What if Your GP Seller Sublets Space to a Smaller practice?

When you are looking to buy a practice, sometimes you may find a seller who sublets their space to another dentist. Maybe that sublet tenant is a general practitioner (GP) or a specialist; does it really matter? Do you care if that sublet practice stays or goes? Well, if they are a GP, I am here to tell you it may make a HUGE difference, and you need to try and learn as much about that sublet relationship as you can.

I recently had a situation where I represented a GP seller who was subletting space from another GP. My client owned minimal furniture and equipment as the rent they were paying included most of those items. What they did have to sell was a patient base that generated approx—$ 130k in annual collections. I know, not a huge amount, still, as most savvy practice owners know, a chart purchase/merger can be the best ROI of any investment a practice can make, hands down, assuming it is done properly.

You might think this is a no-brainer. Why doesn’t the main tenant GP buy the seller’s charts? If a chart purchase is so great, why wouldn’t they? Two reasons. The first reason (I suspect) is that they figure why they should buy them? If the seller leaves and tries to sell the charts to someone else in town, many of the patients might come back to the same physical location, knowing there were two names on the door. The second reason (which I understand) is that it may not add much value to their existing practice’s overall selling price. 

Unfortunately, there is a hidden landmine for the buyer of the main tenant GP’s buyer. Can you guess what it is?

You see, my client, the subtenant GP with only $130k of collections, does a LOT of their own hygiene and has been referring a LOT of dentistry to their landlord GP for many years now. In return, my GP client pays very little rent for their sublet situation. It has been a win-win for both of them. Now, suppose the amount of dentistry getting referred to this landlord GP, who is looking to sell their practice, is $75k annually? If you are the buyer of the landlord GP there is likely no way you are going to know that IF you buy the landlords practice and NOT the subtenants, you will likely lose $75k in revenue! The landlord GP is not likely going to mention it, and you may not ever meet the tenant GP who is looking to sell their charts. What a big surprise for you, the buyer, when you find out long after you close when you notice a drop in revenue of maybe $6k+/month right from the start.

The upside to this story has nothing to do the buyer of the landlord GP’s practice. If you are the owner of a practice nearby the tenant’s GPs practice, how would you like to buy the charts of this practice knowing it will likely generate $200k+ of revenue instead of the $130k the seller is generating with mainly hygiene? What a nice surprise and an even better ROI you could have imagined.

Buyer Beware