Practice Sale on the Horizon? Start Planning Your Facility Strategy Now

If you’re planning to sell your practice in the next 3–5 years, your facility could either significantly increase your sale price—or kill your deal. At NextSite Consulting, we frequently advise practice owners to prepare for transition not just operationally, but physically. The lease terms, condition, and flexibility of your facility all play a crucial role in its valuation and how attractive it appears to potential buyers.

What to Review for Lease Spaces:

• Lease Assignment Language: Buyers need confidence that they can seamlessly take over your existing lease. If your lease doesn’t allow for easy assignment, it can quickly become a dealbreaker.
• Term Length and Renewals: Most buyers prefer at least 5–7 years of lease term remaining, or clear, favorable renewal options. Short terms can significantly reduce the perceived value of your practice.
• Negotiating Market Rental Rates with Long-Term Options: Before a sale, it’s critical to ensure your lease's rental rate is competitive with current market conditions. Overpaying can negatively impact your practice's profitability (EBITDA), which directly affects its valuation. Simultaneously, negotiate for long-term renewal options (e.g., 2-3 additional 5-year terms) that provide a prospective buyer with security and predictability for the practice's future location. This minimizes buyer risk and enhances perceived value, as they won't face an immediate need to relocate or renegotiate.
• Flexibility for Future Needs: Does the lease allow for future expansion or contraction if the buyer's needs change? This foresight is crucial for long-term viability.

For Owner-Occupied Buildings: Balancing Rental Rate for Maximum Value.

If you own your building, you have a unique opportunity to maximize value from both the practice and the real estate. However, this requires careful consideration of the "rental rate" you charge your practice.

• Defining the "Right" Rental Rate: While you can set any rate, the smartest approach is to establish a market rental rate for the practice's space. This means charging your practice what a comparable tenant would pay for a similar space in your market.
• Maximizing Practice Value (EBITDA): If the practice pays an above-market rent, its expenses are artificially inflated, which lowers its EBITDA. Since practice value is often determined by a multiple of EBITDA, a lower EBITDA means a lower practice sale price. Conversely, if the practice pays below-market rent, its EBITDA is artificially high. While this boosts practice value, a savvy buyer will recognize the discrepancy and adjust their offer based on what they
  would realistically pay in rent.
• Maximizing Real Estate Value: The value of your building is significantly influenced by the rent it generates. A market-rate lease with your practice makes the real estate an attractive, stable income-producing asset for a potential real estate investor, whether they are buying it with the practice or separately.
• Simplifying the Sale: By setting a market rental rate, you create clear, defensible valuations for both assets. This avoids complications where a buyer might dispute the practice's profitability due to inflated rent, or where a real estate buyer questions the building's income potential due to an unsustainable low rent. This "arms-length" lease agreement allows for easier separate sales of the practice and the real estate, giving you maximum flexibility.
• Ownership or Real Estate Decision: Consider whether you will sell the building with the practice, lease it back to the new owner, or retain it as a separate asset. A market-rate lease facilitates any of these options without requiring complex financial adjustments during negotiations.

Brainstorming Future Control: Rights of First Refusal or Purchase Options

For owners selling their practice while retaining the real estate, or for those leasing their space, it's wise to consider including specific clauses that offer future flexibility or control over the property for the practice.

• Right of First Refusal (ROFR): If you, as the building owner, decide to sell the real estate at some point after the practice sale, a ROFR clause in the lease gives the practice (the new owner) the first opportunity to purchase the property under the same terms as any bona fide third-party offer. This can be appealing to a buyer who may eventually want to own the real estate, providing them with a path to ownership without obligating them to buy immediately.
• Purchase Option: A purchase option embedded in the lease grants the practice the right to buy the property at a predetermined price or a price determined by a specific formula, within a certain timeframe. This offers the practice clear predictability if ownership is a long-term goal. For you as the seller, it can be an attractive incentive for a buyer and provides a pre-defined exit for your real estate asset.
• Strategic Benefits: Including these options can make your practice more attractive to buyers who prefer future control over their facility, even if they aren't ready to buy the building upfront. It can ease their long-term planning and reduce perceived risk, potentially increasing the attractiveness and value of your practice sale.

Common Buyer Concerns Related to Facilities:

• Deferred Maintenance Issues: Buyers scrutinize the property for signs of neglected upkeep, which can signal future costs.
• Outdated Building Systems: HVAC, plumbing, or electrical systems that are old or inefficient can be significant red flags, suggesting immediate capital expenditures.

At NextSite, we specialize in helping you align your facility strategy with your comprehensive exit planning. Don’t wait until you’re deep into negotiations to uncover a facility-related obstacle that could have been resolved two years earlier. Start today, and sell with confidence tomorrow.