Last updated on September 24th, 2020 at 12:22 pm
Alain Sabbah is a principal at Cirrus Consulting Group, a firm devoted to providing superior dental office lease negotiation and review services to dentists. Alain is a dynamic, hands-on executive with extensive experience in commercial real estate consulting, focusing on tenant representation. Over the years, Alain has taught thousands of dentists on how to best leverage their office leases to maximize the value of their practices.
This week’s post is a guest post from Mr. Alain Sabbah of Cirrus Consulting Group. Mr. Sabbah recently delivered an eye-opening presentation to MGE’s executives and delivery staff on various aspects of dental office leases and how these can impact a dentist’s career, profitability and retirement. We felt this information was so valuable that we asked for a series of articles for MGE clients on this subject.
Last month, we ran the first installment of this series, A Dentist’s Guide to a Safe Office Lease Renewal. In this second installment, Mr. Sabbah covers several vital points to keep in mind when getting started with a newly acquired practice.
We hope you enjoy!
Buying A Dental Practice? Acquire Your Practice The Right Way
If you’re in the market to buy a dental practice, you’ll be inheriting the dental office lease agreement for the space. The office lease agreement is one of the most important contracts you will ever sign in your career as an owner dentist, often containing problematic clauses and expensive hidden risks.
Potential Risks in the Lease
- 85% of dentists across North America have a lease with language that can prevent them from ever selling their practice.
- 75% of dentists have a lease that can prevent them from getting to the end of their career in their current location, being forced by the landlord to relocate, an easy $100,000 + in unexpected costs.
Protect yourself and your investment by following these key steps as you transition into the new and exciting role of an owner dentist.
STEP 1: Practice Needs and Goals Assessment
Prior to completing your purchase, you’ll want to plan out your short and long-term practice goals. This will help you understand what you need your dental office lease to do for you, and how it should be set up to support your goals.
Sample Goals Affected by Language in the Lease:
- Hiring associate dentists.
- Offering alternative forms of dentistry to patients (i.e. Periodontics, Endodontics, etc.).
- Expanding the space with more operatory/hygiene rooms to increase production.
- Retiring or selling your dental practice.
STEP 2: Assembling the Right Team
The next step in your practice acquisition plan is gathering a team of reliable professionals to help make your vision a reality. Assemble experienced and accredited office/space designers, builder/contractors (if applicable), dental equipment supply and technology specialists, financial advisors, a lender, a practice management consultant and a dental office lease negotiator.
STEP 3: Practice Financing
What is your budget for buying the practice? Arrange financing in advance and meet with your financial advisor and accountant to review and determine your ability to manage the investment. How much debt are you prepared to acquire? Will the practice cash flow cover the loan? What type of debt are you considering (i.e. fixed loan, line of credit)? Consider interest rates, repayment terms, and flexibility when determining if the investment makes sense for you.
STEP 4: Letter of Intent or Offer to Purchase
A Letter of Intent (LOI) or Offer to Purchase (OTP) are (ideally) non-binding agreements that outline the buying dentist’s interest in the dental practice. They include high level terms such as the purchase price for the practice, closing dates, the role of the departing dentist, restrictive covenants to the seller such as non-competes, and more.
Draft, negotiate and sign the LOI or OTP for the practice. Ensure to make the purchase of the practice conditional upon a successful transfer of the lease agreement.
STEP 5: Review & Negotiate the Dental Office Lease
When a dental practice changes ownership, so must the lease agreement; the lease interest needs to be transferred from the existing tenant to the purchaser of the practice. Once the LOI or OTP has been finalized, it’s time to review and negotiate the details in the dental office lease, ensuring it supports a smooth “assignment” and protects both parties, with particular attention to the buyer.
Lease agreements are drafted by landlords and their attorneys for their financial interest, containing language that provides significant flexibility to control the landlord/tenant relationship throughout the course of tenancy.
Issues in the Standard Dental Office Lease
Very common in standard form leases are clauses that may: force a dentist to relocate unexpectedly, disallow them the ability to offer prospective patients specialty dental services, restrict the hours of operation of the practice, or disallow the opening of a satellite practice; the list goes on.
Work with your dental office lease negotiator to review the details of the lease for the above noted risks and more. Together, develop a custom negotiation strategy to secure the best possible outcome with fair terms that will help you sustain a successful practice with long-term protection and the flexibility to grow.
Important Leasing Considerations
- Renovations and Improvements: Does the lease allow you to renovate or upgrade the space without requiring permission from the landlord? Are you required to remove any improvements upon practice exit, converting it back to its original shell condition? This can easily cost a dentist $100,000+ in demolition and construction costs.
- Term and Options: Does the lease provide you with enough term and “options to renew” after you buy the practice? Are these terms applicable to you when you take ownership? Your lender will pay particular attention to “lease term”. With little term remaining in the lease, most lenders will not provide financing for your practice acquisition.
- Assignment Language: Does the lease contain language that gives the landlord the right to deny your request to assign the practice, or terminate the lease upon this request?
- Protection & Security: Does the lease provide protection for you, the new tenant, and your family in the event of death or disability?
STEP 6: Closing the Transaction
Upon successful negotiation of the dental office lease (or assumption agreement), have both parties execute the documents, make copies, and save them somewhere safe. Ensure you receive a fully executed copy of the contract for your records. Finalize the transaction by completing the Purchase of Sale Agreement (by waiving purchaser conditions).
STEP 7: Next Steps
Prepare to open by finalizing budgets, confirming office design plans, completing any construction (if applicable), and ordering, delivering and installing equipment and supplies. Acquire the appropriate permits, hire and train your staff, apply any last-minute touches, commence marketing efforts, and open your doors!
The Cirrus team of dental office lease negotiation experts will analyze your lease for important dates, identify potential problem areas and risks, and develop a lease improvement and negotiation strategy to help you achieve fair and equitable leasing terms for your practice purchase. Protect yourself and your investment in this important and critical step in your dental career.
Questions about your dental office lease or how to acquire a practice? Contact Alain Sabbah directly for a complimentary consultation by dialing 1.800.459.3413 x 3256 or by visiting the website http://cirrusconsultinggroup.com/complimentary-dental-office-lease-consultation/.