses, which you’ll spend before you open, and your capital reserve.

Opening Expenses

This figure is the simple sum of a long list of items. Here (DOC File) is a sample checklist for your planning. Note that your specific business plan might not call for all of these items. In fact, no store will use all of them–it includes line items for both rent and mortgage, for example.

Administrative & Operating Expenses

Sample costs include

• Incorporation
• Accountant fees
• Attorney fees
• Utility deposits
• Rent deposit
• Bank fees & costs

How do you get these figures? By calling people who offer these products or services and asking how much they cost. For others, you might want to ask other businesses in your neighborhood how much they spend (trying to get a projected bill out of your electric company will probably drive you nuts, but they might be willing to give you a billing history of the suite you’re leasing). You’ll make dozens or hundreds of phone calls before you even open. You’ll want to keep extensive notes for your comparisons.

Sample Store: Sample store incorporates personally, saving attorney fees but still paying state fees. Sample store has no bargaining position with deposits and so pays the full $4,800 in rents and utility deposits. Total for this category: $5,500.

FFE: Furniture, Fixtures & Equipment

Sample costs include

Tables
• Chairs
• Counters
• Wall fixtures (pegboard or slatwall or a combination)
• Shelving
• Computers (include software)
• Point-of-sale system (it’s software, but it’s important enough for its own listing)
• Receipt printer
• Printer
• Fax
• Telephone(s)
• Bulletin board
• Misc. office supplies
• Shrink-wrap machine
• Cleaning supplies

Sample Store: Sample store has been buying fixtures for a year from liquidation sales and is willing to build additional fixtures. However, the owner doesn’t want the store to all look second-hand, so he’s willing to spend $500 on a few slatwall fixtures, planning to upgrade the rest of the store in 2-3 years. Adding up the supply cost, the cost of a cash-wrap, POS system, and miscellaneous equipment he hasn’t obtained yet, the FFE comes to $4,000.

Build-out

Sample costs include

• Materials
• Pain
• Tools
• Flooring
• Lights
• Misc. repairs
• Signage
• Contracted work

Sample Store: The owner is willing to do some of the work himself, except for the electrical work, for which he has neither the tools nor the training. Also, he knows that commercial suites have a history of building up stop-gap wiring above the drop ceiling, and he wants a pro to make sure the fire hazard up there is minimal. He plans on $1,500 for the electrician (who also replaces the ballast in all the light fixtures, something the owner learns is easy to do and will do himself from then on), $2,000 for flooring and $500 for miscellaneous tools and repairs.

Inventory

Your inventory expense is probably the largest single category on your list of opening expenses. It’s also the greatest variable between stores. There’s no easy answer here.

Here’s a rule of thumb to help until you actually sit on the phone with a distributor for an hour or so and work out an initial order: figure on spending $20 for every square foot in your store devoted to retail. That is, take your square footage, deduct for your game space, bathrooms, office, and wasted space, and multiply by 20. If you use 1,200 square feet out of a 2,000-sf location, figure on spending $24,000. If you only have 700 square feet and you’re going to be using all of it for retail, figure on $14,000.

That’s a rule of thumb, which means it’ll be wrong for most of you. However, it’ll be close enough for planning at this stage. Like many topics, it’ll get more coverage later.

Sample Store: Our sample is a large-ish 2,000 square foot store. The owner knows it’s a bit of an indulgence for an opening location, especially with no local competition, but he plans an aggressive event schedule and wants room for multiple tournaments or demos in the game room, which will take up 1,200 square feet. Also, he has to sign a 4-year lease to get the rate he wants, so he’s going to be here for a while. That leaves about 750 square feet for inventory, which means roughly $15,000 in merchandise.

Note: as a general rule, I wouldn’t spend that much before opening. I’d spend less initially and hold back some of my inventory dollars to spend after gauging customer interest. If miniatures are hot for you to the exclusion of other game categories, you can buy more inventory in that category and maybe add a second line of paints. If you had instead spent 1/4 of that hold-back money on minis, 1/4 on cards, 1/4 on RPGs, etc. most of it would be tied up in slow-moving inventory and you’d be missing sales opportunities in your best category. Despite that distinction, you’re going to be spending this money in the first year, and it messes up the math if we count it under your capital reserve, so we include it here.

Sample Store: We’re up to $28,500 in pre-opening expenses.

