Facility Costs Are Straightforward…Right? | Is It a Good Practice to Buy?

This week we’re moving on to major expense number three: Facility costs. 

Have you ever started an older show on Netflix from the beginning? I recently restarted one that came out in the early 2000s. As I was watching it, I was thinking “Man, we’ve come a long way technologically”. They were using flip phones and using stereotypical “computer geek” jargon that’s pretty much commonplace verbiage now.

I think the same thing when I go to the mall with my family. I wonder, “With everything digital now, how long will this Dillard’s stay open?”

Now as a parent who watched kids doing online learning and a business owner with remote employees communicating via email or Zoom, sometimes (emphasis on sometimes) I get nostalgic for how it was “back when I was a kid.” (I hope I don’t sound too old or depressing.) 

Because of the advancements, even in the last decade, there are many businesses thriving because of this technological revolution. They are able to reduce overhead simply by not needing to pay for a physical office to conduct business. 

But, no matter how digital the world has become, there is still no substitution for in-person dental care. Patients will always need to come to your office, your physical space, to receive your services. Because of this, the facility, and how much you pay for it, is a serious factor to take into consideration when practice shopping.

I really want to stress that this expense is geographically specific so there is no benchmark price you should pay for a facility, whether it’s for lease or for sale.

For example, a six operatory practice in Seattle, WA is not going to cost the same as a facility the exact same size in Bismarck, ND.

However, there is a general principle to keep in mind: Rent is a fixed cost that is not easily changed. If the rent number is high, changing that number downward is nearly impossible.

That being said, facility costs should account for 5-10% of practice collections.

If you’re looking at a seller’s financial information and the lease price looks insane, don’t go running and screaming quite yet. First take into consideration who owns the facility.

If the seller owns the building, the facility costs that you are going to pay can be very different from the seller’s.

When the seller owns the facility, he cuts himself a check for rent. Is that dollar amount fair market value? 99.9% of the time it’s not. 

Most of the time when this is the situation, you can actually expect to pay less than the seller for two possible reasons.

The first (and preferred) scenario is if the seller is also wanting to offload the facility to you in addition to the practice. If so, your estimated yearly loan expense is, more often than not, less than what the seller is paying themselves. 

Now some sellers have a hard time fully committing to retirement so often they opt to keep the building and lease it to you instead. If the seller decides they want to keep the building for a few years, they’ll charge you rent. The amount is always recommended to be fair market value.

If you’ve ever had the exhausting experience of shopping for a house, you’ll know that there are so many factors to consider. The same is true for choosing the physical location that you are going to put down your dental roots. Fiscal considerations, size, location, etc. We’ll get into much greater detail in a few weeks, but let’s learn to walk before we run. 

But because I’m so nice (or maybe downright mean- you can decide) I’ll give you just a little teaser for later…do you think it’s cheaper to: 

  1. Lease right off the bat because you can’t afford two loans or take 
  2. Take out a building loan in addition to your practice loan? 

I’ll give you some time to think it over for a few weeks before we dive headfirst into the pool of “facility considerations”. 

Don’t worry, I’m here to be your lifeguard.