Advisory Column: When should entrepreneurs buy property?
"I'm not a 'hurry come-up' or 'fly by night' business, you know. My company has been around for many years and we own our own office."
Those sentiments were expressed by an entrepreneur I met at a corporate networking event some time ago. For him, acquiring an office space was tantamount to substance and credibility in business.
Interestingly, his view is not uncommon or entirely off-base. Just as home-ownership is the pinnacle of success for the average person, for some, owning the commercial space from which you are based is evidence that your company has 'arrived'.
The fact is property ownership by itself says very little about the viability and success of an enterprise. There are businesses that own large edifices and are steep in debt, have little opportunity for growth, limited liquidity and rack up millions in losses each year. They are property rich, cash poor and on a downward spiral.
On the other extreme there are thriving companies that are quite profitable, have very positive cash flows and huge potential for growth, yet they don't own a single piece of real estate.
With that said, most successful businesses will want to set down roots and establish head-quarters on premises they own as part of their long term plans for continuity and longevity. This goes for brick and mortar businesses as well as virtual enterprises.
However, the decision to buy is not a simple one and should never be influenced by the entrepreneur's personal aspirations or perceptions of others.
There are far more consequential considerations to be taken into account.
Vision and strategy: Entrepreneurs have to learn to set aside personal aspirations in favour of what's best for the company. The business' vision and long term strategy should guide all major capital investments particularly property. These purchases must be well thought out and driven primarily by the company's future plans and needs.
Timing: For companies under seven years it's usually best to rent rather than buy space. Unless its primary business is real estate development or investing, it is generally unwise for a company to purchase property in its infancy because a business needs time to establish itself, develop a robust business model, sound revenue sources, and reinvest for growth. How a business uses its resources in the early growth phase will determine its future viability.
Cashflows: Because cashflows are the lifeline of the business, any expenditure for fixed assets that require significant capital must be carefully examined. More so if that asset is not a direct input for the goods and services it provides, nor offers a competitive advantage in the short to medium term.
Many great businesses have failed because of lack of liquidity - they did not have cash on hand when they needed it most, and real estate purchases can be cash killers.
Maintenance and taxes: For the novice entrepreneur paying rent may seem like a waste of money but this is not necessarily the case. Some of the biggest and most noted companies locally and internationally own a mere fraction of the real estate from which they operate. The reason is that often the highest and best use of their cash is to re-invest in the business for operations, production, marketing, new product development, etc. They earn more from business operations than they ever could from the real estate.
Additionally property purchases come with numerous additional expenses, risks, responsibilities and insurance & tax obligations from the time of purchase through lifetime maintenance.
Location: For some businesses, especially those in retail, location is king. The zoning, level of traffic and visibility, security and parking are some of the key considerations when investing in property as your location will determine your fate. For other businesses location may not be such a critical factor. The diversity in the nature of businesses is yet another reason that buying property requires careful consideration of what's best for your particular company.
Financing: Possibly the greatest challenge of all when it comes to buying property is the
ability to access financing. Many business owners will tell you that they want to purchase property but have been stymied by limited access to finance. It's easier for an entrepreneur in Jamaica to borrow $10 million from a commercial bank to buy a luxury car that adds no value to the business and depreciates by 10 per cent once driven from the dealership, than it is to buy property of equal value from which productive enterprise is conducted and which typically increases in value. In fact, all major banks offer 100 per cent financing on car loans yet none extend that offer for commercial property.
Last week I spoke with business bankers from three major banks who outlined loan facilities for commercial property purchases (see table).
All the representatives noted that the interest rates, loan term and loan amount were negotiable and flexible depending on the customer and their relationship with the bank. They generally listed financial statements, monthly cashflow projections for a year and annualised for several years, and bank statements for at least a year among their loan requirements.
There are advantages, disadvantages, risks and challenges in purchasing commercial property for your business. What is not in doubt is that careful planning and consideration of the factors mentioned above is essential for good decision-making.
n Yaneek Page is an entrepreneur and trainer in entrepreneurship and workforce innovation. Email: email@example.com Twitter: @yaneekpage Website: yaneekpage.com