I just wanted to give you a quick answer to a question that goes through a lot of doctor’s minds as they prepare their transition — regardless of whether you are planning to transition sooner or later, sell, hire an associate, whatever it may be.
The question I get often is this:
Should I sell my building with my practice?
For many situations, my answer is NO.
Here are a few reasons why:
1. Passive Income: one challenge you will face with selling your business is tax issues on capital gains, particularly if you have a large payout. Keeping the building gives you ongoing passive income that you can better plan for in terms of tax consequences (not to mention the income stream).
2. Sale Complications: when you are selling (or doing an Associate ownership opportunity, buy-in, buy-out, partnership, etc), it’s a big deal or opportunity for your buyer. Put simply, it’s enough to handle that transition and transaction. When you add the building to it, you are further complicating things and clouding the issues at stake. There’s a saying that “confused buyers don’t buy” and I believe it 100%. A prospect that has a clear goal: ownership or associate opportunity or whatever — has one thing on their mind. Bring in a second (building purchase) and they suddenly lose focus on the first, start wheeling and dealing or get conflicting advice. Keep it simple. One sale or transition at a time.
3. Too Risky: the final thing you need to think about is the amount of risk your prospect can tolerate. Most young chiropractors have huge student loans. Add to that a loan to purchase your practice and it’s a big step for them. Add on top of that a building purchase and you’ve got Mt. Everest. It seems like a big risk to them to pay all that back (and it is). Furthermore, if you are part of the financing equation, now you’ve upped your risk too. Partially financing the practice sale is one risk. If you also roll in the building, you’ve just increased your risk. If that buyer goes down in flames you lost a practice and a building renter. Sure you can take back both, but at what damage?
When the Building Sale Makes Sense
There are some situations where the combination of a practice and a building sale does make sense. Here are a few examples:
A. The Home-Office Combo: if your practice is located is a home-office combo, you may find that the building’s use is a great fit for your practice and the right kind of buyer. Not everyone wants to work where they live. But, in these cases, the use of the building as a practice may actually increase the appeal of the practice to the potential buyer. Simultaneously, the sale of your building on the open market may potentially decrease its value because the new owner (a non-chiropractor) would have to do a lot of remodeling to make the building work for another purpose. Of course, this isn’t the case with all home offices. But we’ve seen many where the building and the practice are tied tightly together and where it actually makes sense to sell both.
B. Low Buyer Equity — if your buyer does not have a significant portion of cash or equity to invest in the purchase of your practice AND your practice is fairly large, the sale of the building along with your practice may actually help your buyer purchase. This sounds a bit backwards, but banks who are looking to do SBA lending have requirements they need to meet in terms of what the buyer brings to the table on a practice sale that is primarily “goodwill” based (which is most chiropractic practices for sale). But when you add in the building to the equation, now you have a tangible asset in addition to the goodwill and the formulas can change in your buyer’s favor. Again, this is not necessary in every case, nor is it always desirable. But the option can make sense if the circumstances fit.
C. Done With It All – it’s a simple, but powerful reason. You want to be done with practice, done with being a building owner, landlord – everything. Perhaps you want to completely “cash out” or perhaps, for whatever reason, you want out.
D. The Most Appealing Option — the final way a building + practice sale combo generally makes sense is when it is the most appealing option. Many times, this is because the sale of the practice alone is not appealing enough to the buyer or the bank. Or frankly, not appealing at all. But the practice and the real estate combined makes sense.
So there are a few circumstances where selling the building along with your chiropractic practice sale is strategic; but on the other hand, a built in tenant, passive income and a simpler sale WITHOUT the building sounds pretty nice most of the time 🙂
Need More guidance on your chiropractic practice sale or transition? Check out our upcoming FREE WEBINAR: Sell, Switch or Slow Down – How to Maximize the Value of Your Chiropractic Practice Sale & Minimize Costly Mistakes.