How To Exit Your Business Using Property

Owning a business can be one of the most exciting, overwhelming, and rewarding things that you ever do, but as we journey through life it’s safe to say that our circumstances can and often do change quickly. Because of this, having a strategy in place that you can deploy when it comes to exiting your business, is a smart thing to do.

Among other things – retirement, general interests, family circumstances, health and unpredictable events, can lead a person to wanting to leave the enterprise that they’re currently running.

With more than 500,000 independent businesses in New Zealand, it’s important that you’re one of the smart ones when it comes to having an exit strategy and an idea of what you want to do after the final curtain call.

WHAT’S YOUR EXIT STRATEGY?

A 2021 international study found that 52% of respondents wish to sell their business within the next five years, 20% plan to leave it to family, 18% wish to close their business and 10% aren’t sure – however a total of 48% of business owners did not have an exit strategy at all.

Having a plan for your departure will give you more control over what happens to your business and employees, while also maximising your net gain and setting yourself up for success in the future.

There are a few common exit strategies that business owners generally look to:

1. Succession planning

Ensuring the success of your business by passing it on to someone you know and trust.

2. Closing your business

Selling off business assets, paying debts and keeping whatever money remains. This option is often due to unsustainability, debt or failure within the business.

3. Selling your business

Many business owners choose to sell when their sales and profits are increasing, which adds more value to their business and motivates potential buyers.

IS YOUR BUSINESS EVEN SELLABLE?

For a lot of business owners, the main reason and motivator for leaving is retirement. As your business will have been your main source of income leading up to your exit, one of the most important things to consider is how you will continue to make money?

Now, in your early years of business, I’ll bet you were thinking that the plan would be to build a business asset that you could one day sell. I’m guessing that the idea would be that you’ll receive a large sum of money and finally be rewarded for the endless hours of blood, sweat and tears.

In many cases this is a person’s life’s work, however it may come as a surprise to you to find out that most businesses are simply not sellable.

After dedicating your life to a business for some 15 to 20 years, it would be nice to think that at the end of it all, you’d receive a juicy cash reward that allows you to skip off into early retirement. There’s a difference between expectations and reality, and the reality for most means that at the end of it all you may be lucky to come out of it with a dodgy old truck or some worn out machinery – there are no assets.

You realise that you didn’t actually build a business, you had an ATM that you were able to withdraw cash from. And even that’s not very attractive if you’re like most people who have an ATM balance of a couple of dollars until the next payment comes through.

PROPERTY CAN HELP YOU EXIT YOUR BUSINESS

Property can be used as a way to fund your lifestyle when you’re ready to wrap up your business and stop working.

Real estate is a long-term investment and therefore, when it comes to developing a future exit strategy, time is on your side. The earlier you embark on your investing journey, the greater success you’ll likely achieve.

Pros of real estate as an investment vehicle is that over the long-term, it is stable and will always be around in society.

BUILD A PROPERTY PORTFOLIO THAT ENABLES YOU TO STOP WORKING

As mentioned, learning how to build a property portfolio and the actual process of generating wealth from it, does take time. You first must establish some clear goals in relation to when you want to retire and how much money you’ll need to live off because that will help define your exit strategy and timeline.

Have a think about:

• When are you going to exit your business?
  • This doesn’t have to be an exact date – maybe it’s five years or 20 years from now, but you should have at least some idea of your business’ lifetime.

• How much money do you need to retire?
  • Determine your desired retirement annual income. Then assume a gross rental yield (between 3-6%), and then divide the income by the rental yield. This will give you the amount of money you should have invested in property. It’s then up to you to use this figure and work out how many properties you should own which will be dependent on how much retirement income you desire.

• How are you going to finance these properties?
  • If your business is booming at the moment and you have a steady stream of income that you can put towards investing in property, this needs to be factored into the budget. Alternatively, there could be other ways to fund your portfolio such as equity or a joint venture.

Once you’ve mapped this out, you then just need to know the ins and outs of property investing in order to achieve your desired outcomes.

HOW TO BECOME A PROPERTY INVESTOR – PHASE 1

There are three phases to building a property portfolio before an investor is ready to reap the rewards of their hard-earned labour.

These phases are the acquisition phase, the consolidation phase and the retirement phase.

In short, the period of acquisition refers to the initial stages of an investor’s wealth building cycle. Your main goal will be to acquire as many properties as possible to help build your asset portfolio quickly, and to generate as much rental income as you can to increase cash flow.

