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PHASE 3

E-Class 10  

Renovating PROPERTY

This eclass is about building massive value and wealth in your business with virtually no extra effort – sound good??

The majority of our wealthy clients own property with their businesses, and will favour business deals where there is property offered up for sale. This eclass looks at why this is the case, and how you can build siginificant personal wealth and value into your business by using property – and not just physical real estate, also the new world of online “property”.

Owning property along with the business is one of the simplest yet most effective strategies there is for increasing your wealth through business.

When asked what business he was in, Ray Krock, the founder of McDonalds didn’t say “burgers” or “food” – he said “property”. Controlling and owning prime commercial real estate was a key strategy in building wealth and value into his business empire.

Let’s take a look at a simplified example to show you what we are talking about:

Imagine two business owners buy equivalent businesses at the same time, let’s say it’s a small cafe.

Business owner A decides to rent the premises for his business, Business owner B decides to buy.

Business owner A has:

  • Sales $150K
  • Rent $30K
  • Other expenses $70K
  • Total expenses $100K
  • Profit $50K

Over 10 years business makes him:

10 yrs x $50K = $500K in cash flow

$50K profit = $50-100K business value

Business owner B has:

  • Sales $150K
  • Loan payments for premises $30K on a $300K property
  • Other expenses $70K
  • Total expenses $100K
  • Profit $50K

Over 10 years business makes him:

10 years x $50K = $500K in cash flow

$50K profit = $50-100K business value

PLUS – he has paid $300,000 on a mortgage.

Property generally doubles in value every 10 years, so the commercial property is now worth around $600,000.

Even if Business Owner B only paid interest only, then this they would still have around $300K equity in the property

 

Final result:

Without doing anything else different, no extra effort, no better at running the business, no better marketing or sales needed, owner B is well ahead of owner A in wealth. Over 10 years owner B has made $500K plus now part-owns a $600K bricks and mortar asset. Banks like hard assets which means owner B could get more finance more easily if they wanted to.

 

Another simple and effective strategy using business property:

Another advantage of owning the business premises is a bonus when you come to sell. Many business sellers lease the premises to the new owner.

We know one gentleman who has made millions buying and selling cafes and this is a key part of his strategy. He buys cafes where he can also buy the premises they are in. He then builds up the cafe business, does a nice cost effective fit out etc, sells it off and signs a long lease with the new owner in his premises. The new owner then effectively pays off his property without him having to put in any effort – a truly passive form of commercial property and wealth building!

This strategy can also quite effective if you ever franchise the business because the franchisees pay for your commercial real estate.

Property makes your business more attractive to buyers and investors

All things being equal, if a business has property associated with it, it is usually more attractive to buyers, especially wealthy buyers. They are always more interested in businesses where there is the option of buying the business premises.

From a buyers point of view there is an added bonus when property is involved – it makes it much easier for them to get finance as there are hard assets to get security against for loans. The banks like having assets to lend against which is why we sometimes group plant and equipment in with property – especially if they are “heavy” assets like big machinery.

So keep in mind that when it comes time to sell, business buyers and investors like to acquire property with a business. And of course if you have property to sell it means your payday is even better! We have many clients who have used this strategy when it comes time to retire.

 

Who should own the property?

Business property can be owned by the business, another company, a person or a super fund. You need to get specialist accounting, tax and legal advice if you are contemplating these strategies especially as to which entity will own the property. Usually the premises are owned under a separate entity to the business.

Some quick “property lease” tips:

We often get asked about what are the best lease terms to have in place if you are already leasing premises and are contemplating the sale of your business? Here are some useful pointers for you to keep in mind when you are contemplating selling…

Important tip #1:

If the business relies on its current position for customers eg cafe, retail store etc, and moving it would affect sales, then you need a long term lease secure lease in place.

