02 Jun Should I sell my building with my practice?
Selling your practice and your building at the same time will likely result in you losing tens of thousands of dollars in sales proceeds! However, it is surprising how often doctors want to sell their office building at the same time their practice is sold. Many doctors even want to package the practice and the real estate together. This is a major mistake.
Your practice and your office building are two separate assets and there are a number of logical reasons why each of these valuable assets should be sold separately.
Packaging the practice with the building eliminates many potential purchaser candidates. It is a given that there are typically only a small number of quality purchasers per market area. It is also a given that purchasing a practice requires incurring significant debt. Considering the fact that many purchasers are still in debt from school loans and are already struggling with the thought of more debt to acquire a practice, increasing the total sales price by adding the real estate will simply chase many of these candidates away! For example, if your practice is worth $500,000, there will only be a limited number of doctors who will be able to get past the fear of half of a million dollars of more debt. Now you also want to add the real estate to an already frightening loan amount. Let’s say the building costs another $250,000, so now we are talking about a combined sales price of $750,000! You’ve just eliminated the majority (if not all) of the potential purchaser candidates (from an already limited pool) simply by adding the real estate to the total package.
Packaging the practice with the building promotes harmful negotiations. Everyone “negotiates” real estate. As you know, PARAGON will not negotiate the price of your practice once we have determined and set the fair market value. Since 1988, PARAGON’s consultants are virtually 100% successful in selling dental practices at their full appraised value. However, the instant real estate is included; buyers want to negotiate the price. The only party that loses in negotiations is the seller! You’ve never heard of a buyer wanting to negotiate a higher price have you? If you include the building, you will be expected to offer a “package discount” and you WILL lose thousands of dollars in sales proceeds… needlessly.
Packaging the practice with the building often delays the closing on the practice sale. There are certain environmental hoops that must be jumped through in the sale of real estate that house a dental practice. Sellers (and lenders) must obtain the necessary clearance certificates and/or letters before a closing on the real estate portion of the transaction can occur. Meanwhile, the purchaser is ready to purchase the practice, yet, since the seller is requiring that the building must be sold as part of the deal, the entire transaction gets delayed for several months. This is simply not wise. Absolutely nothing good can come from delaying the sale of the practice when the purchaser is ready now! It is not unheard of that another practice comes on the market and the purchaser decides to purchase the other practice because the deal can be closed now instead of months from now. PARAGON knows that this has happened at least 3 times!
Packaging the practice with the building eliminates a “once in a lifetime” financial advantage. Suppose you were willing to finance the acquisition of the building. Instead of selling the building now, rent the building to the purchaser. Your rent payments can likely structured to be the same amount as the mortgage payment would be. Think about it… instead of selling and collecting mortgage payments of $2,000 a month over the next ten years, you are able to collect the same $2,000 a month in rent payments over the same ten years and you still own the building. At the end of the lease, you can then sell the building and collect another $2,000 a month in mortgage payments for another ten years! This amounts to an additional $240,000 income you realize by NOT selling your real estate when you sold your practice!
Oddly enough, some sellers initially have a primary objection to the rental approach. “I don’t want to be bothered with taking care of the building.” This is easy to handle, simply execute a lease that requires the tenant (purchaser) to be responsible for the property upkeep and hire a handyman for other extraordinary landlord repairs, as and if they are needed.
This is issue really a “no-brainer.” Sell your practice and rent your office building to the purchaser of your practice. It will make the sale of your practice and your building a lot easier as well as considerably more profitable for you!