Pitfalls to Avoid in Buying a Building
By Steve Kikikis, Vice President, Broker
Money Pit or Cash Cow?
On occasion when a doctor purchases a practice there is also an option to purchase the real estate. Historically, real estate has been a good investment over time, but owning a commercial building has its own nuances.
There are a lot of similarities between owning a commercial building and a residential house. As the building owner or homeowner, you are responsible for paying the insurance, maintenance, and property taxes. Be sure to understand what your out-of-pocket costs are before you take on the responsibility of purchasing a property. Investing in a building or home inspection conducted by a reputable building inspector is always worth it.
Before you purchase a commercial building, know your demographics, and do your research. If a building is a steal, make sure you do some research to find out why. A commercial real estate broker that specializes in your industry can assist you in looking at the demographic information to fully understand the value of the real estate.
After you’ve purchased the practice, you are now the king of your castle and if you are business savvy, you can make a profit from owning your building. Having some knowledge of what to expect and what the pitfalls are of owning a building can save a lot of headaches down the road. For this article, we will consider that you are the owner and sole tenant of your building.
Maintenance – You’re now responsible for everything from the leaky roof, sweeping the parking lot, HVAC systems, lighting, ADA compliance, security systems, plumbing, and possibly the water and sewer mains underneath the property. The best advice is to adhere to a schedule with regular and preventive maintenance. Don’t skimp on issues that may seem small but that can turn into a bigger safety issue (both expensive and potential lawsuit if hazardous) in the long run.
A lot of potential challenges are dependent on the age of the building and how the previous owner took care of the property. You can hire a property manager to be the point of contact so you’re not distracted and can concentrate on your work. Some owners like to be involved in every decision, while others don’t want the hassle of being contacted for leaky pipes, clogged toilets, etc.
Insurance – a commercial building policy will differ from a residential homeowner’s policy on your home. A commercial policy will also have coverage for the business operations, its products, and operations liability. Much like homeowner’s insurance, the age and construction type of the commercial property will determine the premiums. Commercial insurance is also based on the neighborhood where the building is located.
Although chances are slim, some policies cover loss of income in the event of a fire or other loss of the building. These are usually additional policies that can provide peace of mind.
City ordinances – Although you may own the building, ownership doesn’t necessarily mean you can do anything you want. An example is a new building owner who wanted to utilize a specific size of a sign for his business, but the city ordinances stated a sign can be no bigger than 30 square feet. Be sure to reach out to the city before you decide to change or update the signage on your building and also verify if there are any restrictions for the exterior of your building such as signage, color, material, etc.
Taxes – There are two points on the taxes. First, for the building taxes, make sure your ownership is properly transferred to you during the purchase, and make sure that you keep up-to-date on your taxes. Set up an account directly within the municipality you are located or make sure your loan program is paying it directly. For your business taxes, owning your own commercial real estate has many tax advantages. Connect with your CPA, make sure you’re paying your real estate entity as a business expense, and more.
Money Pit or Cash Cow? There will be costs to owning your own commercial real estate, but taking the proper steps and working with an experienced commercial real estate broker that specializes in medical/dental purchases will save you time and a lot of money. Just think, if you are leasing a space, after 10 years you will be signing up for paying the landlord another 5 years of income. If you own, after 10 years, you will be working towards paying that building off and have the equity in the building.
Read MoreCommunication is the Key to a Successful Dental Practice Transition
As dental practice brokers, we are often asked “What is the most important factor in facilitating a successful dental practice transition?” The simple answer is Communication. While it is imperative for the buying doctor to build a strong team of advisors, complete due diligence on the practice, secure financing, and navigate the closing process, all else could be lost if there is no effective communication between the buyer and seller during and following the transition of ownership.
As part of the due diligence process, the buying doctor should schedule a face-to-face meeting with the selling doctor well in advance of closing. We typically recommend this meeting be held at the seller’s office after operating hours, with the practice broker attending if possible. The initial meeting is designed to allow both parties to get to know one another, ask any questions they may have regarding the practice or each other, discuss practice philosophies, etc. During this meeting, the parties may also exchange contact information so they can reach out to each other directly to discuss any remaining questions or concerns leading up to closing (while also keeping the practice broker in the loop).
The buyer typically learns a great deal about the seller and practice during this interaction and leaves the meeting knowing if the opportunity is the right fit for them. Once the buyer and seller have met and established a personal connection, we also find that negotiations are more amicable and the closing process goes much smoother.
With a fee-for-service and/or personality-driven practice (where most of the patients are coming to the practice specifically because of the seller’s personality), we have found that a second meeting between the buyer and seller in a more casual setting such as lunch, dinner, or happy hour can allow the parties to loosen up and gain additional insight into each other’s personalities, interests, practice philosophies, etc. It is important to mention that we suggest the parties steer clear of discussing pricing, allocations, or any other negotiable items during any of these meetings.
