How Much Is It Worth?
Last week we compared the benefits of buying a new store vs. opening your own store. This month, we’re going to expand on that topic a bit by discussing what you need to look at when you review an opportunity to purchase a game store.
Assessing its Viability
Although you could make virtually any situation work if you threw enough money at it, some stores simply aren’t worth saving. If you have to spend $250,000 to make a store work, why would you? Even if the owner gave you the store, it would still be a bad deal.
When you first look at an offer, you must know the store’s sales. I don’t mean just last month’s sales or last year’s sales. Ask for a categorized record of sales by month. If possible, look at actual daily sales records.
Look for patterns in the records. Is each category growing slowly over time? That’s good. Are some categories growing while others are not? That could be bad—or a reflection of national sales trends. Is the store faltering? If so, I recommend considering two options.
Option #1 is to stop negotiating. You don’t want to buy a business in distress for your first business. The location could be terrible. Recent superior competition could have opened up nearby. Something else beyond your control could be happening there and you might not be able to reverse the trend. You’re done here.
Option #2 is also to stop negotiating. Let sales drop for three months and see how firm the seller is on his price. In all likelihood, additional cash-flow loss will put tremendous pressure on him to sell at any price. Sure, another buyer might make an offer. If you’re comfortable with that risk, a small amount of patience could pay off extremely well.
When is falling sales a good sign? Steady sales decreases could mean that the current owner is not doing something right. Customer service could be horrible. The store could be dirty or understocked. If you can fix the problem that’s causing the drop in sales, then falling sales will reduce the market price of the store—and that’s to your advantage.
The second key item you need to know is the inventory level (always at cost, never at retail). Looking at a flat number tells you nothing. Let’s say the store you’re considering claims an inventory value of $30,000. Is that good or bad?
Remember those word problems in your middle school math books? The answer is “D. Not enough information.”
All products are not equal in value. The current Magic: the Gathering boosters might be as good as cash, but dusty d20 modules might be overpriced at 90% off retail. A computerized point-of-sale system should be able to tell you when the store last sold a certain item. If an entire product line has seen over a year since its last sale, the value of that product line is zero. Sixteen cases of the Young Jedi trading card game are worth less than some Warhammer armies, for example.
Some owners categorize the inventory into different groups. Class A inventory represents high-turn stuff that you know you can sell at full price in a short period of time. Count it at full value. Class B product represents reliable sales over a longer period of time. It might be worth up to 75% of list price. Class C inventory includes lesser RPGs, older miniatures, slower game lines, and oddball accessories that might have been hot at one time. It might be worth half what the POS thinks it’s worth. Class D inventory is the junk that you hope to God will sell one day. It has little, if any, value. While you won’t know which categories each product lines belong to without having any game retail experience, you can estimate based on the store’s sales records, purchase records (no restocks = no sales), consulting with distributors, and even by watching customer activity for few days.
Another point of reference is the rise and fall of inventory over time. Is the store showing a steady increase in inventory? You can tell this by looking at a balance sheet, which should provide information like cash on hand and inventory levels over 2-3 years. You can measure it in the short term by looking at order forms. Pick two consecutive recent months. Count up the total inventory invoices (include standard gaming merchandise from distributors, direct accounts, cash spent for second-hand products, snacks and sodas—all of it.) Divide that amount by the sales for that period. Normal buying cycles might create some variation, but the figure should be between roughly 53% and 63%.
A number lower than the range might mean that the store is cannibalizing inventory to pay the bills. If the store buys $12,000 worth of goods but sells $24,000 worth of product, the store might have a great cost structure, or it might not be spending its money to restock product. Looking at the cost of goods sold will solve that problem for you.
A number higher than the range means that the store is spending more on inventory than sales justify. That same $12,000 purchase on $18,000 in sales means that the store probably sold about $10,000 worth of goods but spend $12,000 replacing them. In the short term, that happens. A new Magic: the Gathering release might cause it. Buying one or more large gaming collections might do it. Adding a new product