Capital Reserve

Before you can calculate your capital reserve, you must determine your burn rate. Your burn rate is the rate at which you spend money before you start to break even. It’s a combination of your fixed expenses like rent and utilities and variable expenses. While technically labor is considered a variable expense, I include it under the fixed expenses category. That leaves for your variable expenses only the cost of replacing the inventory you sell on a daily basis. Our calculations assume that your inventory level remains constant, which it won’t–but we’ve already accounted for your first year’s inventory gain in the calculation above, so we’re okay there.

Finding Your Break-even—How Much

Add up the total of all of your monthly expenses. These include

• Rent (including CAM or triple net)
• Utilities (electricity, water, phone, Internet)
• Labor (including tax and payroll service fees)
• Trash removal
• Pest control
• Alarm monitoring
• Bank fees
• Insurance
• Repair & maintenance
• Advertising

and others. Include a salary for yourself. A healthy business pays its manager, whether the manager is you or somebody else.

One tricky amount to include is your loan repayment. You don’t know the amount of the payment because you don’t know the amount of the loan yet. Leave it out at this stage and then revise the break-even afterward to include the loan repayment.

For the items that you don’t spend every month, like your business license renewal, food permit, GAMA membership, CAM adjustment, etc, add up your annual expenses and divide that number by 12.

You should also include a “fudge factor.” You might forget to include a line item, something might cost far more than you anticipated, or prices might increase between your estimate and the date you make the purchase. There are two methods for including it. The first is to add a small amount to each line item. Personally, I prefer the other method: add an additional line item to your fixed costs. Call this category “fudge factor.” Make it about 10% of your other costs. For $4,000 in fixed costs, add $400 for your fudge factor.

The total of all of these line items is the amount you spend each month. Divide that total by .4 (or multiply it by 2.5, which is mathematically identical) to determine how much you’ll need in sales each month to pay those expenses. For your convenience, I have a break-even analysis that I’m willing to share here (XLS File). Fill in the numbers specific to your store as you gather your figures.

Sample Store: Without going into detail, let’s say monthly expenses total $5,000, requiring $12,500 in sales to pay the bills.

Finding Your Break-even—How Long

The trick becomes to calculate how many months you’ll operate at negative cash flow before you start to break even. I’ve done an article on calculating sales based on different factors, but it’s still heavily reliant on my personal experience. For the record, the majority of the plans I’ve seen or store sales records I’ve seen reach their break-even between months 13 and 16.

Sample Store: With a break-even of $12,500, it’ll take 9 months to reach break-even. Partial months round up. Nine months at $5,000 a month is $45,000 in capital reserve.

Using an online loan calculator like this one, your loan payment is $865 a month. Let’s add that to our monthly expenses and get $5,865 per month, or a total capital reserve needed of $52,785, which forces us to recalculate again, which will cause the loan required to increase, which…quit. Just use $55,000. I actually use a more complex version when planning, but we’re talking about back-of-the-envelope figures here.

Sample Store: Opening expenses of $28,500 and capital reserve of $55,000 means this store needs $83,500 to open.

As you can see, if this store owner has $30,000 available, he could afford everything he needs to open his doors. He’d even have $1,500 left in his bank account. One month later, he might do a thousand or two in sales, but he’d owe $5,000 in expenses before he even thought about restocking the merchandise that sold. He’s bankrupt already!

Believe it or not, some variation of this scenario is the single largest cause of business failure. The big variable is how long the owner can survive by racking up credit card debt, cannibalizing inventory, not taking a paycheck, etc., before he runs out of money. If you’ve learned the lesson here, you’ve increased your likelihood of success tremendously.

Greetings! Regular rpg.net readers might know me from Freelancing is Not for Free, a column for role-playing game freelancers. I ended that column to address a regular question that pops up at least once a month on RPG.net:

“I want to open a game store. Can anyone help me?”

The answer is “yes.”

What Kind of Help?

Here’s a list of some of the topics I intend to address first:

• Calculating Startup Capital
• Getting a Loan
• Buying vs. Opening
• Deciding What to Carry
• Finding Suppliers
• Fixtures & Equipment
• The Pros & Cons of a Game Room
• Pre-Opening Marketing
• Finding Capital

These topics are important to the decision-making and planning process. You must make them before you open. They take priority because of their urgency to people who want information now.

