| offer insurance, maintenance
contracts, counseling and help in finding locations, often for fees of about $150 each. If
a location is unproductive, the company typically claims it will move the machine for
free—except possibly for transportation costs—at least once. The sales pitch is usually the same: Fabulous profits can be made
from a small investment in money, time and effort. In California, Leisure Time Electronics
told investors they could "reasonably expect" to net $38,000 a year from three
pinball machines and three video games. "In fact," said the attorney general's
complaint, "these amounts of income are not a reasonable expectation for most
purchasers." Potomac Mortgage went even further, declaring that with an initial
outlay of $6,500 a buyer of ten machines could be raking in $300,000 a year within 18
months.
All too often, equipment sold by investment promoters is
overpriced, substandard or obsolescent. Worse, |
imitations of copyrighted
popular games have been sold. It's extremely easy to make them, and a buyer who is caught
with one could lose everything, says arcade owner Loevner. Bally has brought "a whole
flock of suits" against alleged perpetrators, according to a company spokesperson. A Changing Times reporter dropped in on several promoters and
inquired about getting into the business. On his first call the reporter was told by the
company's marketing director: "Basically, we take the risk factor out for the
investor." By using tax write-offs and putting tax savings into a tax-deferred
annuity plan, an investor could recapture his entire outlay in three years, the director
said, displaying a sheaf of papers with charts and figures.
"I'd like to show that to my accountant," the
reporter said. The reply was, "Oh, no—we can't let that out."
True, there are tax advantages— |
Laws you should know about
The federal government and about 18 states regulate sales
of business opportunities, including video game propositions, in an effort to protect the
public against chicanery.
Since 1979 the Federal Trade Commission has required
sellers of franchises and business opportunities to give prospective buyers a disclosure
statement at least ten business days before any money changes hands or legal commitments
are made. The document must include the seller's history and financial status (balance
sheet, income statement and cash-flow statement); the cost of starting and running the
business; the names of others who have bought the offering; and other information. If the
seller makes any past or potential earnings claims, they must be extensively documented.
Some enterprises, including gasoline stations and auto
dealerships, are exempt, but a reputable company will provide such information anyway. If
you don't get it, don't invest.
"A few days spent checking out a business could
prevent the loss of lifetime savings," notes the FTC.
The state laws vary to some extent but have the same
purpose. In Maryland, for example, sellers must register with the securities commission
and make similar disclosures to buyers. Violators can be shut down immediately. Victims of
fraud or deception can sue.
The attorney general's office or a consumer protection
agency can tell you about the laws in your state. Free franchise information and more
details about FTC regulations are available from the FTC. Write to the Public Reference
Branch, Federal Trade Commission, Rm. 130, Sixth St. and Pennsylvania Ave., N.W.,
Washington, D.C. 20580.
Another note of caution: Be on your guard when talking
with references or people listed as satisfied customers. One prospective buyer of video
games discovered later that a woman she had interviewed was the wife of a salesman for the
company.
|
|
investment tax credits,
depreciation. business-expense deductions—but experts disagree on whether some
write-offs will be allowed. Confided the president of a distributing company: "I got
five different answers from five CPAs" on the depreciation rules. (The Internal
Revenue Service says video game machines can be written off over a five-year period, not
three years, as some investors have been told.) In
another office a vice-president confessed that although some of her 50 clients were doing
"very, very well," others were having problems. One problem: a machine that
grossed only $10 a week. "So we'll move it," she said. What if it keeps on
striking out? "Then maybe [the owner] ought to think about selling it."
Loevner notes that "machines depreciate fast—one
that cost $2,300 four years ago is now worth $400."
People with big bucks can buy or set up a games arcade
themselves or buy a piece of one through an investment partnership. Arcade franchises are
available in some areas. But many of the same risks exist here also, including possible
market saturation and competition from big-money corporations. Bally, for instance,
operates more than 375 twinkle-box establishments of its own around .the country.
Should you invest?
What it all adds up to is a business that is more
precarious than most, at least for amateurs. If you're thinking about taking a plunge, the
best advice may be not to risk money you can't afford to lose. You might ask yourself why
so many people want to sell these things to you if they're really so lucrative. And you
might want to consider a statement by Droste of the Amusement and Music Operators
Association. That group recently surveyed its members on profitability. Figures submitted
by those who responded indicated that the average return on invested capital was 7.5%
It s possible that the operators are being overly modest.
After all, why should they say anything that might encourage competition? In any event you
can get a lot more than 7.5% these days from Treasury bills and money-market
funds—with almost no risk at all. |
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