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FEC And Equipment Financing Is Readily Available,
If Needed NEW BRUNSWICK, NJ – Ready to count your blessings? Before anybody can say “what blessings?” allow me to explain. We all know many sectors of the amusements industry have their woes these days. But it’s also true that operators enjoy some pretty nice silver linings – particularly in comparison to most other industries in today’s economy. One of our greatest advantages is (relatively) easy and plentiful access to capital. In fact, money is so readily available to street
operators and established entertainment center owners, that many
of us take it for granted. But if you look beyond the narrow world
of coin-op and leisure, the picture is very different. From the
stock market to hi-tech, from communications to services and retail…capital
for business expansion or new business startups has pretty much
dried up everywhere. Why doesn’t the amusements industry face the same problem? In a nutshell, it’s because we have unique strengths that make us attractive to certain lenders, and also because we have access to some unusual sources of capital. Let me explain. CAPITAL CONSIDERATIONS One situation that we often see is a well-collateralized, existing single-anchor leisure facility (such as a bowling center, skating rink, or other site that has a long running successful track record) that wants to renovate or expand, in order to broaden its customer base and keep its attractions fresh. Usually, the facility enjoys good cash flow and considerable equity. Fortunately, the new attractions and revenue generating programs required to expand their demographic appeal are often relatively inexpensive, particularly in comparison to likely ROI. Given this business owner’s high equity, he can easily borrow money from the bank at the best rates on the market. Another typical situation that we encounter is very different. Let’s say an entrepreneur has an idea, a plan, and a team in place to create a brand-new leisure facility. All he needs is the money. If banks and venture capital firms say no, where else can he go? Plenty of places, actually. Now is an excellent time to go out and look for private investors because there are so many of them. Due to today’s economy, many well-to-do citizens have pulled out of the stock market. They also are unsatisfied with 3% interest from “safe” investment targets such as bonds or certificates of deposit. Seeking, say, a 10% ROI over 10 years with reasonable risk, these investors view our industry as an attractive opportunity – especially when they are presented with a well-planned project that includes positive cash flow, property appreciation, and multiple exit strategies. In such cases, all that is needed is an intelligent leader with a charismatic personality and the ability to get people excited by his “dream.” This willingness to put money into a new project makes investors very different from traditional financial institutions. Banks are largely uninterested in startups today, even if you are fully collateralized. As for the venture capital market, it is the last place I would turn for financing. Funding from the U.S. Small Business Administration is also less available than in times past. Turning back to Data Systems Worldwide, the company that James Flannigan wrote about: Why are they facing such a tough financial market? Perhaps because they are a service provider or a high-tech company. They may have great cash flow, but without major assets that can serve as collateral, cash flow alone is not good enough for banks and other traditional lenders. That’s because cash flows are highly unpredictable in today’s market. Wars and rumors of wars, sniper attacks, and even bad weather causes consumers to stay home and hoard their money. The vulnerability of cash flow also applies to our industry, of course, and perhaps more than most. For example, a President’s Day weekend snowstorm in the Northeast reportedly cost the Chuck E. Cheese chain a million dollars. (Note that here I don’t wish to tell you what it cost my operation). When unpredictable events occur, entertainment businesses that sell entertainment “time” simply cannot make up the lost income. Yet this points up another advantage to working with private investors or investor groups: they tend to be more relaxed and understanding when cash flows fall off, due to uncontrollable outside events (weather, war, whatever). Having to comply with 16 or more “covenant ratios” established by your banker is a full time job in itself. By the same token, today’s market climate almost makes it easier to start a mid-sized or large entertainment center project, as opposed to a small startup. This factor also points you in the direction of investor groups as the best source of capital. I admit that putting together an expansion budget for $250,000 or a brand-new $2 million project is not pocket change. But it’s not an impossible dream when the up-front funds needed are divided up into $25,000-$50,000 investor partners. Again, assuming the basic plan is sound, what is required is a dynamic “salesman” who can showcase the idea to potential investors. Some entrepreneurs who seek investor capital are good at it; some aren’t. (By the way, the latter group would actually be wise to hire a polished industry professional to make the investor presentations for them. Sometimes, ego gets in the way – even smart people don’t always see their own shortcomings.) NEW FACILITY FUNDING Here’s the million-dollar question. How do capital-hungry, potential owners of amusement or entertainment facilities find – or put together – a pool of potential investors? For expansions of $1 million and less, or for new centers in the $1 to $3 million dollar range, there is no one set method…but it can be done. One public school athletics coach I knew went to all the parents in his community with an idea for a fun center and found five interested parties who together put up the required equity capital. Using the group’s local banking connections, they were able to obtain the necessary financing. Another example is seen when creative attorneys stage social events so their important clients can meet each other and generate joint ventures and new projects (the lawyers then get to write up the contracts and file the incorporation papers, etc.). This same basic idea also works for accounts. I even know ministers who have approached their congregations with the idea for youth centers and “passed the plate.” Keep in mind that all that I have said above, applies to fun centers seeking funding under $3 million dollars. For site-based projects where costs exceed the $3 million level, the likely returns diminish. And the number or quality of investors that must be found to support such projects can become problematic. You either have to tap into a tiny handful of the ultra-rich, or you have to assemble 50 smaller-sized investors. Either way it’s a daunting task. “STREET” FUNDING" Established street operators who simply seek financing for purchasing a normal amount of new equipment, will find many sources of capital and few obstacles today. Our industry is fortunate to have a number of lending and leasing companies such as Firestone, First Lease, Vend Lease, Alliance Capital, and others that specialize in working with coin-op amusement professionals. Several solid distributors also offer operators credit at reasonable interest rates. These lenders know that today’s surviving operators are professionals who usually buy carefully. Experienced niche lenders also know that carefully planned new purchases in our industry should generate immediate cash flow. The loans are fully collateralized or fully guaranteed. In what other industries are these lenders going to find such quick, reliable repayment – especially when the lenders acquire the money for 3% – and re-lend to the operator at a point spread that both parties seem happy with? A question often asked is whether street operators are better advised to borrow, or just pay cash for their equipment purchases. In today’s market, many operators have achieved debt-free status because there is little or no pressure for them to purchase new equipment. If they buy new equipment, they pay out of cash flow. Industry creditors – especially certain distributors – become even more anxious to make loans under these circumstances. That can be a tool for greater leverage on the part of the operator if he does decide to finance his next purchase. The temptation, however, is for the operator simply to pay off the last debts on his ledger and run his company as he did 20 years ago – cash and carry. Some lenders claim that buying new equipment with cash is not the best way to go, but I disagree. There is no safe investment with high returns, so what else does a good businessman do with capital reserves? If you want to expand your route business by purchasing new games, I think it makes sense to pay for the games with cash, rather than financing new equipment buys and putting your cash into the stock market or bonds. However, when a great opportunity is staring you in the face, you will be able to jump in and finance the expansion without the hesitation that used to always be there when there was a huge amount of existing debt to slow you down. Of course, some of the industry’s financial institutions
will also help you finance the purchase of another route, which
is a whole different story. In that case, financing may be not only
wise but necessary. |
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