We ask two experts the same question to give you two different answers on a complex issue
Question: My lease is expiring next year and I only want to practice three more years. What are my options?
By Tom Snyder, DMD, MBA
If you're confident that you'll be practicing only three more years, signing a long lease with a longer term could be a problem. This is especially true if you're practicing in a small town or rural area. The chances of finding a potential purchaser are much less likely than in a suburban or urban locale, so you could be saddled with a lease of longer duration. You must be realistic in assessing your practice's "sale ability."
You should have a practice valuation prepared by a transition consultant or broker. He or she should be able to assess your chances of selling your practice in a timely fashion. If, in fact, your practice can be sold, approach your landlord to negotiate an initial three-year lease renewal with two two-year extensions. This would cover a seven-year loan term, which banks would minimally want if they financed the sale of your practice. If the practice's value is $800,000 or more, a potential purchaser may consider a 10-year or higher financing term, so the renewal lease extensions will have to be for a longer term.
If you choose not to extend your lease, consider approaching another practice in your immediate area about developing a possible facility sharing arrangement with a mandatory buy-out. An alternate strategy would be to consider a practice merger with a mandatory buy-out. Being realistic about the chances of selling your practice is key to whatever path you pursue.
Tom Snyder, DMD, MBA, is the director of transition services for The Snyder Group, a division of Henry Schein. He can be reached at (800) 988-5674 or [email protected].
Question: My lease is expiring next year and I only want to practice three more years. What are my options?
By Lynne Nelson
If your landlord allows, lease month to month until the practice is ready to transition. Once you have identified a purchaser they will negotiate a new lease. The risk would be the landlord is not willing to offer lease terms that will satisfy your purchaser or lender.
In most cases you will have the ability to assign the lease to your purchaser as long as they are credit worthy … but not always. Read your lease to see if it has language indicating it can not be unreasonably withheld from assigning to someone else. If the lease is assignable, you will need to determine what's best for you, but works favorably for your future purchaser. Most purchasers require lending which means that they will need to have a lease with terms covering the life of their loan. This means they will need a lease with options covering seven to 10 years.
An average new purchaser wants between four and five treatment rooms. If you have three treatment rooms with space to expand, it meets their needs. If you do not have room to add an operatory they may wish to eventually move and not want to be involved in a long term lease. You may want to negotiate with your landlord to have a three-year lease with three three-year options to renew. This way, your future purchaser has the ability to move the practice in fairly short order.
If your practice is healthy and you have a modern, good location, the increments of the lease terms may not matter to your future purchaser. However, it could affect you in how you are released from responsibility. Most landlords will not novate the lease, meaning replace you with someone else leaving you free and clear of responsibility. Leases are assigned and depending on the landlord they may choose to keep you "on the hook" until the end of the first increment. If your increments are longer you may be on the hook longer. When transitioning your practice, negotiate with the landlord to let you off the hook after 12 months of good standing by the new tenant. In most cases the landlord just wants to be assured that the new dentist will maintain timely payments of the lease.
The bottom line is to find a solution that impacts you the least but also doesn't inhibit the future sale! If you are planning on using a broker in the future this would be a good time to introduce yourself as a potential future client. They may save you from headaches later.
Lynne Nelson is senior broker at Consani Seims, Ltd. ADS Northwest, and cofounder of Practice Management Associates, LLC. For more information contact her at (866) 348-3849 or [email protected].
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