Dentists, re-invent your vision from one of “emotional” practice ownership to one of a “solid, long-term investment” from day one.  View your office lease as a powerful portion of practice ownership, when negotiated for business protection. A business-protective lease plays an integral part in maximizing practice value at the time of sale and significantly helps to prepare for a lucrative Exit Strategy.   

The goal of any business owner is to earn a great income, plan for the distant future and have enough funds/investments to retire comfortably at an age that allows for enjoying “the golden years”.  The same is true, in particular, for dental practice owners. There is a lot of great advice amongst the national dental community that focuses on how practice owners envision themselves and their practice. The advice imparted is that dentists consider shifting their language and their thought process from that of a practice owner to that of an investor. This paradigm shift is said to be the first step to achieving financial freedom and lends itself to visualizing the business (practice) life cycle using a bell curve to contemplate what a sale might look like. 

It’s wise to look far into the future and realize that a practice will not be owned by the same owner forever. Businesses, like dental practices, will change ownership as time passes. If the practice is viewed as an investment, from day one, it should mirror how Wall Street rates its above-average investments with the goal of selling a solid investment at the right time. Credit-worthiness based on financial strength, low risk of default, growth potential, good levels of debt and debt repayment, and earning potential determine the overall rating of the practice “investment”. 

There are a ton of moving parts in practice ownership from start-up to growth to selling. Most involve internal operations that are handled by the owner or practice manager. If the owner dentist views his/her practice as an investment, several “maintenance” review periods should be established – patient credit balances, electronic upgrades, insurance credentialing, physical characteristics of the office, fee structure, HR matters, etc. Transitioning into selling a practice, requires a long-term plan that should begin several years before the sale. It’s also wise to hire a dental practice appraiser at different intervals during the ownership cycle and enact procedures and make expenditures to increase the value of the practice at sale. View it as an “investment” that must be reviewed and tweaked from time to time to maximize value. Many experts indicate exit planning should begin a minimum of 8 years prior to actual sale, while others recommend the “investment” thought process should take place practically from day one. 

Along with the huge number of moving parts in the sales process, the single most overlooked portion of the sales process is the real estate portion of the practice sale – namely the dental lease. In the case of the building sale along with the practice, the building will be appraised and the sales amount of the building will be established – done deal. KEEP IN MIND, REAL ESTATE VALUES VARY OVER TIME, WHEREAS LEASE RIGHTS DO NOT.

In the case of a lease as a part of the practice sale, the lease is a large component in establishing the sale of the practice. The contents of the lease can be a mortal enemy or a best friend – depending on how it is negotiated. It is vital that a practice owner with a view toward selling at some point has a lease that addresses business protection that is not negotiated by most attorneys. Most attorneys review and negotiate for enforceability and validity. It is the job of the real estate broker to negotiate for protection from hidden business risk throughout the dental lease. Ambiguous lease provisions can be very dangerous.  

One school of thought is that the seller should review his/her office lease with the goal of possibly renegotiating the existing lease for a longer term and with a favorable assignment clause. While a favorable assignment clause is positive, that one item alone does not protect the buyer from inheriting a lease that doesn’t provide for protection from hidden business risk, i.e., Recapture, Relocation, building owner being foreclosed upon, etc.  There is a myth that a practice buyer can get a better deal by assuming an existing lease – don’t believe it!   

Dental leases are always skewed to favor the landlord, which places much more financial and business risk on the dental tenant’s shoulders. Unless the seller’s lease has protective terms and conditions that shift the hidden business risks away from the dental tenant/practice owner, the purchaser should negotiate a new lease as a required part of the practice purchase. A practice purchaser would never want to inherit a lease that doesn’t properly protect against hidden business risk. In fact, a lease that doesn’t properly protect the new buyer/tenant against hidden business risk actually can devalue a practice and, in the end, decrease the selling price.

Example: One of our clients in Illinois was in the process of practice purchase, and a stipulation in the existing lease ended up costing the seller over $80,000! Why? There was a provision in the seller’s lease, that in the event of a sale, the Landlord had the right to void the existing lease and negotiate a new lease with the new buyer. The attorney left this provision in the lease, because its inclusion is not illegal. The Landlord raised the rent rate. Over the term of the lease the buyer would be responsible for $80,000 extra in rent – over the quoted rate. To proceed with the practice sale, the seller had to decrease the sales price by $80,000! Perfectly legal, terrible business risk for the practice buyer/tenant.   

The bottom line: The dental lease can be a valuable asset. Practice owners can ALWAYS realize a higher practice value at sale if they have a lease that will provide for the expansion of tenant’s rights that will allow for flexibility and future growth, while protecting against hidden business risk.  

Likewise, practice purchasers should NEVER assume a lease without business protection that can last for 10 to 20 years or more. ALWAYS look to the future.  

At some time, a dentist will want to sell his/her practice – depending on life’s circumstances. Be prepared. The costs connected to the real estate portion of practice ownership are second only to payroll costs. It’s a big piece of the pie! NEVER underestimate the power of the well-negotiated lease in profitability!