The Deal Killer You Didn’t See Coming: Your Dental Office
It’s common for practice owners/sellers to focus on practice performance while overlooking real estate issues that can prevent a deal from closing. Even if a dental practice is doing extraordinarily well both clinically and financially, “facility considerations can make or break a deal”, as noted by DentistryIQ.
If you own and want to sell your dental office, it’s important to understand that real estate appraisals are often based on general office comparables. Working with knowledgeable advisors can help you bridge the gap between general office comps and dental office space that should be valued at no less than 125% of general office comps, per square foot.
When a buyer can secure funding for a practice
but falls short on real estate financing,
creative structuring can keep the deal alive.
One approach is to use a lease with a substantial rate increase after two years, which highly incentivizes purchase after a buyer has had time to build financial strength. Similarly, seller financing can be structured with a dramatic rate increase after two years, encouraging a buyer to complete a buyout.
If you lease your space from a third-party landlord, make sure that the lease term, with all option periods, extends far enough to satisfy a buyer’s loan repayment period. Lenders want to ensure their borrowers won’t be left without a place to practice during the life of the loan. Lease renewal options may need to be added through a formal amendment.
Some landlords will not approve a lease assignment without their practice selling tenant to remain as a guarantor on the lease. As discussed within the Dentaltown community, “many dentists underestimate how much their lease or lack of control over it can impact a future sale.” If a guaranty is unavoidable, consider negotiating a defined release period that allows you to exit as soon as possible.
Real estate costs that exceed industry benchmarks can significantly reduce a practice’s attractiveness to buyers and lenders. A generally accepted key performance indicator for real estate costs is that they do not exceed 7.0% of collections. If your rent is disproportionate to practice performance, it may reduce buyer interest and lower your practice sale price.
For practice owners who own their real estate, the strategy becomes more nuanced. If you lease the space to a buyer, setting the right rental rate is essential. While it may be tempting to maximize rent, doing so directly reduces the buyer’s projected profitability, which in turn reduces the value of your practice. A balanced, market-based lease rate often produces the strongest combined outcome for both the practice and the real estate.
Your dental office is not just where you practice; it’s a critical component of your exit strategy. Addressing real estate issues before selling your practice can mean the difference between a smooth transition and a deal that never makes it to the finish line.
Thinking about selling in the next few years?
Why not have a quick, confidential chat?
Take control of your future
PVA℠ helps practice owners prepare for the inevitable transition of their practices to new ownership.
J. Robert “Bob” Brooks, CEPA, CBI
J. Robert “Bob” Brooks, CEPA, CBI, leads Practice Endeavors, an Ohio-based practice brokerage and dental realty company. His company provides practice owners with the tools they need to prepare well for life after practice ownership and to find the best price/best fit buyers for their seller clients. Bob was integral in starting the first of its kind dental practice broker credentialing for the International Business Brokers Association.