By Santee Hathaway, Principal; Xite RealtyEvery practice goes through a life cycle. You open your first practice, grow your business to ultimately retire and sell your practice. No matter what stage of the cycle you are in, there are critical decisions that must be made to maximize the value of your practice. As Steven Covey famously coined, it is best to “begin with the end in mind.”
The Beginning: Practice Start Up
The goal of any business is to maximize profit. For a startup practice, you want to secure dominant real estate in the market with the highest density of your desired patient profile. This can be accomplished by utilizing detailed demographics tailored to your vision. Keep in mind, you are not just looking at where the market is today, but where it will be ten to twenty years in the future.
Some items to consider:
- Competitive landscape
- Potential-patient analysis
- Current and future population
- Potential catchment area
- Traffic drivers
- Visibility
In the beginning, you are most likely in a lease scenario. It’s imperative to structure your lease so that it’s sellable and allows you to walk away from the business with no future obligations. Remember, the end of the life cycle always ends in a sale, so structure your operations and real estate with the end in mind.
The Middle Ages: Relocations and Renewals
You own an established practice and now need to decide if a renewal or relocation is best for you. Relocations can be expensive in the short term, but that does not mean it is not the correct path to maximizing profits in the end.
Relocation
You are already in possession of some of the key data points that need to be evaluated at this stage. Where is your patient base? Has it shifted over the course of your ownership? Has the community grown where daily needs and residential densities adversely affected your catchment area? Is your location still working as a marketing tool—or have you been out-positioned in the market over the years by new development and a changing competitive landscape?
Renewal
You have gone through your due diligence and determined your current location offers your practice future growth. Now what? Does growth require you add operatories? It can be difficult to expand if you are landlocked by other tenants. If you have a vacancy next door, this is a great time to explore expansion and remodeling.
Keep in mind, landlords and their brokers are professionals and know the market. Do your homework, become educated, and start the process early when you still have time to relocate, if necessary. If you approach your landlord with just a few months left on your lease, they know it’s impossible for you to relocate and are a captive tenant.
If you did not enter your initial lease with the end in mind, this is the time to revisit the document with a real estate attorney and make any amendments necessary to set your practice up for future success.
The Golden Years: Practice Ownership
The most important thing to remember when moving into ownership is the most valuable asset you have is your business operations, not your real estate. The decision to own must not alienate your existing patient base and should expand your potential catchment area. Evaluate your current catchment profile and overlay new growth and developments in your market. As you move closer to the end of the practice’s life cycle, keep in mind what would be important to your target audience regarding the exit of your practice. While the majority of your valuation will be driven off production; aesthetics, equipment, location, as well as current and the potential for future growth will impact your valuation.
The second most important thing to remember is you’re deciding to become a real estate investor and need to understand what drives real estate valuations. Real estate values are directly tied to the location of the building, the ability to repurpose the building, and the credit of the tenant. Choosing the correct location and type of building will greatly increase your investor pool and profitability when you want to sell.
The Exit: Selling Your Practice
You have taken all the steps to maximize your practice value over the years, and now it is time to maximize the value of the real estate.
You have two options: continue to be a landlord and collect rent over time or sell your asset to the investment community. Regardless of which option you choose, you need to structure a favorable lease scenario with the new tenant that outlines roles and responsibilities of landlord and tenant. If the choice is to sell the asset, the lease needs to be structured in a way that’s attractive to the investment community and implemented simultaneously with the practice sale.