Read This Before You Sell Your Land To Start A Business In Kenya

Starting a business is a leap of faith, a journey of financial uncertainty, and a dream shared by many. However, the path to entrepreneurship is often paved with financial challenges, the biggest of them raising startup capital. 

Some tap into their savings, while others explore business loans or look for investing partners. However, when these options are out of reach, many Kenyans face a tough decision: selling their land to fund their entrepreneurial aspirations.

Consider the predicament of Edwin, a 35-year-old long-distance driver who recently lost his job. Frustrated by the uncertainty of traditional employment, Edwin is contemplating a bold move: selling his piece of land in Utange, Bamburi, valued at Ksh2.5 million.

His dream? To invest in a matatu and offer SGR-transfer services from Miritini to Diani, a potentially lucrative business opportunity.

Edwin's story mirrors the dilemma many aspiring entrepreneurs in Kenya encounter – should they part with their land, a valuable asset, to kickstart their entrepreneurial journey?

This article will explore the pros and cons of selling land to fund a business, factors to consider when deciding, and alternative ways to leverage your land to raise business capital. 

Selling Your Land to Start a Business

When starting a new business in Kenya, securing enough capital from external sources, such as business loans from banks or other investors, can be a complicated and challenging task and is often not guaranteed. Most entrepreneurs, therefore, take the self-financing route, which involves using their savings or liquidating their assets, such as land. 

Selling your land can provide the financial edge you need to launch your dream business. But before you decide, you should know the benefits and drawbacks of this financing route. 

Advantages of Selling Your Land to Start a Business 

1. You Will Maintain Full Ownership and Profits: Opting to self-finance your business by selling your land ensures you retain complete ownership and reap all the returns. This is unlike external financing options that may require sharing profits or giving out your company stake to get investors. 
2. You Will Have Control Over Your Business: Selling your land means you won't have to appease outside investors or compromise your business vision. You remain in charge of day-to-day operations and can execute your business plan with greater flexibility.
3. You Will Have Peace of Mind: When you sell your land, you won't have to worry about investors withdrawing support or the stress of accumulating debt and debt repayment. This peace of mind allows you to focus wholeheartedly on growing your business.
4. You Are in For Potential High Rewards: Successful startups can yield substantial returns, especially if your business offers an innovative product or service. 
5. You Won’t Have to Deal With a Debt Burden: If your business faces challenges or doesn't succeed, you won't be burdened with the responsibility of repaying a business loan. 

Disadvantages of Selling Your Land to Start a Business 

1. Uncertain Returns: Starting a business is inherently risky. While a successful business can potentially provide higher returns than land appreciation, success is not guaranteed. The business landscape is fraught with uncertainties, including market fluctuations, competition, changing consumer preferences, and economic downturns. These uncertainties make it difficult to predict when, or if, your business will become profitable.
2. You Might Sell at a Loss: If you are rushing against time, you might have to sell your land below its market value. This can result in losses as you might not maximise the return on your investment. Additionally, buyers may sense your urgency and use it to their advantage, negotiating for lower prices or more favourable terms.
3. Loss of a Valuable Asset: Selling your land means parting with a valuable asset that may appreciate over time. Land is a finite resource, and its value tends to increase. Once sold, you may miss out on any potential gains; even if your business succeeds, you will likely spend more money to buy another piece of land in the future. 
4. Limited Financial Flexibility: Land is a relatively stable and secure form of investment. Liquidating it to fund your business can leave you financially vulnerable, with fewer diversified assets to fall back on and hedge against inflation.
5. Reduced Long-Term Security: Landownership often represents long-term security for your family and future generations. Selling it to start a business might jeopardise this security, especially if your enterprise fails. This will leave you with fewer options for generational wealth transfer.
6. Emotional Attachment and Family Rifts: Land often holds deep emotional significance, particularly when it has been in the family for generations, is matrimonial property, or carries sentimental value. Selling such land can be emotionally draining and might lead to conflicts among family members. 

Factors to Consider Before Selling Your Land

If you have unwavering faith in your business idea, you might be willing to go to extraordinary lengths to bring it to fruition, even to the extent of selling your land. However, it's important to know that this alone is not a sufficient rationale; additional factors need to be considered.

These factors include:

Founder-Bias: This refers to the inclination of founders to be overly optimistic, confident, and emotionally attached to their business ideas rather than being completely objective and logical. This can sometimes lead to bad decision-making. Therefore, you need to validate your business idea before you sell your land. One of the best ways to do this is by consulting experts and seeking external feedback.

A client shaking hands with a real estate agent. /FILE

Starting Capital: How much money do you need to raise to start your business? You should ensure that the proceeds from selling your land will adequately support your business, especially in the early stage. Selling your land and realising the money raised isn't enough to run your business to profitability can lead to losses.

Time Consideration: In other words, how fast do you need the money? Selling your land can take time. If your business idea is time-sensitive, you might end up selling your land at a loss or selling it too late when the opportunity is gone.

Risk Assessment: Before selling your land, thoroughly evaluate all potential risks associated with your business venture and develop a comprehensive contingency plan. This involves identifying potential pitfalls, from market fluctuations to operational challenges, and outlining strategies to mitigate them to ensure long-term success.

Cost of Selling The Land: Consider the costs of selling your land, such as marketing, capital gain taxes, and legal/agent fees. It's crucial to ensure that these expenses do not outweigh the benefits of selling your property for business capital. A cost-benefit analysis can help determine the financial feasibility of this decision.

Opportunity Cost: Recognise the opportunity cost of selling your land to fund your business. This entails evaluating the potential gains or benefits you might forego by choosing this path over other funding routes. Assess whether the potential return on your business justifies the opportunity cost of selling your property.

Leverage: How to Raise Money to Start a Business Using Your Land Without Selling It

Selling your land is not the only way to get funds to start your business. You can leverage your land and use it as collateral to secure a business loan. 

The main benefit is that you can get lower interest and friendlier loan terms than applying for a traditional business loan. Secondly, this method allows you to unlock your land's value, especially if it isn't generating any income. 

Finally, when you hold onto your land, you have the potential to benefit from its future appreciation, which can be more valuable than the immediate amount you are selling it for. 

However, you might lose your land if your business fails or you default on your loan. Additionally, you should factor in the interest and other costs to determine if a business loan is worth it.

WRAPPING UP 

Regardless of how you choose to raise funds for your new business, it's essential to conduct thorough due diligence before investing your hard-earned money.

Do in-depth research on your industry and competitors by analysing market trends, identifying potential gaps or opportunities, and understanding the competitive landscape. This will help validate your business idea and create a winning business plan. 

Starting a business is a big undertaking. Therefore, don’t underestimate the value of seeking advice from experienced entrepreneurs who have navigated similar challenges. They can offer valuable insights, mentorship, and networking opportunities.

Joining local business associations or going to networking events can be an effective way to connect with these advisors.

This article originally appeared on Money254. Money254 helps consumers and business owners to search, compare and apply for financial products in Kenya.