Many expats arrive in Spain intent on setting up their own business, but for many, within 12 months their dreams are in shreds as they have not sought professional advice.
Every year lots of entrepreneurial expats arrive in Spain full of enthusiasm and intent on starting their own business. However, for many within a few months their dreams are shattered as they go out of business.
The mistake most make is in not seeking professional help from independent financial and legal advisors and also in not undertaking proper due diligence. It is difficult enough to set up and run a business in one’s own country and even more so in a country where a different language is spoken and where there are endless rules and regulations as to what can or cannot be done from any premises.
Costly errors are made by simply not doing enough research before making any investment. Many of the so called business agents earn their living on commissions from introducing buyers and peddling all kinds of questionable business advice. These agents will tell buyers how any business could be a goldmine, that all necessary licences are in place or they will assist in submitting projects and obtaining licences.
Points to consider
Prospective buyers should independently consider the following:-
- How long have the existing owners/tenants been operating the business?
- Why are they selling?
- What is the price? Is it all goodwill? How is the price justified?
- Is the location right?
- Is the business seasonal or is there an all year round trade?
- Are all licences in place? Don’t make the mistake of assuming all activities being carried on from the premises are both legal and fully licensed.
- What is the exact area that is being rented or leased? If tables and chairs are outside is this permitted? If machines or displays are situated on terraces is this permitted? It is not unusual for the Town Hall to come and inspect and shut down or severely restrict new businesses whereas the previous owner may have got away with breaking the rules for years!
- What lease terms are available?
- How many months deposit will be required?
- Is a bank guarantee (Aval) required?
- Inspect previously filed tax and VAT returns and value the business only on declared turnover and also bear in mind past performance is no guarantee as to future performance.
- Prepare a business plan and a realistic cash flow forecast – don’t under estimate expenses and costs.
- Ascertain employment regulations – heavy fines are imposed for unregistered staff.
- Ascertain accounting requirements and the cost of monthly and annual compliance.
- Factor in the cost of self employed social insurance contributions.
- Finally, will the business fund your desired lifestyle and give sufficient time off for enjoyment?
If considering setting up from scratch, rather than taking over an existing business, the process could take much longer and may involve professional help in drawing up projects, submitting licence applications and then in modifying the premises etc.
It’s wise to be prepared for any downturn in the economy and have sufficient rainy day funds and a contingency plan in place.
Check everything
Appoint independent legal and financial advisors and do not hand over any money without consulting with your independent solicitor. They will check all licences required are in place and assist in negotiating favourable lease terms and ensuring you have reasonable security of tenure. Your solicitor or accountant will also discuss various forms of business structure and outline advantages and disadvantages of each. In Spain it’s more expensive to set up and maintain a company than it is in UK or Ireland. Also, consider attending the Town Hall in person and discussing your business/plans with the officials there who regulate and grant licences. If approached officials at the Town Hall can be extremely helpful and informative and will usually be able to tell you, there and then, if what you plan is likely to be permitted. It’s also worth speaking to other expats and learn from their mistakes. Proper planning and thought should help to avoid expensive lessons on how not to buy and run a business in Spain.
