Friday, July 31, 2015

Setting Up Agreements (Tradecraft)

I've just spent the last couple of weeks working on our company shareholder agreement. Game stores don't have a lot of money, so most are likely one man, sole proprietorships. It's easy, simple to form and operate, and doesn't require complicated structures and fees. The down side is it's not set up for investors and offers no legal protection. It's the default.

Most stores that take the next step usually go LLC, since it offers legal protections (in theory), allows for distribution of profits to investors, is simple to understand "pass through" taxation, and requires minimal paperwork and meetings.

I say it offers you legal protection, but in reality, if you work in the business, you essentially give up protection. The investors are protected though, and nobody should give you a dime without an LLC or a corporation in place. Also, no bank or business will loan you money without your personal guarantee. All my leases have the corporation and me on it. Here's something else we've been working on recently:

Corporations are not much different (the federal government looks at LLCs as corps), but may have other benefits. Our state based LLC charges fees on gross, while corps tax on net. Game stores have a lot of gross and not much net, so converting to a corporation saved us thousands of dollars in state LLC fees. There is zero difference in how we operate day-to-day between the two structures.

These types of organizational structures are incredibly complex. You can form them on your own with various kits, but what you end up with is a hollow structure without agreements or protections within your business. Both types of structures usually require a minimum of one meeting a year, and beyond that, it could look like the Wild West in between. I'm always trying to get some sort of written documentation of our conversation in case we're audited.

Corporate structures also don't help you answer the big questions, like how to get people in and out of the corporation in a way everyone agrees upon. For example, you can form a corporation and legally decide upon the value of an initial share, but what happens when a shareholder wants to leave? Valuing shares isn't in any corporate documents, it's part of a possible side agreement (that shareholder agreement). If you've been in a company for a while and watched it grow, you certainly don't want new people coming in at your initial share value. You also don't expect to leave at that initial value, knowing the company has become more valuable over time.

What if a shareholder dies? Are you obligated to do business with their spouse or children? How much can I spend as the CEO without triggering a meeting? Am I violating that if I make a huge Magic purchase on release? What are the limits? What keeps my partner (or me) from opening a competing store in the same town and taking all my customers and know how and abandoning my business? What does shutting down the business look like? Who gets money when?

These are all in the shareholder agreement and the funny thing is, they are all logical, reasonable, with legal precedent for what's normal. It's a boring document to read. Really boring. At least that's true when you read these documents ahead of time. When you're the one trying to sell your shares or the spouse of a deceased shareholder, you might have very different ideas of what's normal and what you deserve. That's why you do these things early (we're in year eleven).

The main trigger for my shareholder agreement was the desire for the business to continue after I'm dead and to keep my family from having to deal with it. In most scenarios, there's a fire sale and your heirs come in and drive the business into the ground with a massive sell off.

In my scenario, there's a "key man" insurance policy on me. When I die the business gets the money, but that's only half the story. What I personally don't want is for my family to be burdened by this complicated business. I want to leave it to my management staff. That requires an agreement that investors get bought out (including my heirs) and the management team gets the business, along with some operating capital so they have time to figure it out, deal with suppliers who have no idea who they are, and keep the store moving with essentially no credit or understandings. The first half of that is part of the shareholder agreement. The second half, my intent to give it to management staff, is an estate plan (my next project).

In any case, you can see we're planning for a Black Diamond Games for many years to come. Once a business is successful, it just seems like the right thing to do, for your family, your employees, and your community.

Thursday, July 23, 2015

Delegation (Tradecraft)

Riffing off a good ICV2 article by Marcus King, I wanted to write about delegation. Delegation is a shift of tasks or authority to another person while maintaining responsibility for their work. You might think there's not much to delegate in a game store, but as you grow and add new tasks, there's no way to avoid this unless you want to be tied to the counter.

Delegation allows you to take days off. It allows you to give away tasks to those better suited to do them, either because of their skill set or because of their enthusiasm. Most importantly, delegation allows you to add more tasks, hire more people, and make more money.

