Evaluating Facility Costs

Here’s how you should evaluate facility costs during dental practice valuations.

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Q: How much should I be paying for facility costs?

A: Facility costs should account for 5-10% of practice collections, whether you’re renting the facility or purchasing it. This expense is very geographically specific so there is no exact benchmark price you should pay for a facility. But 5-10% is a good range to start with.

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.

On the other hand, if it’s a low number, that’s great news for you. Just beware of the rent number that’s too good to be true. As they say, it usually is.

If you’re looking at a seller’s financial information and the lease price looks way too high or low, take into consideration who owns the facility. If the seller owns the building, the facility costs that you are going to pay can (and will) be very different from the seller’s reported price.

When the seller owns the facility, he cuts himself a check for rent. It’s usually absurdly high or essentially zero. Either way, 99.9% of the time it’s not fair market value and not what you will be paying.

If the seller wants to sell the building to you in addition to the practice, your estimated yearly loan expense is often less than what the seller is paying themselves or what they’d charge you for rent. 

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. That amount is always recommended to be fair market value. 

Find out what the approximate lease charge will be so you can plan accordingly and see where those costs land.

The “pro” to facility costs being permanent, is that they can be balanced by increasing collections. Increasing collections means paying more for labs, supplies, and other variable expenses. But rent is fixed. So if you collect more, the share of rent as a percentage of collections goes down. And that’s the kind of math you should like to do.

At the end of the day, just make sure it falls within that 5-10% of collections, and you’re looking good.

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