Your Lease and the Sale of Your PT Practice

Your lease can stop a sale that is otherwise ready to close. Buyers are paying for a clinic in a specific place, with patients who come to that address. If the lease is weak, the value is weak.

Here is what buyers look for in your lease and what you can do about it before you go to market.

Assignment clauses

In an asset sale, the buyer takes over your clinic's assets. In most cases, they also need to take over your lease. That is called an assignment.

Your lease will say whether assignment is allowed and on what terms. Common versions include:

• Assignment allowed with the landlord's consent
• Consent that cannot be unreasonably withheld
• Assignment allowed only to buyers that meet certain financial tests
• Assignment not allowed at all

Some leases also let the landlord raise rent or end the lease when an assignment is requested. Read yours closely. Your transaction attorney should review the language before you go to market, not after you have a buyer.

Landlord consent

If your lease requires consent, plan for it. Landlords want to know the new tenant can pay the rent. They may ask for the buyer's financial statements, a personal guarantee or a larger deposit.

Landlord consent is often one of the last items before closing. It can also be one of the slowest. Some landlords respond in days. Others take weeks.

A few things help:

• Keep a good payment history and a good relationship with your landlord
• Know who to contact and how they prefer to communicate
• Ask your attorney when and how to raise the topic

Do not tell your landlord about a sale too early without advice. The timing of that conversation matters for confidentiality.

Build consent into your timeline. If the purchase agreement makes landlord consent a condition of closing, a slow landlord can delay your payment. Ask your attorney to plan for that. Ask, too, what happens if the landlord says no.

Remaining term

Buyers look at how many years are left on your lease, including renewal options. A short remaining term is a common concern.

If your lease ends soon after closing, the buyer faces a risk. The landlord could raise the rent or decline to renew. That puts the location, and the patients tied to it, in question.

If your term is short, consider negotiating an extension or renewal option before you sell. A longer, stable lease supports your price. Your attorney can help you approach this without disclosing a sale.

When you own the building

Many PT owners own their building through a separate entity. That gives you options, but it also creates a pricing question.

When you sell the practice, the buyer needs a lease from you as landlord. That lease should be at market rent. Buyers will check.

Here is why it matters. Many owners charge their own clinic below-market rent, or no rent at all. That makes the clinic's earnings look higher than a buyer would see after closing. Buyers adjust for it.

Here is a labeled hypothetical. Say your clinic pays you $36,000 a year in rent. Market rent for the space is $60,000. A buyer will reduce your EBITDA by $24,000. At 4.0x, that lowers the price by $96,000.

The reverse also happens. If you charge above-market rent, your clinic's earnings look lower than they should. A market-rate lease corrects that.

Your options as a building owner include leasing to the buyer, selling the building separately or keeping it as a long-term investment. Your CPA and attorney should advise you on the tax and legal side of each choice.

Review checklist

Before you go to market, gather and review:

• Your full lease, with all amendments
• The assignment and consent language
• Your remaining term and any renewal options
• Your current rent compared to market rent
• Any personal guarantees you have signed

Personal guarantees deserve special attention. You may stay liable for the lease after the sale unless the landlord releases you. Your attorney can tell you whether a release is possible.

Your next step

Pull your lease this week and find three things: the assignment clause, the end date and any renewal options. Write them on one page. That page will tell you whether your lease needs work before a sale.