The skill set of an individual is the key component. We may not be paid like rock stars, but we often have rock star skill sets. I have the skill set of a $50/hour employee (I don't actually make $50 an hour). Should I be cleaning bathrooms? If I am, it's a privilege of being the boss. I can do whatever I want. What I should be doing if I want to make money is higher level tasks that I'm uniquely qualified for and others are not. These are often more nebulous projects, like marketing, promotions and overall inventory schemes. I would delegate these tasks, if I could, but I can't.

What I've noticed in my new role as $50/hour guy, is my work has become more like what I remember from the corporate world. I do a lot of maintaining systems and new research with only the occasional punctuation of success. I might work for a week with the only thing to show for it being a $1000 savings on an insurance audit. Only one thing. That one thing is worth nearly a months net profit, so it's actually a solid win. However, it feels small, since it's one thing, especially after ten years of infinite, tiny daily victories. That's the job of the $50/hour guy.

My manager is my $20/hour gal. We extend this logic down to her and ask what should she be doing with her $20/hour skill set to make or save the company money? These are often mid level promotions, event planning, signage, inventory management and stuff the average line employee can't do. I don't want my $20/hour skill set person to clean bathrooms or sort Magic cards, I have $10/hour people to do that. Again, she doesn't make $20/hour, but she has a $20/hour skill set.

The line employees, the $10/hour skill set people, can certainly work up. If you want to work on my website after you clean the bathrooms or troubleshoot my wireless network, you'll soon be considered in that $20/hour skill set. I make it a point to know all the tasks I delegate, so I might ask you to clean up the mess in aisle three, but you can be sure I've cleaned up my share of aisle three messes.

Delegation without abdication is hard work. It's a management skill. It requires both supervision and enough space to allow people to work on their own, and possibly fail. Many people are not willing to engage this process. They won't delegate, they'll micromanage, or they'll completely abdicate. I've had every one of those bosses and they're all frustrating in their own way. When everything is working, however, it's a beautiful thing, a well oiled machine.

Friday, July 10, 2015

Defining Success (Tradecraft)

As small business owners, we've spent a lot of time just trying to survive. A good percentage, 20% according to my recent research on small business credit, are late on their bills, probably just hoping to float rent or payroll. The struggle leads to a kind of PTSD, a traumatization that makes identifying success difficult to impossible. You don't know it when you're there and you don't believe it when you've got it.

Part of that not believing is success is a moving target. If you stopped for a year to admire your success, it would be gone. Small business is a shark, it must keep moving or die. A shark sitting still, admiring the scenery, is a shark about to suffocate. So you must always be growing, which entails a frustrating level of inefficiency. A lot of times it's action for the sake of action and you need to step back and measure, especially with things like advertising, employee hours and inventory that tends to move like lightning in good times, but clog your shark arteries when it's slow.

Defining success is a personal definition. For many, success means liberation from their day job. For those who've been working the counter for a while, success might mean liberation from being chained to the counter. For others, success might be breaking out from the single store model and finally stretching their owner legs with multiple stores. For a select few, it's scaling their multi store operation to integrate a middle management level for increased efficiency. Everyone has their definition, and that definition can change over time. It's then a question of enough.

When is it enough? How do you decide this right here is the correct incarnation of your business? How do you do that without the shark suffocating? How do you completely reinvent your business while maintaining personal enthusiasm for taking something good and making a different something good? How do you do this without screwing the whole thing up?

I was recently asked in a podcast about moving store locations. Imagine you worked at a company for seven years and you decided to leave your job for a new company. Imagine that if you failed at this new job, you couldn't work in that field again. That's the risks of just moving a store. You could lose everything. Part of that store owner PTSD is thinking perhaps you're just playing a press your luck game with the whole thing and it will come crashing down on your next turn. This is one more reason why you need a support network of like minded individuals. Who else can understand this stuff?

I don't have answers to these big questions. Those are answers each of us has to discover on our own. Definitely don't let anyone else tell you what success looks like, or how your business should be run. Also, these are winner questions. I don't want to sound smug, but these are known as the problems you want to have, the problems that come about because you did the thing and you did it right. These are likely problems you'll always have in business as well, which means if you were hoping to derive some personal happiness by mastering this stuff and solving all your problems, it ain't happening. If you revel in new problems, new scenarios in need of solving, you've found the right place.