Owning your business premises can spur business growth, says entrepreneur
Owning your business premises is often more difficult than renting it in the first five years of the bond, but the advantages are clear when you fit it into your long-term vision, says Leon Botha, financial-services entrepreneur and co-owner of the building in which his company is based.
Leon, founder-director of Optimate Financial Solutions, is about to find out just how true this is. Exactly five years ago, he and his business partner, Scientia Optimate Managing Director Lawrence Johnson, bought an office block for their fast-growing firm that focuses in investments, employee benefits, medical schemes and insurance products. It wasn’t always easy, says Leon, but so far the purchase has delivered the results that he had envisioned in his long-term plan.
Leon’s vision started in 1999 when he was one of Old Mutual’s 25 top sales consultants. The insurance giant demutualised and in the process changed their commission contracts for their agency force. The new dispensation did not suite Leon’s long term goals.
Leon, who at the time had a team of five employees, decided it was time to break away, and started a company called Optimate Financial Solutions, concentrating mostly on investment products.
Although owning his own premises was part of his long-term plan, his first step was to rent. “In the beginning it’s almost as if a business has to create its own world,” says Leon. It is a capital-intensive phase of at least three years in which the company’s clientele, brand, culture, processes and systems have to be established. At that stage there was very little left for the large capital outlay of buying a premises, and Leon had to make do with rented offices.
By 2008, a few years after Leon partnered with Lawrence, they were ready to buy their own premises – an office block in Clearwater, Roodepoort, then owned by a law firm. They made the offer in April 2008 and scarcely three months later the American investment bank Lehman Brothers filed for bankruptcy and precipitated the global financial meltdown.
“During the credit crunch, SA banks changed their granting of credit and reduced their risk. For us as investors, it became extremely difficult to obtain the credit we needed for the purchase,” Leon says euphemistically about the worst freeze in bank lending in decades. If it was not for Business Partners, who agreed to part-finance the purchase of the building through an equity deal, they probably would not have been able to buy the complex.
Both Leon and Lawrence invested some of their own money in the building. When Business Partners came on board as investor and 50% co-owner, a bank was prepared to finance the remaining 35% of the purchase price.
Looking back on it, Leon says that he would have preferred to have only Business Partners as financier. Having more than one financier tends to make the deal inflexible, for example when it comes to renegotiating early-settlement penalties.
The building was ideal in many ways. It had very good infrastructure, and all the previous owner’s substantial fittings and office furniture was thrown into the price, which made the purchase a bargain. Crucially, the building provides the business room to expand. A section of the building that is currently rented out to another firm can be taken over by Scientia Optimate when the space is needed.
Leon expects the company to grow fully into the building in two years’ time, when the size of the building will be optimal for Scientia Optimate, which currently has a staff complement of 48 people.
He does not see the limitations of the building beyond a two-year horizon as an impediment to the further growth of their company. In his vision, the building will develop into the headquarters of the company and further expansion will happen through a growing number of regional branches.
It is often said that owning your business premises can limit the growth your business when you outgrow it and struggle to sell it in order to move to a bigger premises. But Leon has a different way of looking at it. He believes that ownership can actually enhance the growth of the business by creating an asset on the balance sheet of the entrepreneur who can then use it to raise finance for further expansion.
Leon acknowledges that a clash of interest can become a problem if the shareholding in the building differs somewhat from the shareholding in the business. In their case, the shareholding of Scientia Optimate is broader than him and Lawrence, and will most probably expand in the near future as the company has an extensive expansion programme for the next four years. The way to deal with it, says Leon, is to keep the rental of the building scrupulously market-related so that no set of shareholders feels short-changed.
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