Business bites – freehold included?
Simon Hughes considers the options available when selling a practice.
As a principal dentist, you may own the freehold of the building which houses your dental practice. So when it comes to considering a sale you need to be aware of the options in respect of the freehold building. What should you take into account when deciding whether to sell or hold and why does the property always seem to take second place to the sale of the business?
It’s very easy, when considering a range of offers for a dental practice, to focus exclusively on the goodwill value being offered. After all, this is where the majority of the value lies. However, for freehold owners, there is added value to be gleaned through careful negotiation of lease terms from which an investment is created.
Creating a lease
When a freeholder sells a dental practice, or indeed any business, and creates a new lease in favour of an incoming tenant, he becomes a landlord. The rent that he then receives can itself be sold as an investment at any point in the future. This value is determined by a number of factors including:
- The ‘covenant’ – the financial worth of the tenancy itself
- The length of lease; typically at least 15 years
- Rent review frequency
- Repair and other liabilities within the lease.
Clearly, professional advice from a suitably qualified property surveyor should be taken when negotiating lease terms with any party to ensure that value is maximised. The difference in investment value between a corporate tenant and private individual can be very substantial and this is simply down to the risk profile of the two tenant types. This is often missed at the point when the sale price is negotiated.
Many property sectors have defined a clear formula for accurately calculating rent. This is not so in the dental sector, unfortunately, where the majority of the property is either converted from a residential property or more institutional settings such as shopping centres.
As such, dental rents tend to be fairly arbitrary and arrived at through negotiation, although they should be benchmarked against residential values, allowing of course for the cost of converting back to this use.
Alternatively, office rents can be taken as the comparable rents, plus a premium for D1 (medical) use.
Unlike many other property sectors, buyers of dental practices tend not to want to acquire the freehold property when acquiring a practice. Why is this? Very simply it is because capital can much more efficiently be invested in goodwill than tied up in a property where the value will generally only increase in line with an increase in rent.
Whether buying or selling a practice, knowing what to do with the freehold can prove as complicated as the practice transaction itself. It is therefore imperative to seek advice from suitable, accredited valuers who will be able to advise on the strongest course of action that suits your specific situation.