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Selling Your Practice? Know Real Estate Value Before You Do.

If you own your facility and you are planning to sell your practice, it is important to know what the value of your real estate is before you put your practice on the market. The consequences of not knowing can be costly and sometimes disastrous. Consider these scenarios and their possible outcomes.

Scenario #1 – You guessed at the value and you offered it significantly below its market value.

Scenario #2 – You guessed at the value and the asking price was significantly above its market value.

Scenario #3 – You didn’t know the value and the value was so high that the revenues of the practice cannot support the debt on the real estate.

In Scenario #1 – You potentially left money on the table. In Scenario #2 – You probably will need to adjust your sales price for both real estate and the practice. The real estate price will probably be negotiated to the appraised value, but if the practice price was based on its cash flows, the facility costs were based on the inflated value you guessed at. With a reduced value for facility cost, more excess cash flow would be available and thus a higher price for the practice could have been justified. Only problem is, it is pretty tough to negotiate up in price, so you might have left money on the table again. Scenario #3 – If the market value of the real estate is very high (too valuable) relative to revenues and cash flow, you can have some very serious problems in your sale. We have seen instances where a practice sale is not even possible due to the value of the real estate. We have also seen a case, where a practitioner was selling his practice and real estate himself and had his practice on the market for 3 years not realizing there was no possible way to make a sale happen because of this issue. Now, knowing the real estate’s market value in advance wouldn’t have allowed the sale, but there are strategies that can be used to overcome many of these issues, if you know the market value of the real estate in advance. It was very clear to the practitioner in this last case, that knowing the real estate value before the sale would have been better than waiting 3 years to find out and then finding out what his options were.

One can usually obtain values or estimates of value for real estate in several ways. Some options are more expensive than others, but understand that the cost is very small relative to the consequences of not knowing. I personally feel, that for the purposes of sale planning, that informal or summary appraisals can generally be used and these can often be obtained from real estate appraisers at a reduced cost compared with pricing for full appraisals. Contact your local bank that you do business with for a list of appraisers or do a search on the Internet. Commercial realtors in urban areas can also sometimes be found that will do value estimates or do what is known as a Comparative Market Analysis (CMA). If they are knowledgeable, this resource could be extremely valuable in understanding what the facility and land could be valued at for a very modest cost. Just be sure they are well versed in what commercial properties are selling for. I usually do not recommend using the county appraisers figures for the real estate value as it seems the values they arrive at rarely align with market values.

Once the value of your real estate is known, knowing how to structure and complete your practice and real estate sale will become much easier. Many times this can be done just before your sale, unless you have a situation that you suspect may be like Scenario #3. If that is the case, find out 1-3 years in advance of your anticipated practice sale and plan what you are going to do to overcome the problem of having real estate that is too valuable. Contact your accountant or a practice sale specialist or other knowledgeable consultant to assist you in what your options may be.