Don’t buy a business like it’s property, experts say

“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,” she explained. 

For starters, Ms Tamvakologos highlighted that risks, as well as barriers to entry of both asset types greatly differ. 

“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,” she stated.

Citing CoreLogic’s August data, Ms Tamvakologos said that a home buyer would need an average of $747,800 (or more, depending on the location) to purchase a home — an amount that she argued can buy several businesses for a fraction of the overall price. 

She also debunked the most common misconception that unless a business does not reach the same level as business giants such as Google or Facebook, property remains the king of financial returns.

“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,” Ms Tamvakologos said. 

On the one hand, she noted that businesses are not bound by the same limits. “Business owners 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,” she said.

And unlike property — which is typically viewed as long-term investments — the expert stated that businesses don’t necessarily have to wait years or decades to reap financial rewards. 

Director of Paramount Business Brokers Fred Samoun acknowledged that the property and small-business markets (or those below $1 million in value) are “inextricably linked” due to owners using property to buy and operate their business. 

However, the broker claimed that the similarities between the two assets ended 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 said. 

Mr Samoun said that purchasing a business is like securing a “living dynamic beast” rather than buying merely bricks and mortar or a freehold. 

“[It’s] essentially a living entity that will grow and change in response to your inputs,”  he added. 

Unlike the largely transactional nature of real estate, Mr Samoun highlighted 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.  

Both experts concurred that buying a business requires the same level of due diligence as purchasing a property. 

“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,” Ms Tamvakologos advised. 

Similar to buying a property, the expert recommended aspiring business owners shopping around on major listing sites to see their options. Ms Tamvakologos also underlined the importance of an in-person visit before sealing the deal to get a firsthand impression of the place.

And lastly, like with any investment purchase, she reminded buyers that negotiations should be based on the business case, not emotion.

“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,” she said.