Need advice on purchase of medical business

Real Estate Deal Analysis & Advice
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Need advice on purchase of medical business

Carlos Santiago
Jackson Heights, NY · Member since 2013 · 5 posts · 0 votes

Hello.

I'm a board certified doctor in the NY area looking to open up another location.

I found a place that seems to be offering a good deal, but I would like the help of others to help me analyze the specifics and provide their opinion.

So, the place i'm interested in is a doctors office in great condition, a great location, 2000 usable square feet, 3 additional doctors offices not including mine, 4 car private parking lot, and is near a community that I want to specifically cater to. It also offers a lot of intangible benifits.

The owner of the property is willing to give me a long-term lease (20 years) with a 4% increase on rent that is substantially below market price. Also, I get the ability to sub-lease and with the extra space, I have the potential to work there rent free. I've given the lease to my lawyer and all seems to be quite fair.

Now, here's the issue. This is the purchase of a business. The current business owners were running some medical practices I do not wish to continue. The contract of sale will give me the right to determine who can continue to work there. I do not wish to continue running the type of medical business that's currently in place and instead wish to implement and build my own business and rent out the facility to my own colleagues. I have a dedicated patient base and I currently rent out a small office not too far from the location so I don't doubt that I can get patients in there quickly and start generating revenue. The issue lies in the fact that in order to get the rights to use the property, I need to purchase the business from the current business owners. However, with no intent to continue running that type of business, I would essentially be buying something that will not be generating any sort of revenue, atleast to begin with. On top of that, I don't expect to be up and running right off the bat, so there will be atleast a few months where i'll be paying rent as well.

The price the business owners are asking for is below market. I also get the right to implement whatever type of business I want with the ability to sell it down the line when I near my retirement. Knowing the market, i'm sure that I can sell my business for substantially more than what I'd be paying to purchase the current business. However, I just don't know if I can justify paying 250k+ for a business that will not be generating me any sort of revenue to begin. There's so much potential here, and the property offers A LOT of intangibles, but I would really appreciate some advice on whether or not this sounds like a good deal to you guys.

Thanks!

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    13y

    Hi Carlos,

    What you are referring to is business brokerage. Where just the assets of the business and cash flow is being bought but not all of the liabilities.

    If the sale is a business and the building then you get into a real estate component.

    You can look at www.bizbuysell.com which is Loopnets business buying and selling portal. There are some other sites as well but that is the main one.

    When I look at a business most owners are asking a multiple of 3 times net profit. So if the business nets 33k a year they are asking 100,000. My goal as a buyer is to pay a 2 times multiple or 66k. I then want to go in and put down 30 to 50% and have the business seller hold a note for the rest at very favorable finance terms to me.

    I do not buy businesses where all the profit is tied to and owner operator. For example they claim 40k a year in net profit but that is because they work there five days a week as a JOB. If I take that out and be an absentee owner and hire a manager then my profit is almost zero a year. I look for larger businesses that have a full time manager, assistant manager, and staff built into the costs and still shows a great profit on the books. Those businesses do not need my everyday direct involvement to run.

    Is the business you are not wanting to buy actually making any money (net profit)?? OR Are they trying to get you to buy equipment that they can usually only get 10 cents on the dollar for with liquidation value??

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    13y

    We can value the business, it's not like an ice cream store, it's professionally based on the clients retained.

    But, Is the lease offered subject to you first buying out the existing business? If not, are you saying you could then become the landlord by sub-letting to those in the existing business? Where a new lease would need to be negotiated? Seems you just want them out, not thier business. Do you want any other assets of the business, equipment, fixtures? And rents going up 25+% in 7 years is a good deal? I'd tie rent increases to an index, not automatic increases, unless it really starts out way below market rates. :)

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  • Carlos Santiago
    OP
    Jackson Heights, NY · Member since 2013 · 5 posts · 0 votes
    13y

    Thanks for the replies!

    It is indeed generating profit, however, what is truly drawing me in is the ability to pretty much start fresh. I don't really need to purchase any additional supplies other than what would be needed to perform my basic duties (I'm an oncologist so wherever I go i'll need to buy supplies specific to my practice). To me, it's like purchasing the property at a fraction of the price because i'm getting the long term lease, the ability to generate revenue from whoever else I rent out to, and the ability to implement and build my own business.

