A healthcare practitioner opted to purchase the practice he had been working in from the founding clinician, and was later offered the option of also purchasing the property and building housing the practice.
The founder/seller had received a cash offer on the property from a third party at a price considerably higher than what the property was appraised for, but he preferred selling the property to the clinician who had also purchased the business.
The practice constituted the largest tenant in the property and would have been able to continue its operations either way. However, in the event that the seller had chosen different buyers for the practice and the property, future growth would have been at the mercy of lease renegotiations after the end of the current lease term.
Haines & Lagerquist CPAs was asked by the buyer to assist in reviewing options associated with the transaction. In addition to the existence of the above-appraisal cash offer, a number of other factors came into consideration, many of the intangibles. These included:
- The buyer was considering converting the overall property (which included a multi-tenant commercial building and ample parking) into a ‘power strip’ by leasing the adjacent spaces in the building to complementary enterprises, which would in turn increase business for all parties in the center.
- In addition, the buyer recognized that the practice would need to expand its own physical space in the near future to accommodate growth, and having control over the center as a whole would enable that growth to take place through expansion into contiguous space.
- The practice had been located in its present location for 30 years and there was a risk of customer loss associated with moving to a new location. In addition, the practice would likely struggle to find a new space in another location zoned appropriately for the use.
To assist the client with its analysis, Haines & Lagerquist prepared a 15-year cash flow projection. This helped the client to identify the amount of negative cash flow for each year; how many years the cash flow would be negative; what year the cash flow would turn positive; and in what year the positive cash flow would ultimately recoup the previously accumulated negative cash flow.
Haines & Lagerquist created a 5-year cash flow projection for the practice, which provided the client with the information he needed in order ensure that anticipated cash flow from the practice would be available to cover the negative cash flow of the real estate.