Throughout the closing process, the buyer should clearly communicate his or her expectations of the seller leading up to and following the sale and the seller should notify the buyer if he or she is unwilling or unable to fulfill these obligations. Regardless of the seller’s post-closing plans or obligations, the selling doctor should plan to serve as a resource to the buyer following the sale and be available for a phone consultation to answer questions and offer advice.
By effectively communicating throughout the transition process, the buyer and seller will have established a solid foundation for a smooth and successful dental practice transition.
-Rod Johnston, MBA. CMA
Ideal Practice Benchmarks
by Jim Vander Mey
Practice Transition Advisor
People love benchmarks. They want to know how many glasses of water we should drink each day. How much we should work out every week. Or, how many miles per gallon our cars can achieve. There are benchmarks to look at when you are buying a practice. They may not necessarily be deal-breakers, but they help determine what you will need to do to right the ship if the benchmarks are a little out of whack. Here are some of the benchmarks you should look at and calculate when buying a practice:
- Staff overhead as a percentage of collections – 20% to 25%. If it’s higher, the practice is overpaying staff, underperforming collections, or too many staff.
- Facilities Expense – 7% to 9% of collections – Too high and the practice is either paying high rent, space is underutilized or production is too low.
- Supplies – 5% to 7% of collections – If this is too high, it could be that the practice is using high-end supplies, or the supplies inventory (or vendor) is not managed properly.
- Marketing expense – 3% to 5% depending on the growth stage. A practice that is looking to grow will have a high percentage. A static practice may not spend much on marketing at all.
- Collection Rate – Minimum of 98% for a well-run practice. A low rate means the front desk is not keeping up or managing the accounts receivables very well.
- Total Overhead (all expenses less owner and associate pay) – Ideally should be less than 65%.
These are just a few benchmarks to analyze when looking at a practice. Again, these are benchmarks and if the practice you are analyzing does not meet or exceed these benchmarks, it does not mean it’s a bad practice. It simply means you have work to do in those specific areas.
Contact me if you would like more information – jim@omnipg-vet.com.
Ideal Practice Benchmarks
by Jim Vander Mey
Practice Transition Advisor
People love benchmarks. They want to know how many glasses of water we should drink each day. How much we should work out every week. Or, how many miles per gallon our cars can achieve. There are benchmarks to look at when you are buying a practice. They may not necessarily be deal-breakers, but they help determine what you will need to do to right the ship if the benchmarks are a little out of whack. Here are some of the benchmarks you should look at and calculate when buying a practice:
- Staff overhead as a percentage of collections – 20% to 25%. If it’s higher, the practice is overpaying staff, underperforming collections, or too many staff.
- Facilities Expense – 7% to 9% of collections – Too high and the practice is either paying high rent, space is underutilized or production is too low.
- Supplies – 5% to 7% of collections – If this is too high, it could be that the practice is using high-end supplies, or the supplies inventory (or vendor) is not managed properly.
- Marketing expense – 3% to 5% depending on the growth stage. A practice that is looking to grow will have a high percentage. A static practice may not spend much on marketing at all.
- Collection Rate – Minimum of 98% for a well-run practice. A low rate means the front desk is not keeping up or managing the accounts receivables very well.
- Total Overhead (all expenses less owner and associate pay) – Ideally should be less than 65%.
These are just a few benchmarks to analyze when looking at a practice. Again, these are benchmarks and if the practice you are analyzing does not meet or exceed these benchmarks, it does not mean it’s a bad practice. It simply means you have work to do in those specific areas.
Contact me if you would like more information – jim@omnipg-vet.com.
Top Pitfalls To Avoid When Buying a Veterianry Practice
There are a number of things to look out for when buying a veterinary practice. If you’re not careful, you could end up with a bag of tricks. Here are some of the top pitfalls to avoid when buying a practice:
1. Not understanding the numbers. Be sure and know what normal veterinary expenses are and what may be extraneous.
2. Assume the staff are all on board and will be staying with the practice. Know who the staff is and what their relationship is with the seller, and how good they are…
3. Embezzlement – hire an accountant to look for any irregularities. Statistics show there are a high number of practices that are embezzled by their employees each year. Are courtesy credits high? How about patient refunds?
4. Does the procedures the selling doctor perform match the procedures that you do? Make sure a large amount of the procedures you don’t do are not currently being performed by the seller. You don’t want to have an immediate drop in production right from the start.
5. Understand the lease. How many years are there left on the lease? Are there more options to extend? Is there a loan form the landlord build into the lease? Which expenses are covered in the lease? Is it triple new or a gross lease?
These are only a few of the pitfalls to make sure you don’t get tricked. Spend as much time in due diligence as you need and bring on experts to help you along the journey.
-Jim Vander Mey, CPA. ABI