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Busting investing misconceptions: buying a business vs buying property

While there are many similarities in the actual process of buying a business or a property, leading business sales marketplace AnyBusiness.com.au says that many business buyers are confusing the investment strategies and earnings prospects of the two very different asset types.

“The key considerations of purchasing a business versus a property are virtually polar opposites. Yet many mum and dad investors and people looking to become their own boss are mistakenly using the same approach for both,” says Mary Tamvakologos, Director of Operations, AnyBusiness.

“Business is well-known to be a riskier place to invest money compared to property, but what isn’t so apparent is the fact that businesses have a much lower cost of entry. Median house prices across Australia are currently around $747,8001 – and far higher in some capital cities – while many businesses can be purchased for a fraction of that amount.”

For example, a fully managed Port Melbourne café is currently listed for sale at just $49,000, while a 40 year-old NSW-based automotive antitheft technology manufacturer is listed at $380,000.

But perhaps the greatest misconception is that, unless you develop the next Facebook or Google, the greatest financial returns come from property.

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“To a large extent, you can’t control a property’s value: the sale or rental returns are relatively capped by market forces determining the value of similar homes within the same area,” says Mrs Tamvakologos.

“Business owners, however, have virtually unlimited control over their revenue growth and value, which are determined by factors under their stewardship such as marketing effectiveness, operational efficiency, sales conversions and customer satisfaction. And they don’t necessarily have to wait years, or decades even, to realise that growth.”

Business vs property – core similarities

  • The need for good advice from your agent/broker plus reliable accounting, legal and financial advice.
  • Negotiations should be based on the business case, not emotion.
  • Presentation is important – know the difference between quality assets and quick makeovers.

Business vs property – key differences

  • Investment risk is higher in business, but the cost of entry is generally lower.
  • Businesses have uncapped revenue and earnings potential.
  • Proper due diligence is even more important for business.
  • People impact business value – customers and employee satisfaction, supplier relations, relationship with vendor.

Business broker and director of Melbourne-based Paramount Business Brokers, Fred Samoun, says that the property and small business markets (those below $1 million in value) are inextricably linked, as owners often leverage property equity to purchase and operate their business. Yet the similarities largely end there.

“In the small business space, prospective buyers often ask questions as if it were a property purchase. But aside from the actual buying process – search online, enquire, inspect, make an offer and buy – they are totally different things. So, we have to try and get them to think about it more as an investment,” Mr Samoun says.

“I often describe a business as a living dynamic beast – you’re not actually buying bricks and mortar or a freehold, but essentially a living entity that will grow and change in response to your inputs.”

Unlike the largely transactional nature of real estate, business vendors also have a vested interest in its ongoing success under the new owners – making them a valuable resource to leverage post-acquisition.

“A business vendor wants to see the buyer succeed and do well. They have often built the business up over 10 or 20 years and don’t want to see their loyal customers let down,” says Mr Samoun.

“I have never met a vendor and sold a business from someone who has not wished the business to go on and prosper.”

Both Mrs Tamvakologos and Mr Samoun concur that their biggest piece of advice for anyone purchasing a business is to do thorough due diligence, with the help of reputable legal, accounting and financial advice.

“As with a property or indeed any major purchase, it’s important to shop around, obtain good advice and be very clear on exactly what you are getting for your money,” says Mrs Tamvakologos.

“Similar to perusing property listings on the major portals, business listings sites like AnyBusiness.com.au have filters that allow you to search businesses by industry, price and location. And just like buying a home, a business is somewhere you will spend a great deal of your life – so it’s important to also pay a visit in person before signing on the dotted line, to ‘feel’ it and know that it will be a place you will enjoy.

“It shouldn’t be purchased on emotion, but it should be somewhere you – as well as your future customers and staff – can feel positive and upbeat.”

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