Increasing goodwill rates stifle growth of startups

Startups are suffering from exorbitant costs key among them “goodwill” payments charged by landlords or those exiting business premises with new tenants saying the charges could run them out of business.

Flora Thande, who recently retired from the civil service opened a new stall in one of Nairobi’s Moi Avenue shopping malls and had to pay Sh400,000 as a one-off “goodwill” for a 6” by 5 feet” floor space to enable her start her business of selling beauty products including perfumes and ladies clothes.

She pays a monthly rent of Sh35,000 besides paying Sh10,000 in monthly wages to her shop assistant and Sh6,000 in annual city council licenses.

“It is now eight months since I opened this shop. Sales are good, but I have not been able to break even and expand to other areas,” says Mrs Thande who blames the “goodwill” payment for denying her capital to invest in more goods.

Unregulated

Analysts say goodwill charges are exploiting the SME investors since it is unregulated and uncoordinated.

“The goodwill charged by landlords and those exiting business are exorbitant, goodwill charges are unregulated and hence landlords take advantage of SME investors and this inhibits growth of small and medium enterprises. Goodwill should be scrapped. According to the International Accounting Standards (IAS) only purchased goodwill should be sold or the brand name,” says Daniel Kamau, a business development manager at Fusion Capital— a specialised finance company, established to support the growth of SMEs in East Africa, through the provision of tailored financial services and advice.

Some investors in the exhibition style shop say landlords have refused to waiver the goodwill charges despite pleas that it is increasing costs and running many investors out of businesses.

Suggestions that the goodwill payments should be spread over a period of time and based on the monthly performance of businesses have also fell on deaf ears.

“I’ve met the landlord on several occasions since I wanted to expand into a shop which fell vacant recently, but he has insisted on up-front payment of goodwill of Sh350,000. If I pay this I will not have enough capital to buy goods,” says Susana Adhiambo, who sells shoes and cloths at a mall on Nairobi’s Tom Mboya Street.

The SMEs, according to the Ministry of Trade are the engine of growth in the country as 1.6 million registered small businesses employ about 5.1 million people accounting for 75 per cent of the total labour force and contribute 20 per cent to Kenya’s gross domestic product.

Lack of access to finance from banks has made it difficult for new investors in the sector to mass up funds to pay the goodwill charges.

Most banks prefer to advance credit to established SMEs or even demand collateral such as land title deeds or car logbooks before credit is advanced thereby making it difficult for most investors to raise the required goodwill.

Analysts point out that even though landlords in Nairobi charge the highest goodwill, towns recently found to be investor friendly by a World Bank survey could follow suit.

According to a recent World Bank survey—Doing Business in Kenya 2010, Sub National Series—small towns of Narok, Malaba, Thika and Kisumu—have been ranked among the best investment destinations globally because they have less cumbersome requirements for establishing businesses.