The Parable of the Toy Soldier: How a Small Gaming Business Became a Victim of their Own Success.

This story has all the ingredients of a great novel - drama, intrigue, the Chinese, hostile takeovers and a guy named Lonnie.   It has shaken the world of miniature gaming, where excitement is usually imagined rather than real.  And, although the details are murky, it is an excellent case study that demonstrates how mistakes made by business owners can result in severe and unintended consequences.

On January 17th, the founder of Wargames Factory, Tony Reidy issued an open letter:

Wai Kee Hui - if your true intention is to salvage this company and pay back the debts - you have started down the absolutely wrong path.

I understand that this is so far beneath you because you run so many multi-yuan millions businesses - but if you want to salvage anything, you are proceeding in the absolutely worst direction right now.

Your faith in Lonnie Mullins is incredibly misguided. You're trusting a guy who threw me under the bus in order to save his own skin. A guy who has no honor whatsoever.

Read full letter Open letter from Tony Reidy

What Happened?

On August 30, 2010 a certificate of amendment was filed with the Massachusetts Secretary of the Commonwealth, Corporations Division to change the managing partner from Tony Reidy, the founder of WF to George Sivy, North American representative of a Chinese toy manufacturer called Ghost Studio.

It seems that the transfer of management and a significant portion of the company, 41%, was in a bid to finance a spike in orders for their “ Shocktroops”  miniatures which had enjoyed unanticipated popularity.  Further complicating the situation there appears to have been a delay in a shipment of orders which would have contributed to their financial difficulties.   As a result of their need for cash flow, Reidy’s ownership share decreased from 41% to 4%.  Per Reidy, there was a clause that would allow him to buy back the shares in January, 2011.   As far as he was concerned this was merely a temporary financing arrangement.

There were further delays of shipments due in November, which actually arrived in early December leaving a barrage of frustrated customers (comments from whom can be seen on their Facebook page and forums). 

In December, 2010 Christmas orders were again delayed.  According to Howard Whitehouse

The fact of the matter was that the orders were all packed and ready to go. Tony was able to scrape together some cash to ship the goods, but then the whole account was frozen by the representative of the Chinese partner.

 

At the same time, the entire staff of WF was let go except for Lonnie Mullins, the sales manager.  Lonnie, Reidy and Whitehouse believe, had been responsible for bringing an internal (I imagine scathing) email denouncing Ghost Studio for its delays and unreliability, to the attention of their management.  This may have led to ensuing actions.  Lonnie appeared to have maintained a relationship with Ghost Studio as relations everywhere else were breaking down.

On January 17th, the new management issued a letter requesting information from both Customers and Suppliers regarding outstanding orders stating:

The single most crucial emergency that WGF now faces is the immediate determination of who has placed and paid for orders and has not received them. We have been attempting to obtain that information from the previous management but without success and the records we do have are unreliable or inaccurate. Therefore, we now must rely upon our customers to assist us in restoring this information so that we may make things right. 

See full  press release

As of now outstanding orders have not yet been fulfilled, and customers may not yet place new orders –We're not taking pre-orders until they begin to arrive in our fulfillment center; that way we can start shipping them as soon as they arrive.

What Can We Learn:

From a small business perspective, there are several issues that stand out here (all of which, of course, are much easier to recognize in hindsight): 

  1. Wargames Factory was a victim of their success.  They experienced rapid growth, due to a line of products and a business model that appealed to people in the miniatures gaming community.  They were seen as a superior alternative to other game companies in the same space as they provided a lower cost alternative.  More importantly their miniatures were built with the direct input of their customers who would submit design ideas and revisions.  Once the demand for a specific line exceeded a certain level, the order for production was initiated.  Their growth was  a dream come true for many small business owners, but unpreparedness is one of the primary reasons that they fail.  Keeping up with rapid increase in demand brings on a whole set of financial and operational issues that many small business owners are simply not equipped to handle mostly due to a lack of business expertise. 
  2. They did not anticipate their cash flow and financing needs adequately.  As a result it appears that they were compelled, under pressure to finance a large order, to relinquish a significant share of equity.  This ultimately resulted in the loss of control of their company. 
  3. It appears that they may not have had access to the best corporate counsel, which resulted in a contractual arrangement that did not seem to protect them adequately.
  4. Communication with their customers was inadequate, thereby exacerbating the negative goodwill the late orders was generating. It can be problematic to discuss internal problems, publicly, but at a certain point businesses do need to come clean.  With a superior product/service many customers will prove to be supportive and patient.  It is interesting to note, that despite lack of fulfillment, many of their customers appear to be ardently supporting Reidy and his team.
  5. They placed too much trust in their partners, believing that Ghost Studio, despite having the ability to assume control, would not do so.  It is important for business owners  to protect themselves in concrete, enforceable  ways.
  6. They seemed to be lacking financial oversight and general business experience that may have allowed them to make better financial decisions.

The lesson here is that, as unlikely it may seem early on, small business owners need to be prepared for growth.  Of course this is easier said than done, but at the very least the possibility of unanticipated growth should be contemplated, seriously and early on and ideally a section should be devoted to this in your business plan.    Perhaps the most pressing issue at this time is the need for financing, the sources for which should be identified well in advance.  The extreme consequence of not doing this can be loss of your business, as demonstrated in the Wargames Factory story.

As an aside, I am puzzled by how new management, in the absence of the creative force behind the product line, expects to continue this company profitably.  They might be able to fulfil demand in the short term, but for the long term the company require innovation and engagement in order to be successful.  The prior team was involved with their customer base to the point that many of them were on a first name basis.  They were responsive to their needs and interacted in a way that extended beyond the miniatures they were creating.  On the other hand, current management appears to be faceless and nameless.  Their handle on the WF forums is “administration” and their interactions, although professional and reassuring are cold and uninvolved.  There also seems to be a great deal of negativity towards Sivy and his team, which will take a fair amount of work to turn into goodwill.

Would love to hear your thoughts.  What are your experiences with growth?  What are the biggest obstacles to your small business growth?  Do you think these problems can be avoided?

Ronika Khanna is a Montreal Accountant who helps small businesses achieve their financial goals.  To receive regular updates of articles pertaining to small business, accounting, tax and other topics of interest to business owners you can sign up here.  You can also follow her on Facebook or Twitter