Simon Palmer, June 2013
After years as an employee dentist, my father had finally been able to save and borrow enough money to realise his dream of owning his own practice and becoming his own boss.
When he found the practice he was looking for in Sydney’s CBD, it only had a 2 month lease left. However, it was in a building that had had a dental practice in it for many decades and when he spoke to the landlord he was told that the new lease would be available in a few months as the building was trying to get all the leases to run concurrently. He bought the practice, introduced himself to the patients and began practicing dentistry in the practice, comfortable in the belief that all was well.
A few months later came a letter saying that the building was going to be renovated and he had two weeks notice to vacate the premises. To reinforce this point they started demolition on the adjacent suite with a jackhammer the next day.
In effect, what had happened was that despite having purchased the equipment and goodwill of the practice, my father had nowhere to put the equipment he had purchased and nowhere to perform treatment on the patient base that he had bought...but more on this story later.
As with all business disasters there is a vital lesson to be learned here:
Never underestimate the importance of security of tenure when buying a dental practice
What is security of tenure? Simply put it is your assurance of the legal right to continue using the space that your business is in. When buying a business that is in a premises owned by someone else your security of tenure is your lease terms.
Here are 4 reasons why a dentist wants long security of tenure in a practice they buy:
- There is usually a component of existing patient goodwill attached to the location.
Patients come back to a practice for many reasons. Sometimes it is the service levels of the staff, sometimes it is loyalty to the dentist, sometimes it is because of price, sometimes it is because of the extended opening hours but usually there is a percentage of patients that keep coming to a practice because the location makes it convenient for them to do so.
As much as all dentists want to think that they are irreplaceable in their patients eyes there is almost always a percentage of patients that are only coming back to your practice because it is close to their work, or their kids’ school or the train station that they need to pass, etc.
The percentage of patient goodwill attached to the location varies from practice to practice but usually it is there and as a result needing to move a practice’s location can often result in some patient attrition if your practice becomes less ‘convenient ’ for them to get to.
- There is sometimes a component of new patient goodwill attached to the location.
New patients come to a practice for many reasons. One of the reasons why a new patient may choose your practice over others is that when they had a dental issue they remembered your sign or remembered passing your practice in their area or on their way somewhere.
The percentage of new patients received by this method will vary from practice to practice. Those in a prominent street front will usually get more business this way than a dental practice in a suite in a commercial building. Moving a dental practice will also mean a loss in the community familiarity associated with that location and therefore a loss of new patients.
(However it is important to note that if the practice moves to a location with more visibility the loss of familiarity with your initial location may be easily made up for in a short period of time.)
- Dental practices aren’t the type of business that are easily moved.
Even if we aren’t talking about moving a patient base, dental practices aren’t easily moved when you compare to other businesses.
You aren’t just talking about needing tables, chairs and a sign on the door like an office does.
If you are moving to a new premises started from scratch there are council permissions and licenses, council waste removal to organise, there is non-standard fit-out and plumbing needed for a dental practice. Chairs are very heavy to move and need installation, OPGs need lead lined rooms. Dental fit-outs involve a lot of work, expense and planning and are usually very expensive compared to other businesses.
- Selling a practice with poor security of tenure.
When the time comes to sell the practice, if you have poor security of tenure the smart buyer will realise the reasons above and negotiate or lose interest accordingly. The amount of goodwill that is asked for any practice is easier to achieve with a long lease than it is if relatively less security of tenure is available.
So getting back to the story that started this article.... luckily after much cold-calling around my father managed to find a nearby practice with extra space that allowed him to rent there and he moved his patient base in. He had a couple of beautiful kids and started to build a very successful practice. After 17 or so years later when he moved his business and needed to negotiate a new lease he got a 5 year lease with 5+5+5+5+5 (25 years) of options to renew. Overkill you may say for a (then) 45 year old dentist but then he wasn’t just trying to make sure he had enough years on the lease for himself. He wanted to ensure when the time came to sell the practice that he had security of tenure to sell the purchaser as well.
