John Knight from Business Depot looks how to avoid the most common errors when buying into or starting a new real estate business.
I OFTEN FIND MYSELF (unfortunately!) advising new principals and picking up the pieces when things don’t quite go to plan. ‘Stepping up’ is an exciting time but here are some things to look out for.
- WRONG LEGAL STRUCTURE
Once in place it is often hard to change a legal structure without incurring a big tax bill; Capital Gains Tax and stamp duty in some states are usually the problems. Don’t forget about the administrative burden on changeover of your structure. Get advice! - BURYING YOUR HEAD IN THE SAND ON TAX
Tax is a problem that will not go away. Start by being aware of your obligations; I like to do this very simply by preparing a tax timeline, setting out due dates and estimated commitments. Watch out for the ‘double whammy’ of tax which will usually hit at the end of the second year of trading. Putting GST and PAYG Withholding (the tax deducted from wages) aside in a separate bank account is another way to make sure you have a good idea of how much cash is really yours. - THINKING THAT PROFIT EQUALS CASH
Cash is king, but profit matters. Don’t forget too about all of those cash commitments that don’t appear on your P&L. The most common differences between cash and profit are principal debt repayments, depreciation expense, principal drawings and VPA receivables. - NOT KNOWING YOUR BREAKEVEN POINT
If you know your business, you will know the levers to pull or push when markets change or when critical events happen. Your profit formula is essentially splitting your business between the fixed and variable components of the business. Your breakeven point is the level of income you need to earn before you can stop putting your hand in your own pocket and kicking money in. - NOT RECOVERING ALL VPA UPFRONT
Before you all start jumping down my neck saying it doesn’t work in my area, I have seen time and time again that the more profitable businesses are those that recover 100 per cent of their advertising upfront, either from the vendor or from the sales team. As a new principal you are hungry for every dollar; my advice is to set the standard from day one and create a culture where recovering advertising upfront is the norm. - NO PROVISION FOR WORKING CAPITAL
In layman’s terms, working capital is the amount of cash you need to have available to pay the bills while the business is getting its rhythm. Ask yourself, if you started a business today, how long would it take before you would have enough income to pay all the monthly expenses? The general rule of thumb is that your working capital should be three months of your fixed expenses, but in real estate I will usually recommend four months. - TOO MANY COMMISSION STRUCTURES
Adjusting your standard commission structure to appease every Tom, Dick and Harriet that comes through the door can bite you in the butt further down the track. Have a standard structure where performance is the driver of any variance in commission structure. For example, if someone wants a higher flat rate of commission, you may only give it to them based on a minimum performance expectation. - SPENDING MORE THAN YOU EARN
Even if you are spending your money on good, growth-focused strategies, like growing a rent roll, it is not sustainable to be always spending more than you earn. The money has to come from somewhere, so put more money in to fund the strategy, or spend less. - TOO SCARED TO ASK QUESTIONS
You need to find advisors who suit you and the stage your business is at in the business life cycle. One discussion a year with your accountant is not enough! Your questions are probably not that silly, so find someone you are comfortable with to ask any question that you need to. - DRIVEN BY SALES, NOT PROFIT
It is great to win a stack of awards for sales but, as a new principal, you need to make sure profit is the key focus – not just sales.
Both new and existing principals can learn great lessons from the avoidable mistakes of others. If you keep my mantra in mind, “sales are vanity, profits are sanity and cash is reality”, you will create a mindset that will ensure good business decisions are made.