Important tip #2:

If the business is relocatable (like a wholesaling or importing business, some manufacturing businesses, or service businesses), then don’t get locked into a long term lease as you want to keep the option open for a new buyer to relocate the business – this can be a big plus to a potential buyer. Once your business is on the market for sale we recommend that you negotiate a month to month lease if possible – whatever you do don’t resign a 5 year lease at this stage! See tip #3 below…

Important tip #3:

When you know you are going to sell in the short to medium term, make sure leases have options to terminate if possible. In particular make sure your lease contains an option for you to assign and/or sub-let the lease with landlords consent. This will allow you and the buyer to move the business if necessary and you still at least have an opportunity to rent out the premises to another business.

If there is no option to exit the lease or sub-let and the new owner wants to move the business then remember that you are still stuck with or obligated to the lease which can be costly and may create unnecessary headaches when it comes to selling your business.

 

Quick Renovations for your business property:

Renovating to sell a business is somewhat like renovating to sell a house, you need to make it look good on the first impression and highlight the positives. You don’t necessarily need a full make over, but you most likely need to tidy it up. Take stock of your business, take a good look around it and view it from a potential buyer’s point of view. Does it make a good first impression?

Here are some key tips that sound simple but we have noticed many a seller NOT do these simple things and it costs them:

  • Get rid of all the junk that’s in the yard or in the foyer
  • Spruce the place up – vac and dust and clean the windows, tidy up any rubbish, get rid of cobwebs and consider painting the place including possibly the floors if you feel it necessary and its not going to be too expensive to do or maybe wash the walls and floors etc
  • Doing an inexpensive “facelift” on the premises with a coat of paint and tidying showrooms can work wonders
  • Clean up or remove unattractive items such as old bowed bookcases, boxes, old desks or furniture – buyers notice these things!
  • Tidy up your machinery – park your vehicles in neat rows, wash them, clean off oil leaks in parking areas
  • Cut the lawns, tidy the garden, throw out any ugly pot plants that are gathering dust in the corners.
  • Remove personal stuff left lying piled up in the corner – it looks a mess! Or put it into a neat pile and put a cover over it.
  • CLEAN dirty kitchens, crib rooms, toilets etc! Make sure the staff amenities, lunch rooms etc are neat and tidy – we often see these looking less than desirable and its amazing what an effect this can have on a potential buyer. And in the same vein make sure the toilets and bathrooms are clean and presentable (get rid of those magazines that your workers may have) – you can be fairly certain any visiting buyer will want to use your restrooms at some stage and they may judge you and your business by your toilet.

Often sellers don’t seem to realise that their premises looks a mess, but this is why you need to take stock – step back and look through a buyers eyes. Make the place look efficient, cared for and in particular a reasonable environment in which to work.

 

Using Virtual online Property to increase the value of your business

There is a whole new world of property now online. Domain names, websites, page rankings and links are all valuable. Here are some strategies for creating wealth and value with virtual property.

Setting up websites and controlling virtual real estate

We will discuss this idea and strategy a lot more throughout later eclasses but we want to cover the basics here because it is so important, and we find that many business owners don’t even consider it or realise how powerful and important it can be.

Dominating the online marketplace for your business can be easier and more cost effective than you think. Many business owners still haven’t realised that this is the most common place people now go to search for solutions and businesses, and there is plenty of opportunity to dominate markets and own all the best “real-estate”.

Websites as valuable assets

You need to treat your online presence as a valuable asset, one that is worth building and growing. The influence and effectiveness of traditional media like the yellow pages has dropped as more and more people use online search engines to find what they are looking for. So if you can position your business where it will be found online before your competitors, you have some valuable virtual “real-estate”.

These days, when you come to sell your business, an online real estate portfolio adds significant value and attractiveness to your business. Especially if you clearly dominate the market by owning the top positions on the front page of Google for your industry, products or services.

For example, we were recently involved in the sale of a traditional spa and BBQ retail business. The main reason why the key buyer was interested in the business was because he wanted the website that came with it. He was the major competitor and he told me that for his own business 75% of all leads came from his website. He knew my vendor had the number 1 ranking site for spas and this made the business HIGHLY attractive to him!

What is the most valuable online real estate?

