But as soon as the worst of the start-up days are over, the business case for owning your own premises becomes overwhelming, says Shane Padayachy, area manager at Business Partners Limited (BUSINESS/PARTNERS), who outlines the top five reasons:
Your business escapes rental escalations
To the certainties of death and taxes, you can add rental escalations. Your rent will go up every year, and most probably by a rate higher than inflation. It means that the longer you rent a premises, the more expensive it is going to become for you to be there.
Unfortunately, the monthly instalment on a bond is usually higher than the monthly rental at the beginning of a lease, which easily sways the argument in favour of renting for cost-conscious business owners. But with annual rental escalations, it only takes about four years for the rent to catch up with a bond instalment that business owners would have been paying had they bought the property. This calculation is of course also dependent on what happens to interest rates over the period, says Padayachy.
Generally, the total amount spent on rentals over a seven-year period tends to be equal to bond repayments over seven years, a calculation which gives business owners an important rule of thumb when deciding whether to buy or rent. If they are fairly certain that the business will occupy the space for at least the next seven years, buying is a very good option.
Security of tenure
Receiving notice from the landlord is an unwelcome disruption for any business. Even for a small desk-based consultancy a move means spending hours finding new premises, and at least a day or two will be written off to the logistics of moving.
On the other end of the spectrum there are businesses that simply cannot move. A bed-and-breakfast or a school, for example, would pretty much have to start from scratch if they had to find new premises.
In between are the majority of businesses for which notice from the landlord will be a very expensive blow. Retail businesses, for example, build up value in the spot from which they trade because their clients get to know where they are. Almost all of them lose substantial turnover when they move, even if it is just around the corner. For businesses with heavy equipment the costs of a move can run into hundreds of thousands of rands.
All of this means that the landlord, who is often aware of the costs of moving, holds increasing sway over the business the longer it rents, and when the lease comes up for renewal – if it is indeed available for renewal – the rental increases can be staggering.
The security of ownership stands in stark contrast to this uncertainty, which can destabilise a business just when it should be settling down.
Not only does a bond repayment become cheaper over time when compared to escalating rentals, but the value of the property goes up. Business owners who own their own premises therefore gain a double advantage. There is of course no 100% guarantee for the appreciation of anything, but few asset classes are so certain to hold and increase its value than property. Provided that the property does not have a major defect and that it is situated in a fairly good area, the appreciation of the value of property is a very good bet.
Control over the space
When a business that occupies a premises has full control over how to shape the property, it is able to optimise the space for productivity. Compare that to a situation where a landlord refuses to allow a wall to be broken down in order to amalgamate two separate sections of workshop into one, and the productivity benefits of owning your own premises becomes clear.
Many landlords do allow changes and improvements, but almost always with the understanding that that the increase in value to the property is for the benefit of the owner. Even fittings such as shelves are often contractually bound to remain behind if the business moves out.
A deposit is no longer an issue
One of the major hurdles to buying your own premises is the 30% deposit that a bank requires in order to approve the finance for the purchase of the property. It is prohibitive for most business owners, who would much rather spend such a chunk of money on their operations, if they had it.
To address this issue, BUSINESS/PARTNERS offers business owners 100% finance in return for an equity stake in the business. Part of the deal is an opportunity for the business owner to start buying over BUSINESS/PARTNERS’ minority stake, usually four or five years into a ten-year loan.