The real assets are your customers, not your premises

This column is designed to cut through the noise and give you, the South African business owner, entrepreneur and professional, clear and practical answers to the questions that keep you up at night. Each week we will tackle real reader queries – from navigating tariffs and taxes, to funding challenges, cash flow headaches and growth dilemmas – offering straight, jargon-free advice grounded in data, regulation and local realities. The goal: to equip you with insights you can use immediately to make smarter decisions for your business.

Your question

I own and operate a medium-sized private business that imports and distributes electronic equipment. We operate from a warehouse and showroom that was purpose-built a few years ago by a developer; and the landlord has now informed us of his intention to sell the property. Should I consider buying the property and service a mortgage bond rather than continuing as a rent-paying tenant?

The short answer: No, you should not consider buying – rather remain a tenant.

Here’s why

The rationale behind this advice is informed by the principles first proposed by the Harvard academic Theodore Levitt, who wrote: “The true purpose of any business is to get and keep a customer. Without customers, no amount of engineering wizardry, clever financing or operations expertise can keep a company going.”

In your case, owning the building will not help you either to find new or keep existing customers; so, I advise that all your resources and effort rather be directed towards achieving these two goals.

In some cases, the premises might be inadequate for these purposes – your showroom might be too small to display all your products to best effect; or the logistics in your warehouse might make it difficult or impossible to properly service existing customers. However, from your description, your premises seem fit for purpose – if they were not, you shouldn’t want to buy them anyway.

Tenants often underestimate the costs and risks associated with ownership – at first glance it seems a no-brainer to own rather than rent property! But the sort of return on capital you might achieve from owning your building is likely to be much lower than that which you could achieve by deploying the same capital in favour of your customers. You might rather invest in better marketing to find new customers, better or more salespeople to service your existing customers, or a better CRM (customer relationship management) system to keep track of your progress in both regards. All of these alternatives are likely to produce much better bang for your buck.

Resist the temptation of “margin envy” that comes from peering both up and down your value chain. Stick to what you know and do best, and appreciate that a good landlord is an asset.

This customer-centric approach applies to virtually all business in all sectors, including manufacturing, agribusiness and all types of services. All your important decisions can be informed by the test: will this course of action help me find new customers or keep the customers I already have? If the answer is not strongly affirmative, look elsewhere!

Sidebar

The Levitt thinking can also usefully be applied in the political arena, where efforts should be directed towards finding new supporters (voters) and keeping those you already have. Since a “National Dialogue” would not appear, at first glance, to support either objective, it is no surprise that it has not yet gained much traction.

But wait ...

The exception proves the rule. There is one circumstance where a tenant might consider ownership. This occurs during what is typically a narrow time window when your current lease is about to expire. At this point, your ongoing tenancy has value, both to your existing landlord who might want you to renew your lease, avoiding the risk and costs associated with vacancy and finding a new tenant; or to another landlord with existing vacant premises whose underlying value would be significantly enhanced by procuring a desirable and creditworthy tenant.

The final word

In both cases you have temporary leverage which could be converted into shared ownership at little or no capital cost. Such ownership may result in the lost opportunity of simply gaining more favourable lease terms; but it is a one-off transaction which, when concluded, will allow you to go back and focus on your customers. DM

This week’s answer comes to you from Uncle Mike, a former non-executive director at a listed South African retailer, with extensive (read decades) experience in retail, packaging, private equity and property development.