Occasionally, a practice owner that is leasing is given the opportunity to buy their premises at a reasonable/fair price…
If you, as a business owner, have this opportunity:
- What are the relevant considerations that you should take into account?
- Why should you buy when you can rent?
- Achieve capital growth through paying your rent.
As a practice owner, you are already paying rent to someone else – if you buy the premises and put that rent towards premises interest repayments, you would be able to a get the capital growth through the natural growth of premises value in the area over time.
2. Achieve capital growth just for being a dental practice.
Commercial premises with strong tenants are seen as more valuable investments than premises with weaker tenants and for many reasons dental practices are seen by investors as very strong and stable tenants.
As a result of this if a successful dental practice moved into a vacant premises they would immediately add 10-15% to the value of the property, just by virtue of occupying it.
3. Achieve Asset Diversification.
A lot of business owners would like to build some assets outside of their home and business. Commercial real estate can be a good asset class to diversify into - especially if you have a chance to buy commercial real estate with a solid (dental practice) tenant.
4. Any practice renovation costs improve YOUR capital.
When you are renting and you pay money to renovate, that renovation will either need to be undone at the end of the premises lease or it will improve the value of the landlord’s asset.
However, if you own the real estate and you pay money to renovate, the renovation should improve the value of both your business and your premises, such that both assets are increasing in value.
5. Security of tenure
Security of tenure is perhaps the best reason for a dentist to buy their own real estate.
What is security of tenure?
Simply put, it is your assurance of the legal right to continue using the space that your business is in. While it is possible to get security of tenure by leasing premises…even the longest leases are usually not as long as a long career in dentistry.
Poor security of tenure can compromise the value of your practice in multiple ways.
5.a. A dental practice isn’t the type of business that is easily moved.
The further you need to move a patient base, the greater the practice attrition if your practice becomes less ‘convenient’ for them to get to.
If your lease ends and you need to relocate, dental practices aren’t easily moved when you compare them to other businesses. You aren’t just talking about tables, chairs and a sign on the door, like an accountant or law firm.
If a dental practice is moving to a new premises, you will usually need special council permissions and radiation licenses for the new premises, organisation of council waste removal, non-standard fit-out, radiation shielding and plumbing. Chairs and X-ray equipment need specialist movers and installation.
5b. Existing patient goodwill attached to the location.
As much as all dentists want to think that they are irreplaceable in their patients' eyes, there are usually patients in any practice who are only coming back because it is close to where they live or their work, their children’s school, the train station, etc. The percentage of patient goodwill attached to the location varies from practice to practice, but it is usually significant, and needing to move a practice’s location, therefore, will usually result in some patient attrition.
5.c New patient goodwill attached to the location.
New patients come to a practice for many reasons. One of the reasons why a new patient may choose your practice over others is that, when they had a dental issue, they remembered seeing your sign or passing your practice when they were in the area.
The percentage of new patients received by this method will vary from practice to practice. Those in a prominent street front will usually get more business this way than a dental practice in a suite in a commercial building. Moving a dental practice will also mean a loss in community familiarity associated with that location, and could therefore mean a loss of new patients.
5.d Selling a practice with poor security of tenure is hard.
When the time comes to sell your practice, good security of tenure reinforces the value of your goodwill and practice as a whole.
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