Investing by buying your own business rather than investing in other peoples’ businesses on the New Zealand sharemarket (NZX50) can deliver up to seven times the return.
That is the key finding from data released by ABC Business Sales comparing average returns (dividends) on New Zealand’s stock exchange (NZX50) with the country’s average returns (profit) for small to medium sized businesses (SMEs).
“There’s potentially a seven times greater return on offer from investing in a business compared to investing in the NZX50” says ABC Business Sales managing director, Chris Small.
“The NZX50’s average pre-tax yield (dividend) is 4.2% on cash invested whereas the average pre-tax yield (profit) for New Zealand SMEs equates to a 29% return on cash invested – effectively a seven-fold return.” *
Small says the analysis excludes any capital gains for each asset class, and the pre-tax profit for business ownership is also based on the business being fully managed with limited input from the investor.
“That means we’re comparing passive investment scenarios as much as we can, so it’s not like these are businesses where owners are expected to work 12 hour days or anything like that.”
Small acknowledges that private business ownership does have a higher risk profile than share market investments, but he doesn’t believe the risk premium for investing in a private business is anywhere close to seven times higher than investing in larger businesses listed on the NZX50.
Additional supporting factors for business ownership in this comparison is that effective due diligence can mitigate many of the risks involved in purchasing a private business, and an owner’s level of control/management in a private business investment is much greater than the limited influence shareholders have over businesses listed on the NZX 50.
Small says this is the sort of information that could be encouraging young New Zealanders towards a goal of saving to buy their first business instead of speculating in the sharemarket.
“It’s also about helping to educate people on the positive trends of SME business ownership in New Zealand.”