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Starting a Business in Southern Europe

I've been asked about starting a business in Portugal, either in the Lisbon area or in the Algarve. Here's my response, which may be useful to others.

First, of course, you need to buy land which can be developed. You will also need to be near a largish conurbation to secure plenty of potential visitors, and be easily accessible. You will also need supportive planning, and a business-friendly government environment.

Let's take these in turn.

1   Buying the Land

The purchase of land with a business/tourist zoning category will be relatively easy pretty well anywhere in the EU close to a large conurbation or tourist resort. There would be no problem about this either in Lisbon or in the Algarve. With the current state of the property market the purchase price of such land should be relatively cheap.

One small point here, though. The longer you wait the cheaper the price will be as prices are still falling in most of southern Europe. In this respect let me remind you that land prices are low, and getting lower in Italy. They have started to fall in France, and that trend may well accelerate over the next few years. Prices are on the floor in Spain, and still falling. Prices are falling in Portugal, but there is resistance to selling at lower prices. You have to take into account the Portuguese mentality. They are not business savvy.

Let me give you an example of what I mean. In Portugal, customers are hard to come by. The building trade is in free fall. Let's assume builder Antonio has a nice business, but last year it started to fail through lack of custom. Whereas he was working five days a week he is now working only four, so he compensates by raising his prices by 20% to make up for the loss of work. This means he now gets even less customers as his prices are now no longer competitive, and so he only works 3 days a week. To compensate, he raises his prices again, until he has no work at all.

Translate that into the property world and you have a situation where the market is irrelevant. What is important is the price the seller has fixed in his brain. If that price is €100,000, then never mind that the land has been for sale for ten years and no-one has bought, it wont occur to him to reduce the price to encourage a sale. He's more likely to raise the price. This means that land prices in Portugal are not competitive, and there is a strange incentive to keep them high.

2   Getting Customers

You need a good hinterland filled with people who might want to visit. Lisbon is a large place, roughly the size of Manchester. It would support a business venture with ease.

The Algarve on the other hand is anything but large enough. The size of the population in the whole of the region is about 400,000. This increases substantially during the summer months. It would be fair to say the population doubles during the 3/4 months of the traditional summer.

The Algarve is an ideal place for winter holidays, as there is really no winter at all as experienced by northern countries. However, the tourist board makes no effort to encourage snow birds to over-winter here. There are no pensioner deals, and the place is pretty well deserted from november to may. You would probably do well for 3/4 months of the year, but would run at a loss for the rest of the year.

Look at it this way. Two thirds of the hotels close down for the winter period, and those that stay open have about 25% occupancy or less. It simply isn't viable, which is a crying shame.

There is also the problem of access. The motorway for the Algarve is now a pay road, but the method of payment is so insane that few people use it. This has discouraged foreigners from using the road, and the influx of tourists from Spain has dropped considerably.

There is also a problem with image. Youngsters dont like the place. It is primarily a place for retirees, and those who come on a package holiday and sit on the beach for their stay. You wont get those customers at all as they have no transport. This means your clientele will be severely limited. I still think you would be successful in the height of the tourist season, but there is the rest of the year to think about.

You may find that a better option would be to look further north for a place to start a business. There is a far greater population in Southern France and just over the border into Italy. I haven't checked out land prices there recently, but I would suggest that you have both a tourist potential there, and a local potential. How far away is Milan and Turin, and so on?

Now look the other way. There is the tourist potential of the Costa Brava, and the local clientele from Gerona and Barcelona.

Tourist figures for Portugal are well down from their highs of ten years ago. I note Spain had one of its best years ever for tourists last year. But of course, you do need your basic clients from the local population for the bulk of your business. I would suggest that tourists are regarded as the icing on the cake.

3   The Business Environment

I'm sorry to say that anyone thinking of setting up a business in Portugal has to be a bit of a masochist. Let me give you a few examples of what I mean.

I decided to start a business over a decade ago. I created a company, got my fiscal numbers and was all ready to go. I gave the tax department a start date (three weeks hence), and went home. Three days later I received a tax demand. I hadn't even started! I dont muck about. I went to the office, closed the company, and took my custom elsewhere.

Local taxes on property have tripled this year. That means a pretty hefty charge at the local level for close to zero services. Larger premises are being charged 8% of value p.a. That is unsupportable. Do you need that?

There is no system of reliable law here. It is jungle. Many disputes are solved with a gun. It is that simple. You employ an accountant and pay your taxes to him for him to send on to the taxman. Very often he wont do that, he'll pocket the money. You then get a penal notice a couple of years later. The taxman is not supposed to go back more than 8 years, but I know of several instances where they suddenly demand taxes from 12 years ago. If you dont have your receipts you are in big trouble. They do the same for cars. Sell a car? Send it to the crusher? You will likely still get tax demands for running the thing, and there is nothing you can do about it. They then fine you every month you are late. Quite frankly it is a nightmare.

Courts: well, how about this. Someone only last month was accused of lying in court when all he said was that he was drunk at the time and didn't remember what went on. He was not accused of anything, but was only brought in as a witness against someone else. He was fined €400 for lying. He appealed. He was then told that his appeal was out of time because he should have appealed before the case was heard.

You cant make up this stuff. I'm sure most people wont believe what I've just said, but it is perfectly true and not at all unusual here. Do you want to live in the jungle, because that's what this place is. It's fine if you want a quiet life, and you keep your head down. However, if you want to have a thriving business, please remember that's not what Portugal is about.

VAT (IVA here) is 23%. That makes everything here ridiculously expensive. Petrol is expensive. Owning a car is expensive. People are getting much much poorer, and discretionary spending is way down. I dont think anyone should start a business in this place unless they have lots of money, and can grease hands continually to keep afloat. And that's another thing; corruption here is endemic. If you dont like that then stay well clear.


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