The Amount Of Businesses That Fail in Spain is Staggering - Why?

Many people who move to Spain struggle to find decently paid work which comes with a contract entitling you to time off and medical care. So many people instead decide to start their own business in Spain.

Unfortunately most expats who start a business in Spain fail. In the article below we examine why the rate of failure in Spain is much higher than in other countries such as the United Kingdom.

This article may make painful reading but being aware of the realities of running a business in Spain at least will possibly help ensure you are not one of the many who open a business only to lose most of your precious savings.

Why Do Expat Businesses in Spain Fail?

1) The basic idea is wrong.

2) Start-up capital was too low.

3) Capital is wasted.

4) A lack of hard work.

5) A lack of business / financial knowledge.

6) A lack of common sense.

7) No ability to deal with a people: suppliers, customers, employees, local authority, language problems.

8) Poor pricing ( too high or low).

9) Ignorance of local authority and government requirements or restraints.

10) Taking the business lightly after completion.

11) Thinking you on holiday

12) Prefer to go to the beach

13) Opening to suit your lifestyle not the business needs

Which of these is the most widely experienced?

Experience in the service and food industry tells me it's numbers 1 and 2 with number 5 coming right behind (financial knowledge). Although number 11, 12, and 13 are also all too common.

Too many business start-ups are emotion based rather than conceived after a detailed study of the market and very deep self examination especially when starting a business in Spain where emotion rather than pure business is the main reason for wanting to go into business to realise the dream of living in Spain. Take it form one who knows living and working here is harder and takes longer hours than in the UK

So many small businesses in Spain fail because owners never even bother to budget income and expenses. The most common sign of this is beer a euro a pint when the operating costs are 1500 euro per month - it just does not make for a good income to expenses budget. You may think low priced beers that generate a 50 cents a pint gross profit will make money but the nett profit is likely to be ZERO after taking the operating costs from the 50 cents gross profit.

Not understanding costs is a shortcoming for most new business owners.

The least understood aspect of business is the real cost of stock and wage costs against productivity.

What are true wage costs then?

If you employ someone or pay yourself 10 euro per hour you should in general multiply this by 3.5 to get the real cost.

For example you or a member of staff will only be productive for 70% of you time in any working day therefore adding 3 euro per hour to the productive wage costs. Add to this productive hour the cost of rent, rates, utilities, licences and incidentals you will likely be looking at a cost of 30 plus euro per hour. This is the true cost per productive business hour (the hours you are open)

Another blind spot is the relationship of every cost item to revenue. If you are operating a 70% gross profit business (about correct for food and licenced trade) then for every 30 euro you spend you must make 100 euro revenue. Therefore you pricing policy must match you expected gross profit.

Be prepared to keep costs low and keep shaving them daily even saving a euro a day will make a difference to your bottom line and will mean your gross profit is easier to attain.

How much will it cost to buy a business in Spain?

This of course depends firstly on your budget and how much you have to spend.

Secondly the costs associated with buying a business can vary depending on which type of business you are buying such as a sole trader business or a company.

The majority of buyers are looking to purchase a bar or small restaurant as a sole trader in which case you should be looking towards costs of around 10% on top of the purchase price for legal fees, licences and incidentals. This is where many purchases then go wrong as you will require on top of this enough capital to ensure the business operating costs can be met during your first months trading.

As with any new or take over business the settling in period whilst you find your feet and find your market can mean that the business operates at a low profit or even a loss for some months. This is not always the case but it should always be planned for in you budget as a shortage of capital is the number one reason for failure during the first six months of trading.

Therefore when setting your budget you should look at ensuring you have enough capital on top of the purchase price and fees of at least six months rent, and working capital (stock, fixed monthly costs etc) for three months.

As a guide you will be looking at this much working capital on a purchase price of a small bar for 50,000 euro with a rent of 1,000 per month with an expected turnover of 6,000 per month.

Six months rent 6,000 euro Stock purchase 5,400 euro approx 30% of turnover Fixed costs 2,000 euro Electric, insurance, performing rights etc

Why so much?

As much as you may plan for every eventuality, Spain is your new country, you are in a new business, and learning the way things are done in Spain. By ensuring you have enough Capital to cover minor and major problems you will ride out any unexpected storms. The bonus of course is that you may not need all or any of this capital but it would be unwise not to budget for this.

For an example of an unexpected Storm and these things can happen.

Mr A buys a bar

In the first two months all goes well and the bar turns in a good 4,000 euro profit, which Mr A after his living expenses is left with 1,000 euro capital in the bank. After a day off Mr A returns to find his bar flooded with water, only to find that the drains to his bar are blocked having collapsed overnight.

After seeking professional advice he is told that the entire bar floor is going to have to be excavated and the drains replaced which will take one week at a cost of 4,500 euro plus the lost revenue and profit during the closure. In addition the fixed costs and rent still have to be paid. Two weeks later Mr A has closed due to lack of working capital even though he has a profitable business.

If you take note of the pitfalls and buy in the right location it is possible to succeed. Don´t be one of the 60% of ex-pats who fail within two years, do your homework and be realistic. Never let your emotions rule your decisions.

For more information on buying a business in Spain see the The Real Benidorm Guide

Currently living and working in Spain on the Costa Blanca. Publisher of The Real Benidorm Guide

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Related Make a Living in Spain Pages:

Make a Living in Spain Main Index | Jobs in Spain | Buying a Bar in Spain | Finding Work in Spain | Starting a Business in Spain | Business Opportunities in Spain | Franchises in Spain | Summer Jobs in Spain| Business For Sale in Spain