During the acquisition stage, you want to be focusing on high growth properties in a variety of locations in order to make the most out of your equity gains. To do this, you will need to understand what factors influence the market.

HOW TO BECOME A PROPERTY INVESTOR – PHASE 2

Once you’ve exhausted all of the equity the banks will allow you to lend against, the next phase is to consolidate your investment portfolio. You’ll need to refine your investments to maximise rental yield, therefore increasing your cash flow. Most investor’s will cycle through the acquisition and consolidation phases numerous times until they are ready to transition to the lifestyle phase of their investing career.

To move into a positive cash flow phase, you will need to lower the loan-to-value (LVR) ratio of your portfolio. What this means is that you’ll need to reduce the amount of debt you have, you can do this in several ways:

• Sell one or more non-performing properties: as you move closer to retirement, it is wise to let go of properties that are making a loss, otherwise you’ll have to sacrifice some of your retirement income to maintain the investment.

• Add value to your properties through development or renovation: increasing the market value of your property will therefore increase the value of the investment against the mortgage.

• Stop buying properties (or reduce the rate at which you’re buying them): when you’re in the growth stage, it can get quite exciting expanding your portfolio quickly, but more properties doesn’t necessarily mean more income. As you get closer to retirement it is best to become very selective with the properties you acquire.

Once you’ve reduced your debt to a lower LVR – maybe somewhere like 50% or so – you’ll be able to enjoy the benefits of leverage while owning property that is positively geared. A property which is geared positively means that the income derived from owning the property exceeds the financial and maintenance costs incurred.

HOW TO BECOME A PROPERTY INVESTOR – PHASE 3

You’ve finally made it! The lifestyle or legacy phase of an investment property career is the place the property investor is striving towards. You’ve built your portfolio to a point where it is generating enough income for you to retire (in whatever way that is to you).

Either way, at this point, you’ll have the choice on when and how you’ll exit your business. Regardless of what this looks like for you, the main idea is that you no longer need to work in order to fund your lifestyle, because your investment properties now provide that income for you.

THE BASIS OF A STRONG PORTFOLIO

An important factor to ensure when building a strong portfolio is that there is diversity within your properties. It’s vital that your portfolio showcases a variety of property types.

The best way to decide which types of properties to go for is to research the population demographics in the location(s) you wish to buy in. From there, you’ll be able to determine the supply and demand in your chosen area and choose which property type you wish to diversify your portfolio with. If you already own an apartment, for example, consider investing in a stand-alone house, so you’re covered for both these property types.

Ensuring that you have an array of different property types that cater to different tenant markets will allow you to build a strong property portfolio that will perform well over the years and experience growth in several markets.

GOOD YIELDS AND POSITIVE CASH FLOW IS VITAL TO YOUR EXIT STRATEGY

There are two main reasons that people invest in property:

1. To create a passive income through rental returns
2. To increase their overall net worth through capital growth

A property that has good rental yield and cash flow generally means that the desirability of your property permits you to charge rental prices that then allow your rental income to exceed your expenses, leaving you with a profit. In other words, the more desirable your property, the higher the permitted rental rate and the higher the profit you’ll receive.

In order to continually raise your rental prices and increase your cash flow, there are a few things to consider:

1. Quality of Location

The more desirable the location, the more attainable a higher rental return becomes.

2. Quality of Tenant

Essentially, if you do not have tenants who are willing and able to pay increasing and competitive rental rates, this will negatively impact your cash flow from rent.

3. Supply and Demand

Supply and demand in your chosen area(s) can be affected by events or advancements happening in and around your property’s location. This can positively or negatively affect the desirability, and therefore the rental return, of your property.

DEPLOYING A SUCCESSFUL BUSINESS EXIT PLAN

Exiting your business is a big decision and one that you should be prepared for. Once you’ve analysed your situation and chosen an exit strategy, setting yourself up for future success is the next important step.

Investing in property (when done correctly) is a sure-fire way to future-proof yourself when it comes to generating wealth, smoothly exiting your business and going on to enjoy retirement or part-time work.

To know more about retiring early and using property investment as a source of income, come along to our free real estate investing seminars. Our team of experts are here to help you through any real estate, investment or retirement planning questions you might have.

Register now for the free property investor webinar.

By Sue Irons

CEO – Positive Real Estate New Zealand

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