Good domain name – easy to remember, descriptive and catchy. Some domain names are now worth in the millions just for the name alone – like realestate.com or travel.com

Top search engine ranking – especially on Google. Remember, you don’t have to rank high for everything, just your niche and for the keywords that your customers are using to find you. For example, if you had a domestic cleaning business, it may not be as important to rank for “domestic cleaning” because that’s not what your customers would be looking for.

Go to the Google Keyword Tool (https://adwords.google.com.au/select/KeywordToolExternal) and look up your business service or product or industry. When someone living in bondi searches for a cleaner, they most commonly search the terms “home cleaners bondi”, “home cleaning bondi” and “bondi cleaning services”. So it would be more valuable (and much easier) for this business to get ranked highly for those terms.

Think of your ranking on google just the same as the physical location of a traditional brick and mortar business – its all about the traffic and potential customers that get to see your business. If you have more traffic passing by your business it is perceived as being more valuable because there is more opportunity to capture that traffic and convert it into sales and money. So for example a coffee shop outside Town Hall station can have the worst coffee but the business still has massive perceived value because of its position.

Links and networks – the more links you have to and from your site, the more connected it is, the higher Google will rank your site and the more traffic you’ll get. Links take time and effort to build, which is also why they are valuable.

What online property does your business own?

We suggest you start controlling a range of virtual real-estate for your business. You can set it up yourself, outsource it, or even buy it!

In a later eclass we discuss a powerful strategy of growing your business by acquisitions of other websites in your industry so you can capture even more traffic and increase your virtual real estate holdings.

HOT TIP!

The biggest online marketplace for buying and selling websites is www.flippa.com. Websites can sell for as little as $1 and as much as $300,000!

Go and search for websites that have already got TRAFFIC, and that are related to your industry or niche. We have seen websites with THOUSANDS of targeted visitors a month sell for less than $500 – now thats an incredible cheap and automated way to get a whole bunch of new leads for your business.

 

 

Actions for this week:

  1. Look into buying premises for your business – consider location, cost, loan repayments etc, tax considerations, speak with your accountant, bank etc. Also you should keep in mind the renovation potential of the property -is it easy, coat of paint, can you clean it up cheaply, is it in right position for the business, will it really be an asset?
  2. Tidy up your property – What quick tidy up renos can you do on your current property including your website? Can you quickly and cheaply make them look better to your visitors and/or buyers? Whether you own the property yourself or are leasing the premises you should always make sure the property is kept tidy and presentable. We are constantly amazed at how many business owners don’t bother to keep their premises neat and clean and up-to-date.
  3. Look at your online “real estate” – how valuable is it, where do you rank on google at the moment. Do some research (on the net) of your competitors or old tired looking websites – approach them and see if they want to sell
  4. Tidy up your websites – Your website is often the first thing a potential customer or buyer will look at so it is important that it makes a good first impression.Make sure it conveys what you do quickly and shows the kinds of products/services you provide and looks like you are a quality company.

    Important: make sure the site is up to date for your business and there is no out of date information on there; we have often had buyers ring and say “their website says the business is located at such and such address which turns out to be an old address.

    Similarly make sure you don’t have old brands or distributorships listed on there that you may no longer deal with – buyers will want to know why you have discontinued them!

    You can do all this very quickly and inexpensively these days so there is no excuse. Just go to www.odesk.com to hire a freelance web designer and graphic artist for a quick makeover – it shouldn’t cost more than a few hundred dollars and is definitely money well spent.

    We constantly come across business websites with outdated information – especially addresses and phone numbers. Remember, a lot more customers are finding your business on the web these days, so this week book in time to go through your website and correct any mistakes and ensure your contact details and product listings are accurate.

Next weeks class…

Next week we’re going to give you an introduction to the internet for business. The internet plays sucha major role in how customers find you and buy from you you MUST know how to take advantage of all the powerful resources and advertising opportunities it has to offer.

If you have any questions please email us at [email protected]

All the best,

 

MATT AND LIZ