Orthodontic Practice Lease Considerations – Part 1

Whenever dealing with a practice sale or transition, the buying and selling orthodontists have a lot to consider throughout the process, such as purchase price, length of the doctors working together before and after the sale, staffing issues, etc. However, we often see that one of the most important issues takes a back seat in the transition negotiations – the office lease! Whether the office is owned by the selling doctor or by an unrelated third party, we have seen numerous transactions be delayed due to lease issues not being resolved timely.

In the case where the selling doctor owns the real estate, the selling doctor often does not know what the fair market rental rate of the property is. The selling orthodontist often sets the lease rate he/she pays to himself/herself based on tax considerations or mortgage payments, which may be significantly higher or lower than fair market rental rates. We often have sellers tell us during the valuation process or transition negotiations that the rental rate should be $XX per square without really knowing the market, getting advice from a real estate expert, or understanding if this is a gross or net lease rate (“gross” meaning that the landlord pays most or all expenses, such as real estate taxes, insurances, maintenance, and “net” meaning that the tenant pays such expenses). The buyer, often inexperienced in these types of transactions, is generally advised to get the opinion of a local real estate expert to help evaluate the lease rate. The problems arise when the buyer’s expert says the rental rate should be significantly lower than the seller’s expectations. After much more time and research by the seller, it may be discovered that the rental rate he/she can receive from an actual tenant is much less than what he/she initially thought would be paid (or, often worse, if the seller realizes that the lease rate should be increased, which, if requested by the seller, creates other trust issues for the buyer). This situation can create a stumbling block in the transition negotiations and delay the closing of the transition.

The seller doctor, acting as the landlord of the property, has to understand that most buyers will do some research on what the fair market rental rate should be for similar spaces in the area. So, ultimately, the seller has to be reasonable and agree to lease the office at (or very close to) fair market rental rates. Otherwise, it may mean that the seller has to go through negotiations with multiple buyers to either: (1) find the buyer willing to pay a higher than reasonable rental rate, or (2) eventually understand that qualified buyers demand a reasonable rental rate and the rent must be set at market rates. Unfortunately, the latter often occurs after one or more qualified buyers have walked away.

Our advice to selling orthodontists that own the real estate is to do some research on the fair market rental rate for their office spaces when they first begin to consider selling their practices. The sooner these rates are established and supported by actual market research, the smoother and quicker the transition negotiations will go. It also helps in the valuation of the practice because the practice’s value is largely dependent on the income/profit accruing to the owner. If the income/profit used in the valuation is not correct (due to incorrect lease rates), the buyers may also challenge the valuation.

In our next blog post, we will review lease issues that can arise when the office is owned by a third party rather than the selling orthodontist.

Chris Bentson Article Featured in Orthodontic Products Magazine

GREENSBORO, NORTH CAROLINA— At least once in their lives orthodontic practice owners will go through a practice transition. Whether they are buying into a practice, adding a partner, or selling their practice for retirement, Chris Bentson of Bentson Clark & Copple advises orthodontists through every step of the process.

In the latest issue of Orthodontic Products Magazine, Bentson explains practice transitions in five main steps.

Begin by Gathering Information
The transition process starts at least two to three years before an orthodontic practice is put up for sale. Begin by learning as much as possible about the transition process. Talk it through with financial advisors, spouses, and other orthodontists who have gone through a transition. Make sure you consult several colleagues and sources of information, as experiences can vary. Word of mouth can also be a valuable asset when choosing a company to conduct an orthodontic practice valuation. Being well informed can minimize any pitfalls or surprises that come with the transition process.

Have A Valuation Performed
Before selling a practice, an orthodontist needs to know exactly what it’s worth. Like selling a car, or a house, appraisals must be done before any transactions can occur. An orthodontic practice valuation is much like having an orthodontic appraisal done before you sell. Valuations allow an orthodontist to know exactly where their practice stands financially before undergoing a transition.

Find the Perfect Partner or Buyer
In the current market there is a ratio of 3:1 seekers to opportunities, which is good news for those looking for another orthodontist for their practice. While residents tend to move to coastal states or high-density areas, it’s important to look for a candidate that can transition into your practice in the time frame you had in mind. Consider listing your opportunity with a transition specialization firm that has resident/doctor matching services. Transition firms often match doctors with buyers or partners free of charge.

Finalize all Transaction Negotiations
This period is where a transition will really kick into gear. During transition negotiations, buyer and seller will agree on a price, a financing plan for the orthodontic practice sale and work out any other details of the sale in writing. Generally, finalizing all the paperwork can take up to 90 days.

Official Ownership Transfer
This final stage of transition is essentially nothing more than finally signing official documents, and changing stationary and nameplates. Done properly, ownership transfer day will seem like just another day in the office.

These steps are an outline of the transition process to prepare orthodontists for the future. Proper research, planning and patience will allow for a smooth and rewarding transition.

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