January 13, 2006
Wow! Dumb Business Idea of the Year
Posted by Christine Hurt

My colleague Eric Goldman pointed me toward an article in the Journal Sentinel on gift cards.  Interesting stuff about whether companies are charging fees for nonuse to get unused gift cards off their books.  Here's a local business that doesn't seem to care about carrying obligations on its books, or may not even be aware that it is supposed to keep books.  Mader's, "Wisconsin's Most Celebrated Restaurant" sells gift cards that accrue value.  These $20 cards are redeemable in 2103 for $5000 (roughly 8% a year).  The 63 year-oldowner of the German restaurant, Victor Mader explained that he was unconcerned by this outstanding obligation because he'll be dead by the time the cards are redeemable.  So far, in the last three years, sales have been between $50,000 and $70,000 a year.  The article notes that Mader's does not have a sinking fund or reserve account with any portion of this money put into it to prepare for 2103.

So, before I go out and buy a zillion of them, how will this play out?  I assume that the cards were issued by some sort of entity, either a corporation, an LLC, or an LP.  When Mr. Mader dies, I assume this 100-year-old restaurant, started by his grandfather, will continue.  The restaurant (entity that owns the restaurant) may in fact last another 100 years.  The restaurant entity will then seem to be liable for up a very large sum should these cards not be lost.  If the restaurant entity tries to liquidate in any way, before 2103, these obligations would have to be accounted for in some way.  And, should the cards be lost, that money should escheat to the state, with the restaurant entity writing a check to the state of Wisconsin.  There seem to be a lot of issues here that Mr. Mader does not see.  Perhaps his heirs should talk to him.

I hope Mr. Mader doesn't use this theory of finance when he tries to get a 30-year mortgage with a huge balloon payment at the end.  "Well, I may not be here when it comes due. . . ."

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