If you have an office that has been operating for a period of time, at some point within the first 5 years, you will reach a key decision point. Maybe your lease is expiring. Maybe a spanking new mall is being built a few miles away. Perhaps you feel that the area around your office is in decline. Whatever the case, you are probably faced with the decision of whether or not to relocate the office to a new facility.
Clearly, the first thing you need to do is to assess the cost of a potential move. In a lot of cases, you can move your equipment, waiting room furniture and other office furniture to the new facility. You’ll probably want to upgrade some electronics so maybe you are looking at another $10,000 or so for that plus $5,000 or so for the movers. You won’t be able to take your leaseholds with you so, for a standard office, you are probably looking at another $150,000 of buildout cost (excluding any tenant improvement allowances). If your office was profitable at the time of the move, there should not be any startup costs to bear. You also may be looking at a rent deposit or other costs to get into your new facility. So, we’ll peg the total cost at about $175,000.
With that cost in mind, what should you be thinking about with regard to a relocation? Let’s take a look at the issues:
Consider the reasons for your move
As you think about why you want to move, make sure that the reasons are for improvement in operating and financial results. If you are moving because your practice is declining, make sure that location is the reason for the decline and not something else.
Let me give you an example from our own business. In an area of Mexico, we had an office in a mall that was losing tenants. The mall itself was falling into disrepair, the landlord was not accommodating and other attractive office space was opening up. New patient contracts fell by about 50%. One of the tenants that moved in next door to our office was a bar that made the Double Deuce look tame. One night, the bar advertised live music. The band didn’t show and the crowd was displeased, to say the least. A fight broke out and spilled over into our office. Imagine the office team’s surprise when they walked in the next morning to find the office trashed! This was a clear case when a relocation was absolutely necessary.
In another office in the same country, one of our clients wanted to move to a new office because the facility was getting older and patient contracts had declined. However, a closer examination of the numbers revealed that the number of new patient appointments had actually increased over the last year. The rate of closing cases, or batting average, had fallen substantially. There was no need to move. Rather, we had to focus our efforts on the selling process.
Now, we will see a number of doctors that have built up a successful practice and want the $750,000 build out with a big conference table and fancy leather recliner for break time. That type of decision is generally less about solid economics and more about other reasons, but certainly, we do not hold that against anyone. But, that does lead us to point 2.
Consider the return on this investment
If you buy a piece of equipment or hire a key person, you expect some type of performance and financial return for your practice. For example, if you hire a marketing person, you should see the number of new patient appointments go up. If results stay the same as they were before the hire, what was the point of spending money on the new person? The same with a new office. If you are going to build one, move into it and then see the exact same production and profit numbers, you might as well have spent that $175,000 on a new Ferrari. At least you’ll be able to enjoy that more.
This is one of the biggest issues we see with doctors considering a relocation. As you compute the value of the move, you should be able to point to one or two concrete catalysts for improvement in results when compared to your current office. Maybe it’s the new mall opening up or a large subdivision under construction. Or perhaps you’ve made deals with potential referrals sources. Whatever it is, make sure that those factor into your decision.
How much of an improvement in profit should you require before you decide to move? Let’s look at the $175,000 investment number we’ve been discussing. Let’s say that you get a rate of 5% interest and plan to pay off the loan over 5 years. That results in a monthly payment of approximately $3,302. So, you need to make sure that I earn at least another $3,302 per month in profit to justify this investment. If you normally earn a profit of 40% on normal production, which would mean that you would need to sign another $8,255 of production or new patient contracts ($3,302 divided by 40%) per month to get to that number. If you see that potential, make the move. If not, stay put.
Consider your existing patients
Depending on certain considerations related to your new location – the distance from the original facility, traffic, retailers near your original office – you will probably alienate some of your existing patients who strongly preferred the old location. Now, if the new office is 2 doors down, that’s not a big deal, but for some moves, the existing patient base could decline by 10-15%. This is certainly not a small concern.
Some doctors offer incentives for patients to say in the form of a small discount for those most burdened by the move or a gift certificate to a retail store. Others simply let the chips fall where they may. In any event, you need to take this into account when considering the move. If you expect patient attrition, consider this another hurdle to overcome in terms of the additional profit required to justify the cost of the move.
Let’s say that you expect to lose 50 patients who owe an average of $1,000 each. That’s $50,000 of patient balances that could be lost and will need to be replaced in addition to the extra patients required to offset the promissory note payment related to the move. It’s certainly not insurmountable, but it needs to be considered when you are making the decision.
Obviously, relocation decisions are made for a lot of different reasons. If you are struggling with this choice in your own practice, let us know and maybe we can help you think through some things.
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