Expats Doing Business in Costa Rica. Reading between the border lines.
People lie. Made up of people the same could be said of businesses.
There is nothing groundbreaking about this news. We understand that humans regard the world through a perception, a perception that is self-serving, and therefore flawed in a an imperfect circle.
I don’t believe I know a single person who hasn’t fudged a game of solitaire, left out details in the telling of a story, or entirely avoided life’s difficult truths. For those of you, to whom this does not apply, you may elect to stop reading now as the rest of this article does not apply to you.
In business, in the U.S. at least, the Profit and Loss sheet of a given business is that business’ final word in value.
Oversimplified, operators and owners are trained to minimize the spend lines while increasing the earning lines, thus positively impacting the bottom line: operating profit. The bigger the company, the greater scrutiny its line-items come under, especially if the company is traded.
For those same companies, tracking exactly where every single penny spent goes is near impossible, but remains the goal.
In smaller companies, tracking where every other penny went is also challenging, but losing track of them can also be advantageous when it comes time to sell.
As one hypothetical example:
Yesterday I bought some groceries for my wife and my home. While I was shopping I remembered that I also needed light-bulbs and aluminum foil for our business. Those items were all purchased together and arrived at their separate locations, the home and the office.
Now if the light bulbs and aluminum foil do not land on the spend line of my P&L, then not only am I shirking my moral obligations, but I have learned that this omission is fairly easy to get away with, and with nobody to say anything about it, I have effectively reshuffled the solitaire deck.
Some might expand this lesson to larger ticket items, or multiple items over the course of time, always increasing the profit line of the P&L.
Let me tell you, it happens in the good old USA, and it definitely happens in Costa Rica.
But don’t let this knowledge throw you from making headway into your dream business.
Do yourself a favor, and don’t do what buyers frequently do: overlook blemishes on a Porsche for dream of ownership, only find out at the mechanic sometime later the car is a salvage title.
There is no Carfax for business sales in Costa Rica and you will have fewer resources for recourse after the deal is done.
The reality is that the P&L of a small business in Costa Rica (or anywhere) will almost always be skewed to the positive, telling one version of the story.
Knowing this before making a purchase, planning for it, and planning around it could be the difference in buying a lemon and buying a cherry.
What I pose is that when making your business purchase you go in knowing the P&L will be skewed, planning to do your own market research, plan to do your own math, and in the end if it doesn’t feel right, don’t buy it.
Since we know the P&L will only tell one version of the story do yourself a favor and have your attorney look at the P&L as soon as you can.
A good attorney for this purchase will one you have from a trusted referral, has a track record of success that can be verified, and may cost more than you planned to spend on an attorney.
Your attorney should not be affiliated with the seller or his attorney in any way. To the old question about why legal advice costs so much? I reply: because it’s worth it.
Our attorney saved my wife and I two and half times what we paid him for facilitating the sale and was worth every penny.
Hiring the right attorney, admittedly, can be tough to completely sort out, but I recommend not blowing off the effort.
I have heard more that one story where the selling and buying attorneys worked together to split the commission percentages on sale price by keeping it the negotiated price high and letting the buyer take the hit.
For our purchase we used an attorney from San Jose, who contracts as part of an established firm who does large construction contracts in Escazu, and we pre-contracted a flat fee up front contingent on a successful sale.
In the end, when he agitated the seller with his diligence, I took the seller’s frustration as confirmation of my attorney’s competency.
As an example of how our attorney helped us with the P&L, when the initial one was presented to him, he had the experience to know he didn’t have the official document, and requested the true P&L from the sellers accountant. I would not have known to do this.
But this is all the lipstick and rouge of the purchase, a hurdle to be overcome, and a detail to not get too caught up in. Remember the P&L is one version of the story.
So how does one find the truth? Why it’s good old fashioned market research! If you are just walking into town with cash to blow you are rolling the information dice.
Smart buyers spend some time in a town, shopping various businesses, mingling with the town folk, and gaining other perspectives of sellers and their businesses.
