Small business: Own or rent? Wild Wheat bakery

Andrew Fearnside, owner of Wild Wheat specialty breads, says buying a property was the best thing he could have done. Photo / Richard Robinson

Andrew Fearnside, owner of Wild Wheat bakery, talks to Gill South about owning his own factory in East Tamaki, Auckland

I own a bakery that specialises in artisan breads, with three retail outlets as well as a strong wholesale side. All food production is done in one location, which makes that site the most important aspect of the business.

In 2006 we had outgrown our original factory after six years and I was searching for a larger property, looking to find double, the size of the current location of 5000 sq feet. Initially I was happy to continue with renting, but in discussion with land agents, I discovered my ideal factory size would likely require an almost tripling of my rental at the time. At that point I figured why not buy and put that significant amount of rental into my own personal investment.

How did you go about finding the right property?
It was extremely hard as most of the factories I looked at were over $1 million and I did not have sufficient equity to secure that amount of finance. I had help from a merchant banker who was part of the accountancy firm that I had just shifted to, in Hamilton. He was very instrumental in helping me understand the process of how funding levels are worked out, and also sourcing other options beside my business bank. I would recommend people speak to a merchant banker of some description, they offer different view point from the banks.

How did you finance the purchase of your factory?
At that time I owned two residential properties, and leveraged every bit of finance I could against both. It was a risky time not only for me, but also the two other people I owned these properties with. Both people had to agree to allow me to mortage their portion of the equity.

For the first three years it was extremely difficult financially. The significant increase in rental that Wild Wheat was now paying its new "landlord" placed immense strain on Wild Wheat, as initially we were operating in a factory that was at least 40 per cent too big for the company. This was also compounded by going quite some way over budget with the fit out. For the first three years I was continuously robbing Peter to pay Paul. The fit out added value to the building which has subsequently helped in consolidating the loans for the factory further down the track. In 2006 I had five separate loans to buy the factory, now there is just one. I do have the ability to borrow against the equity in the property.

How did you structure it?
I run two separate companies, Wild Wheat and another company for the factory. While they are distinctly separate companies, having the same directors allows synergy, especially with planning for the future. Not all landlords are on the same page as their tenants, in my case, we both have the same end result. It makes it extremely easy to make plans for expansion, or alterations, knowing the landlord will always say yes.

Would you do it again?
Yes I would certainly entertain the idea of future property purchases if the right opportunity came along. I do always check properties not only for lease but also sale. I also do keep an eye on any factories for sale close by our current location. Despite buying twice the size of what was needed in 2006, a bit more space would be helpful.

Has it been worth it?
For the first couple of years I was always second guessing myself as to the wisdom of buying the factory. Now it is the best thing I could have done. In 2006 I did make a conscious that I needed to make money from the effort I was putting into Wild Wheat. I felt that property would possibly be more productive way to make money long-term, than slaving over an oven for the next 10 years. The G.F crisis hasn't helped in the short term, though long term I hope that decision proves to be correct.

Tips:
Think big. In 2006 I could play cricket inside the factory. Now I wish I had gone bigger. If you are a growing company, dream big!!

Know your financial limits, especially when it comes to servicing. Deals can easily be done based on flash looking reports, and valuations, but deep down, you need to be certain you can simply pay the rent/mortage every week.

Next week we look at SMEs who open their doors to interns and to school children looking for some career guidance. What's in it for them? Send in any of your thoughts or experiences to me, Gill South, at the link below.