    The property owner has specified that I do need to buy out the current business and those will be the lease terms I receive. To give you an idea of the market i'm in, another piece of real estate which included a cardiology business along with the purchase of the property is asking 1.7 million. In this deal, I pay 260k, get a 20 year lease, ability to resale business down the line and the right to basically start fresh, along with the many additonal intangibles that it's offering.

    I suppose what i'm looking for is guidance to determine whether or not it makes sense to buy out a business to receive that type of lease. This is in NYC just to give you a better idea of the market.

    Thanks again!

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  • Carlos Santiago
    OP
    Jackson Heights, NY · Member since 2013 · 5 posts · 0 votes
    13y

    I've also been practicing for over 20 years. As I mentioned, I have an established and loyal patient base. The location of this facility is 3 blocks from where I began my career, so I have a lot of old patients in the area that would be coming back. It's also near a community that I have a cultural connection with. I'm currently renting a small office that's charging me almost $2000 in rent so I can transition those patients over to the new site and get it generating revenue quite quickly.

    The site i'm interested in is asking for $5100 a month in rent for the entire facility. In an NYC market, $5100 a month for 2000 usable square ft along with a 4 car parking garage is very reasonable in my opinion.

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    13y

    Looks like you're asking what 260K is worth to you over 20 years.

    At 10% CAP, it's like paying $2,509 more a month. Initially, without those automatic increases, you're paing $7,600+ or $45.60 a ft annualized.

    Question now is what those patients are worth to flip to other providers. Thier age, health conditions, frequency of visits for services as well as thier loyalty to thier doctor are considerations to the value the expected earnings. Are the doctors you are buying out staying in practice and moving under another operation? Non-compete agreements are tough to enforce with professionals, while they may agree not to practice within 12 miles of you, patients can travel 15 miles to keep thier doctor.

    People generally go to a provider based on that individual health provider, if they are the required provider under insurance requirements, then I'd say location might be considered.

    Off the top of my head I'd doubt the financial value of the business would be 20% of what's being asked, without knowing what they do and the concerns mentioned.

    I suggest you see your CPA as well as to the treatment of premiums on the lease vs buying a business that you plan to hold. It might be possible to pay amount to the property owner and have him buy out the tenants for much less. The owner requiring you to buy the business seems a little fishy, IMO, as opposed to paying them to move or buying out any leasehold interest.

    While I understand the liabilities of the landlord not leasing without some agreement with existing tenants and being in related professions, there are better ways and more conventional arrangements of moving existing tenants out. I would address this aspect with your attorney. If you are not a dentist or surgeon, you may not be allowed to even own such a business or hold the licenses required. What I'm getting at is a point of negotiation as to the value, thier only so many possible buyers with those applicable specialties. I am not familiar at all with medical license requirements in NY as to the ownership or controlling stock or equity in an to a medical practice, at least to hang the license to keep it a going concern while liquidating the business. There is little value in any business that must close the doors when the deal is closed.

    Bottom line, sounds like the existing tenants don't want to stay and they are leveraging you through the owner for a stickup. The owner seems to want to jump on a 20 year lease. I'd guess that the existing lease could be nearing termination, otherwise why would the owner even entertain a new lease, that or the other business may have been closing or moving.

    Sorry to ramble on, I don't know the market there, but I'd bet you won't get much of a salvage value for the business. There is much more to this deal than is showing here, but if you are willing to pay about $47 a foot, plus, for 20 years, by all means. I'm usually all about the deal, but I also see you have other intrinsic motivations you may be willing to pay for. :)

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  • Carlos Santiago
    OP
    Jackson Heights, NY · Member since 2013 · 5 posts · 0 votes
    13y

    Hi Bill. Thank you for taking the time out to provide such valuable advice. I have some rather good news. Looks like the seller has decided to come down drastically off of what they were asking for and accept $100,000 as the price. Obviously, this changes the deal drastically and I think it's something that I may bite.

    I don't think that i'd be able to find a better deal than that. Let me know what you think if you have a second.

    Thanks!

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    13y

    Offer 75K, if they take it, send me 5, LOL. Good luck!

    ps. I'd work on indexing that 4% increase each year.

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