Diana Clement: Good business blows property out of water

Looking for an investment that returns 25-50 per cent a year? Look no further than a business. That's the return you can expect from a good business, say brokers. It blows property investment out of the water, according to those who have been successful.

There are 460,000 small businesses in New Zealand, says the Ministry of Business, Innovation & Employment (MBIE). Every year thousands of Kiwis take a long, hard breath and take the plunge. Not all will succeed. But Kiwis who start a business often wish they'd done it years ago.

It's hard to generalise, but newbies often fall into one of two categories, says David Newport of Switch Business.

The first category is people who have worked for large companies and believe they know how a good business should be run, says Newport. Thanks to earning a good salary they have put capital away, which they can invest into a business.

The second is a middle manager or even a general manager who has suffered the "slap in the face" of being made redundant one too many times. Many have a good level of equity in their home, which allows them to borrow $500,000 or more from the bank, says Newport.

Success or otherwise in both categories is fairly similar, says Newport.

Returns can vary hugely. A basic home-services franchise might cost $30,000 and return a similar amount to a franchisee each year, says Newport. A $500,000 independent business is likely to return $150,000 to $250,000 to the owner who works in the business full-time with one or two employees. A $1 million business could return $350,000 to $500,000 a year. That 35-50 per cent return, he points out, makes the 9-10 per cent that some property investors struggle to make appear meagre.

The big difference between buying a $500,000 business and a $1 million or larger one will be that the larger business is usually more resistant to market forces. The smaller business, says Newport, may have three or four main clients. Lose one and the business may not be viable.

Two recent sales by Switch Business around the $500,000 mark were a specialty food importing business and the franchisor of a cleaning business.

Newport is expecting to see more small businesses on the market in the next year or two because many baby boomers who wanted to sell during the financial downturn held off until they could get a better price.

The Employers & Manufacturers Association has 10 tips for would-be business owners.

Focus on something you really enjoy. Not just one part of it, but you need to enjoy as many of the key areas of the job as possible.

Decide if you want to work part-time, or are prepared to do full-time, or more than a full-time enterprise.

Think about the sales process. People either love or hate sales and business development but you can't afford to be half-hearted at it. If you don't enjoy either, you will need to pay someone to do it for you - or join a franchise where this is done for you.

Consider how much risk you can take on.

Work out how much money you have to spend to get the business going. That will depend on the type of business. Some businesses require a lot of capital.

Weigh up the competition and how you are going to carve out your niche.

Write a budget, a business plan, a SWOT - strengths, weaknesses, opportunities, threats - analysis and a market analysis.

Factor in issues relating to health and safety compliance, and tax - including the possible impact of paying provisional tax.

Ask advice from everyone who may have something helpful to contribute: family, friends and people you know who are in business.

Plan, plan, and plan some more.

Business broker Matt Gumbley of Company Sales and Acquisitions will, when possible, encourage would-be business owners to use their skills and industry knowledge. It makes borrowing money from the bank much easier. Sometimes, Gumbley accepts people have had a gutsful of their industry or just want something new.

One of the big things that puts people off is that they think the process of buying a business can be scary.

Everyone, says Gumbley, has a "yikes" moment when they've just bought a business. It's natural. Don't let this paralyse you, he says. People often see a salary as being safer than owning a business. But this is false security as a salary could be taken away at any time. As a business owner you control your own destiny and can get 25 per cent or more a year on your investment. What's more, if you buy a business and subsequently decide it is not what you want to do, you have the option to sell it again.

Many buyers look at "sexy" industries such as food (excluding hospitality), says Gumbley. Such businesses are in demand and as a result it's not easy to bargain the price down. Food businesses are, however, easy to sell when you need to exit them.

Ten years ago, one of those newbies who bought a business through Company Sales and Acquisitions was Dan Ganley. Ganley was sick of working for business owners from Australia and negotiated himself a redundancy package.

The redundancy money along with a loan was invested in GFC Fasteners & Construction Products, which supplies the building industry. Ganley's background was in manufacturing and engineering. Nevertheless his business experience enabled him to identify a company that could be run much more efficiently.

Ganley admits he works longer hours than he did in a corporate job. But thanks to the shortcomings he identified in the business while doing due diligence on the purchase he has been able to increase turnover seven times in 10 years.

At age 66 he plans to stay in the business for four more years before retiring.

Not everyone wants to buy a business. Starting from scratch is a popular option for some people who have a bright idea. Sometimes it can be done without the capital needed to buy a business. Pate wholesaler Genevieve Knight started small and has grown the company Genevieve's considerably - to the point where she is ready to export. Knight, a chef, wanted to get out of restaurants. She began by selling pates at Parnell's La Cigale French market.

What was a cottage industry took off after she won a Cuisine magazine award and retailers began requesting her product. The problem was that her pates had a shelf life of only three weeks at that stage and, although able to cost a plate for a restaurant, Knight didn't have the business skills needed to become a wholesaler.

The shelf-life problem was solved after Knight funded a Massey University fourth-year student to devise a way to produce longer-life products without using artificial additives.

Start-up businesses such as Knight's are also able to get considerable help from government and council agencies such as the Government's Business Information Service and Auckland Tourism Events and Economic Development (Ateed). Chambers of commerce also provide free assistance.

Knight says she got invaluable help from Ateed. Most recently, for example, Genevieve's has been sponsored by Ateed to appear at the Auckland on the Menu stand at the Food Show this weekend. The council organisation also connected her with a business mentor.

The business.govt.nz website has a wealth of information and tools on everything from staff and HR to laws and regulation right down to very specific topics such as protecting your intellectual property. It's a bridge between the business owner and Government that is designed to demystify the sometimes less comprehensible information from government agencies such as the IRD.

The site includes many practical tools such as a charge-out rate calculator and holiday leave calculator. The most popular tool for would-be business owners is ONECheck, which enables them to see if a company name, domain, and trademark are taken.