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Issue #42 - 4.1.08
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Should I Invest in My Practice to Increase Its Value?
We get this question a lot from dentists all over the country. The answer is simply, “It depends.” We’ll discuss two major issues that face late career dentists as they ponder their exit strategy. The first issue is updating the facility or adding technology. The second issue relates to lease expiration and renewal problems.
Updating the Facility and New Equipment
A facility with a worn, tired look and older equipment will not command the same market value as another practice in the same community that has recent renovations and equipment. The critical questions one has to ask are: “How many years do I plan to practice before considering a sale?” and “Will an investment in my facility increase the odds of selling?” The most important variable that will impact your decision is practice location. As we have stated in prior columns, practice location will be a key predictor of whether or not you will be successful in selling your practice. If you are located in a small town or rural area, making a capital investment in your dental practice for the sole purpose of enhancing value may be more risky than if you are situated in a suburban or urban locale where there are more potential purchasers, as well as peers who may be considering their exit strategy as well. Practice enhancement in the later scenario may be a competitive strategy to get potential purchasers to consider your practice over others.
Another big question to address is how much you should spend. Is it necessary to spend $100,000 plus to make everything state of the art? Or should you replace older equipment such as a hygiene room(s) and make facility upgrades such as enhanced wall treatments, flooring and reception office furniture? Sometimes the optics of a practice makeover can have a good impact on a young doctor who walks through your doors for the first time.
The Economic Stimulus Act of 2008 provides exceptional benefits for deductions allowed for purchasing equipment and technology this year. Under the new law you can expense up to $250,000 of Section 179 property purchased this year. Absent this new legislation, the expensing limit for Section 179 property would have been $128,000. In addition, there is also a special 50% depreciation allowance in 2008 as well. Be mindful that you may be subject to depreciation recapture in the event that you sell in a few years.
Finally, what is the return investment you’ll receive for this equipment? If you truly believe that your facility will become more attractive, chances are you will see a higher practice value. However, in almost no cases will you get a “dollar for dollar” return on the investment that you will make in your facility. Often times it’s just creating a situation where more potential buyers will take a critical look at your practice rather than pass you by if your facility is out of date and unattractive.
Building Lease Issues
Some of you, unfortunately, are faced with the reality of negotiating a new lease. Many practices located in commercial buildings are often times at the mercy of large real estate conglomerates who own the property. Getting a lease renewal at favorable terms can sometimes be difficult. If, for example, you are 60 years old and want to retire by 65 and if you’re faced with the “no win” situation of signing a ten year “only” lease, chances are you may not want to sign. If you can break the lease into two five-year renewable leases, that would be preferable. More important, you may want the lease to be transferable to a potential buyer. In certain cases when you do renew a lease you can get some enhancements to the facility, and if your facility is a bit worn down, you may be able to make some enhancements and have these costs partly borne by the landlord as an allowance with the balance being financed through your new lease. If you have a timeline of five years or less, this situation will become very critical. In the final analysis, if you are in a “no win” situation with a lease renewal or extension, and you still need to practice a few years, your best alternative may be for you to seek out a larger practice in your area who may be very interested in you folding your practice into theirs and allowing you to practice a few years, thereby providing you with an equitable buy-out for your patient list.
When someone is at the twilight of their career, the pressure to make a six-figure investment is a very, very trying decision. But if it’s grounded in reality by knowing the probability of selling your practice, you’ll make a much more informed decision.
Dr. Thomas L. Snyder, is Managing Partner of The Snyder Group, LLC, a nationwide practice transition and financial management consulting firm. With more than 75 years of experience in the field, The Snyder Group can provide you a full range of services relating to practice transition matters and retirement planning. They can be reached directly at 1-800-988-5674.
If you would like additional help, email Dr. Snyder at drsnyder@thedentistsnetwork.net.
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