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Financial Pitfalls of Expansion
Projects and How to Avoid Them
Wouldn't it be nice to
have perfect hindsight before you make a big financial move? When we get excited
about something, we tend to downplay the potential risks and focus on the
benefits.
In my experience,
acting prior to planning creates $100,000 mistakes all of the time and is the
largest reason for many of the common problems in expansion projects.
What if you could
actually isolate the risks and then mitigate them before you began your project?
One of my favorite
sayings is “intelligence is no substitute for experience”. If you have always
been successful at everything you have done, you may be at risk for thinking
your success in one area will be applicable in another.
Expansion projects
involve the highly specialized areas of design, construction, real estate and
banking. All of the people that you will negotiate with during your project do
what they do for a living. They spend 2,000 hours per year plying their craft.
The probability of you getting the better end of the deal is low.
A Professional,
working on your behalf, is far more likely to negotiate a more favorable deal
for you. Consider the following case examples of common mistakes created by
unwitting dentists as they move through their expansion projects. Then consider
the probability of you running into the same traps. Hiring a Professional to
take you through the process may be the edge you need to come out on top.
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Economic Concept – The Ego Bias
This common bias is that most people are
not willing to assume that the “true probability rate” information
applies to them. The typical person assumes “I’m special and those
probabilities don't apply to me”. The Ego has an amazing ability to
distort information. Suppose, for example, you were told, based on
your lifestyle and age that you had a 32% chance of living another 6
years. Would you accept those odds? Probably not because you are not
willing to assume that data applies to you. |
All of the examples
are real with the names and subtle details removed to protect the identity of
the person.
Case Example #1 –
Signing a lease before you create a plan
We have had several
clients sign new office leases prior to having a complete financial and project
plan in place. The amount of damage this error can do is incredible. The errors
tend to build on themselves.
If you are spending a
significant amount of money for leasehold improvements, you are likely going to
want a long-term lease (10 years with options for 10 more). The property owner
is likely to require your personal guarantee for the lease payments. This means
that barring bankruptcy, you are not going to get out of making those payments.
 Before you sign the
lease, make sure you understand the total cost of completing the project and
have the capital lined up to fund those costs. The more detailed your plan, the
better. Asking the property owner or the Condo developer how much it will cost
to convert the existing space to your dental office is not going to get you
close to the cost of the project.
If you are leasing
space, the closer you get to making two lease payments the higher your anxiety
around financing grows. The longer it takes to obtain financing, the less
discerning you get. This is how people end up with the wrong type of financing.
You eventually get the money, but the terms are onerous or your cash flow is
compromised.
We have seen people
sign leases that increase their monthly payment 200 - 300 percent prior to
knowing the cost of the project or how they were going to finance it. If your
rent is going from $2,500 to $8,000, you should understand the costs of your
project with a high degree of certainty.
Case Example #2 –
False confidence in your local bank
 The
appraised value of a dental building is usually less that cost of constructing
the building. Most local or community banks lend the lower of the appraised
value or cost of the project. If you build a new dental office, you will have a
GAP between what the bank will lend you and the cost of construction. Add in the
cost of technology, equipment, furnishings and you have a large amount of money
to borrow over a short period.
It is common for a
dentist to know a local banker that promises him “all of the money he needs for
his project”. With that statement, they are full of confidence and begin the
process of building the Taj Mahal. Banks are highly regulated and have strict
lending policies. The days of character based lending are over. If your banker
has not issued a commitment letter that you understand, then you should assume
that you do not have any money. The bank must understand the project completely.
How will you cover the Gap and the additional costs of the project? If you rely
on your bank to construct your plan, you have a high probability of having
problems.
Case Example #3
–Not leasing enough space to achieve your practice goals
 It
is common to meet with a dentist that has signed a lease for space that will not
accommodate the number of operatories he wants to build. The ratio of square
footage to operatories is too small. There are certain regulatory bodies that
dictate square footage allotted to the facility and there is no way around it.
It is common for someone to lease space intending to build five operatories but
after considering the national and local building codes only are able to
complete three.
You should never sign
a lease for a space without having the space reviewed by an architect that
understands dental office design. The cost of this mistake can be huge. It will
affect your productivity for the length of your lease. These mistakes can easily
add up to $100,000.
Architects must comply
with ADA (American Disabilities Act) codes and restrictions. Many dentists
perceive that non-public areas do not need to be ADA compliant and that is not
the case. Architects must also comply with fire marshal codes that have certain
restrictions that can dictate the square footage required to achieve your ideal
space. You should know all of the local and national code requirements before
you sign a lease.
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If all this
sounds overwhelming you may need a professional to advise you throughout your
project, you need
We offer 2 programs to help you
through your project:
Private One-on-One Consulting
for the dentist who wants to delegate and stay focused on dentistry
or Peer Conference Coaching if you are a do-it-yourselfer.
Click here for more information and how to receive information
packages.
With Private One-on-One Consulting
a Finance Geek works exclusively with you and we can start any time.
With Peer Conference Coaching you're part of a group of other
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Click here for details. |
Case Example #4 –
Leasing too much square footage, over-extending yourself
If your current office
is too small, you may fall into the over-compensation trap and make your new
office too big. Big offices are hard to finance and hard to sell.
You may fall prey to
this bias if your waiting room is always full and your business office is too
small. Maybe your hygiene department is always booked up too. Humans tend to
move in extremes. Be careful that you do not make an extreme change to the size
of your office.
Another related
blunder is building a facility based on attracting an associate. In my
experience, the associate either never comes or does not stay. In general, if
you can attract an associate, it may be better to stagger your schedule to
accommodate them than to create a larger facility. In my experience, you have a
higher probability of paying for more operatories than you need than to profit
form the associate during the time you employ him.
Case Example #5 –
Know what you are getting before you sign
 What is included in
the price of your lease or Condo purchase? Are you getting an HVAC system? How
about a floor? We had a client that leased space and did not receive either of
these items.
You are paying for
2,500 square feet, how many are usable? Column locations are a big issue and
must be considered in relation to how the space is laid out. If the column falls
in the middle of the tray prep area, it renders the area useless. Architects
that don’t understand how you use the space can make this mistake. It will
require you to lease or buy more space that you would ordinarily need.
Understand the
difference between usable and gross square feet. If you are considering an oddly
shaped space, you must understand how your office will be laid out to fit into
the space while considering all of the local and national building codes.
Case Example #6 –
Know the land before you buy it
An architectural
consultation and investigation will help you uncover what your easements and
setbacks are. It will also help you understand the access considerations. What
are the existing conditions of the site? How will the building layout on the
land? Is the property properly zoned for a medical facility? If not, how long
will it take and how much money will it cost. Can you achieve your ideal
building on this ground?
It is not unusual to
see a dentist buy a piece of land without the appropriate investigation. Land is
a liability because it does not produce cash, carries an insurance and tax
burden and cannot be easily sold. These are not the qualities of an asset. Being
stuck with land that will not work for your project because you thought it was a
good deal and had to close fast, may not be the best move on your part.
 You
have seen six common problems associated with expansion projects. There are many
more. A
bigger challenge comes when you combine multiple problems. This occurs when one
issue creates the next. It can be overwhelming and wear on your confidence.
Consider seeking a Professional in each area of your project that will work on
your behalf so you can avoid $100,000 mistakes.
I would like to
acknowledge the help of Kitt McKillop of T.H.e. Design for her assistance with
part of this article. Over the past six years Kitt as worked with hundreds of
dentists as an Office Planning Consultant for T.H.e. Design in Austin, TX. See
them on the web at www.thedesign.com.
You can contact the author via email at
david@financegeeks.com.
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