Finding out that your seller is the town drunk, notorious for shady deals, or a severe recluse, may give you new perspective on the P&L and sale price. Also getting a sense of who, if anybody out there, is shopping the business is going to shed light on matters as well.
When my wife and I purchased our pizzeria we knew that the seller’s claim to have other offers was likely a tactic, a shady one I might add, but a classic “fear of loss” sales attempt at simulating our anxiety.
We were able to sniff this out, stick to our low-ball guns, and ultimately win in the end. Having an attorney we trusted helped.
Do your own math… as if you are just buying assets, as if you are starting fresh. In many cases, in the area where we live, new owners opt to make large changes to the look and even name of the business. This is smart if the reputation is not flawless.
In our case, the pizzeria was five months old and we could find no bad press about it, in fact little press at all.
It was like starting almost new with a little momentum. What we were seeking to know most importantly, regarding the P&L, were the big-ticket items.
I mentioned minutia earlier as an example, and true that nickels and dimes can make or break any balance sheet, but the larger items have to fit in the budget before you can consider the smaller ones anyway.
If they don’t fit, if things don’t work on paper, then this may not be the opportunity you are seeking right now. I say “don’t buy.”
In the case of our pizzeria, we weren’t as impressed with the whole P&L as we were with one line item: the dough. The former owner was spending way too much on his crusts, 50% of his costs per pie in some cases.
We checked with the provider to verify the data and decided that this gave us an edge with some minor operational changes.
Last thought: If it doesn’t feel right it probably isn’t… don’t buy or kick yourself forever.
If 3 months from now you find yourself sitting in your now closed business, drinking straight from a bottle of Casique Guaro, repeating the words “I knew something was shady when I bought this place,” you are never going to forgive yourself.
I am not a fan of instincts in business as there are too many variables at play. Hiring a guy because “it just feels right” can be the fastest and worst decision you have ever made when you find out afterwards that he was a thief.
This being said, getting that stanky feeling, after doing your market research, checking the numbers and working with your attorney to make sure the P&L is the best version of truth you have, then you will only have yourself to blame when the proverbial hits the fan.
Instincts, when we sit with them for a minute, can be identified and tied to logical rationale in many cases.
If you have leveraged a trusted attorney, worked behind the scenes to know the market, the seller and the big-ticket items from the P&L, if you have felt the sale out and don’t get an icky feeling beyond the normal fear of purchase, then as some point you have to pull the trigger like the rest of us.
I wish you diligence and efficiency in your pursuit of truth when purchasing your first business in Costa Rica. May you never be cheated, but may you also never cheat yourself in a game of solitaire, or with the opportunities to consummate your dreams.
Written by VIP Member Damon Mitchell who spent over 10 years in the fitness industry before he moved to Costa Rica in search of a better work/life balance. Currently he lives in Playa Tamarindo in Guanacaste, where he and his wife Cristina are owner-operators of Pizza&Co pizza express, located in Plaza Conchal 2.
Daily, Damon runs on the beach or works out at Tamarindo Fitness Center, keeping fit by doing a combination of old-school weight lifting, calisthenics, TRX, stability ball work and just about anything he can do to create new and fun exercises. Most recently he is learning to surf.
You can email Damon here if there is anything specific about staying fit and healthy in Costa Rica you would like him to cover in his next article.
Expats Doing Business in Costa Rica. Reading between the border lines.
Article/Property ID Number 4441
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Andrew Makarik
to@welovecostarica.comAndrew Makarik is the main editor of WeLoveCostaRica, a fan of this sunny country. He is also a loving husband and a has a lovely daughter. By being a devoted family man and the biggest Costa Rica fan, he wants to make more people feel at home there. WeLoveCostaRica unites people and helps them find new home or a new travel destination. This website is a friendly community where everyone can find not only information, but also new friends and travel pals. Andrew is also passionate about IT and programming, so he himself maintains a friendly atmosphere in this cozy environment of WeLoveCostaRica.com.
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