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Review your lease

Posted on October 19, 2021 in Articles & Frank Taylor & Associates

For those looking to increase the goodwill value of their practice, our Managing Director Lis Hughes recommends looking at the terms of your lease…

For those practice owners looking to increase the goodwill value of their dental practice, start by looking at the terms of your lease.  About 50% of dental practices in the UK operate from leasehold premises – meaning the building is owned by someone else, and a lease is granted for a set period of time.

When the time comes to sell, it is highly likely a buyer will need to arrange a bank loan to fund the purchase. This is fine as upwards of 95% of sales require a bank loan to secure the purchase. However, the remaining term on your lease matters at this point as a buyer will only be able to get a bank loan over a term to match the remaining term of the practice lease. So, if your lease is for 15 years, but there are only 5 years remaining, a buyer will only be able to get a bank loan that will need to be repaid over 5 years. This could make your practice unaffordable for many, particularly as most buyers put down a 20% deposit and look to get a loan for the remaining 80%.

Take this as an example……if we assume a practice value of £1,000,000 with a buyer putting down a deposit of £200,000 and getting a bank loan for £800,000.  With only 5 years remaining on a lease, any bank loan will need to be repaid over 5 years resulting in the annual repayments being about £173,000.  However, if the lease was extended prior to sale to a term of 15 years this would mean a bank loan is then repayable over 15 years not 5, so in turn the annual loan repayment drops to about £67,000 making it much more affordable for many.

A word of caution….be careful how you go about asking for your lease term to be extended as some opportunistic landlords may seek a premium if they know this is to help you sell. We’ve seen payments up to £50,000 paid to landlords for a lease to be extended! Making the request on the grounds of it will help you make longer term plans with the added security of a longer lease has worked for many of our clients in the past so it’s well worth approaching it this way with your landlord.

It’s also worth bearing in mind that your lease term will directly impact your goodwill value…. for example, if your remaining lease term was only 5 years this could result in your goodwill value being discounted by up 50% so it is affordable. A horrible situation that no practice owner wants to consider.

Planning your sale in good time will enable you to review your lease, and if necessary, extend the term if it is less than 10 years.  This will ultimately add to the goodwill value to your dental practice.  Planning is all about bringing the future into the here and now so you can do something positive about it.

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