Owners of a healthcare clinic analyze strategies to maximize wealth and diversify investments with the help of dedicated advisors

Background/client need

Our client is a leading healthcare clinic with more than 10 locations. The client was considering consolidating a few locations into a single space in hopes of reducing doctors’ travel time and expenses. The client also had plans to hire an associate that would help grow the business and its capacity to serve more patients. However, the current rental space they were hoping to consolidate these clinics into was not large enough to accommodate these changes.

The client knew that additional office space would soon become available for rent in their current building which would accommodate their needs and also provide room to grow. However, the client was also entertaining another option — to build an entirely new office building that would provide the needed room for growth while also giving the owners the opportunity to build equity in the business (versus paying rent to an unrelated party).

In order to determine which of these options would be the best choice for their business, the client engaged Baker Tilly Advantage (Advantage) to do an in-depth build versus rent analysis.

Approach

Working closely with the client’s real estate advisor, Advantage was able to identify which of the available lots would be best to purchase and build on, while also calculating the costs. Having this valuable data at their fingertips allowed Advantage to provide the client with a detailed build versus rent analysis that presented the projections of each scenario over the life of the building loan (20 years).

The analysis provided the client with the following:

• An after-tax cash flow analysis: Giving them the ability to see how much cash was needed each year if renting versus buying, as well as a cumulative comparison throughout the 20 year period
• An estimate of their increased equity in the company over a 20-year timeframe
• An expected rate of return from building a new owner-occupied office
• An estimated return on investment (after-tax):
  – Advantage built this into our analysis as we assumed some of the current doctors would be considering retirement within the 20-year time period.
  – By having an estimate on ROI, the doctors are able to see if they could retire earlier than expected and also how much additional return they could earn by working longer.
• Insight into how much additional revenue would be needed to net a $0 variance in their change in cash position between renting and building (i.e., how much additional income would be necessary for the cash outflows between the two scenarios to equal each other?)

Results

On the surface, the analysis provided the client with exactly what they asked for; an illustration of the differences between building a new office or continuing to rent and taking over the additional space when it becomes available. However, the real value of the analysis came from the additional questions it prompted, compelling the client to look to the future and think about things they otherwise would not have.

Such as:

• Will there be ongoing maintenance cost for the new building and how do those compare to the costs associated with renting?
• As stated above, what additional revenues are needed to be able to “break-even”?
  – Recruitment of new doctors and staff in a newer, bigger building
  – When will current doctors retire?
  – Will the current doctors take on the additional work?
  – Will they follow through in hiring an associate to consume the additional work?
• Value increase in purchased lot and building
• What, if any, other investment vehicles are available that may provide better returns than an owner occupied building?
• Would building a larger building and having other tenants provide better ROI?
  – What do landlord duties involve and is that truly the best use of doctors’ time?
• What are the lot and build costs in various nearby areas that allow the company to accomplish its goals? Can money be saved in different locations?

Business owners should carefully weigh all financial and non-financial factors of owning or renting a business property based on their own circumstances. However, it is important to have a trusted advisor on your side to help you identify and address these items.

Connect with our dedicated small business advisors to learn more about how they can help you position your business for success.

For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.