Later on, I’ll address topics of great importance that focus on decisions later in the process, like

• Merchandising Skills
• Marketing & Advertising
• Professional Organizations
• Paperwork & Forms
• Lease Negotiation
• Planning Store Layout

You use these skills once you’re already open or preparing to open, but in some cases (especially M&A), knowing how you’ll do them later affects your early decisions.

Why Me?

My management experience began in 1987 with Domino’s Pizza. Domino’s at the time was still expanding strongly. Its management program was designed to teach walk-ins how to run a half-million-dollar a year business within six months and train them to buy their own franchise. The corporate training was intense. It involved paperwork, training classes, videos, tests, weekly supervisory review, and much practice. The average manager age at the time was 19, and the average 7-store supervisor was 21.

My market at the time, which included my trainers and the people I trained into management positions, led the nation in profitability.

A dozen years later, I had an opportunity to buy a game store. One of my favorite hangouts was on the block. The owner claimed he wanted out mostly to spite his soon-to-be-ex-, and I’m sure there was much truth to that.

I suspect he also thought the industry was declining. His sales were down, although he didn’t have very clear sales records to help identify where the problem was. That was in 1999. Pokemon was already on the market, but nobody had any. We signed paperwork and I traded money for the keys in May.

Within weeks, Wizards came through with the Pokemon. After that, I had ready cash to cover any errors I made. The timing was partly luck, and partly good decisions on my part.

From the first, I had good advice. The owner who sold to me already had an offer on the table. He even told me what it was and let me see the offer. After much discussion with a friend (another Domino’s veteran and now owner of a $1+ million a year courier service), I offered less.

Yes, I bought the store with a lower offer than an already existing offer. That worked for me because the owner was in a hurry to sell, and I offered him more money sooner. It wasn’t a question of what was the better financial decision in the long run. It was a matter of what he wanted most. Later on, when he offered to buy out the rest of the payments (he held the note, saving me from having to secure financing), I saved another $5,000 because he was spending money faster than he anticipated.

So I’m in the industry. One of the things I learned at Domino’s was to identify what I needed to learn about a business. I set out to find a network of peers and any publications I could find to help me in my education. I’ll tell you about all of those in another article, but let’s just say that they were priceless. It quickened my education and saved me thousands of dollars in errors.

At Domino’s we had the three “key indicators,” or “keys” in company jargon. Keep those numbers low and profits go up. What are the keys in gaming? Product cost and labor. I’ll address each of those topics in separate articles.

Sales rose continuously. I tracked Pokemon separately even before I installed a point-of-sale system, and non-Pokemon sales climbed. While I was happy to put the Pokemon money in the bank, I really didn’t consider it indicative of my management skill. It was, in a way, free money to anyone with a WotC account. The numbers I was most interested in tracking for purposes of feedback were my sales by category. As long as all of those were growing, or the sum total was growing, then I must be doing something right.

They did.

Sales kept going up for every category but historical miniatures. I tried at first because it was a legacy of my store, and I didn’t want to disappoint the guys who had shopped there before I bought it. When I finally stopped trying, several other categories increased more than the loss. I hated disappointing the old customers, but I had bills to pay, and I had other customers who wanted to give me their money.

Leaving the Industry

The plan when I bought the place was to run it about 50 hours per week and write for about 30 hours a week (yes, I’m quite comfortable working 80 hours a week or more). I thought that being around gamers all of the time would help my writing. The stories, the new perspectives, the playtesters, the rules arguments–would all help. On that part, I was right.

In reality, the store took more than 50 hours per week. Worse, I wasn’t very productive with my remaining time because the store needed regular attention even in my absence. The store was not the path to where I wanted to be. Once I realized that, I prepared a sales package that included all the information necessary for due diligence and shopped it around. I sold the store to one of my employees, who took sales even higher next year and then beat that record again the next year.

And Here We Are

Since I sold my store, I’ve written business plans professionally and counseled other would-be store owners. I’ve written a book on gaming retail, which is with a publisher now. I’ve begun working with other would-be business owners in my area, potential franchisors nationwide, and other people planning to start their own business.

These articles should create a slew of follow-up questions because their brevity will force incompleteness on my part. Naturally, I can’t discuss how to adapt each article to every gaming business model. I’ll have the answers for some of those in articles planned for later, but I’m willing to address them immediately in the forum. I’m always available for specific discussion relevant to your situation. If at any time you would prefer discuss your issues privately instead of sharing your plans on the forum, you can e-mail me through the form. I’m here for you.