Many dentist’s wanting to start-up a dental practice often encounter the dilemma of how large a tenancy to choose. This has become more relevant currently as fit out costs and rents increase substantially. The answer to this is multi-faceted. As a base one should know how many dental rooms will fit within a certain square meterage. Subsequent to this, it is essential to understand the competition and population growth of the area combined with growth opportunities and leasing rates.
As a general rule, for a standard rectangular shaped tenancy, 55 SQM will fit 1 dental room, 75 SQM 2 dental rooms, 95 SQM 3 dental rooms, 120 SQM 4 dental rooms (this assumes 3m x 3.3m dental rooms and adequately sized sterilisation room, staff room, OPG room and waiting room given the number of chairs). However, this is very general and depends on the shape of the tenancy, location of the entry/exit points, other unusual features and location of services.
In terms of the competition and population growth. If you have identified an under serviced area but there is moderate and limited population growth then choosing a tenancy that will fit 1 to 2 chairs is appropriate. Contrastingly though if you’re in a significantly under serviced, outer or regional/rural area with minimal competition and a suitable population size then planning to eventually get to 4 chairs is appropriate. Similarly, in areas of rapid population growth, leasing a site with the ability to get to 4 chairs is warranted. We don’t want to be constricted by a smaller space and needing to relocate early in the life of the business. Although, we usually limit our initial start-up size in these areas to 4 chairs (120SQM tenancy) as anything more we feel we need to be in our own premises. There are several reasons for this and probably another article is needed to explain this comprehensively. However, at 4+ chairs and the subsequent size and value of the business, you ideally do not want to be controlled by a landlord and at this point the profitability of the business should justify being in your own premises (there are some exceptions). There are also significant wealth generating opportunities of owning your own premises which we have covered in other articles on our website.
In terms of leasing rates, we aim to have the overall rate under $600/SQM (includes outgoings). This is also dependent on landlord incentives and if they’re providing a rent-free period or fit-out contribution. If they’re providing either of those then the leasing rate is adjusted by taking that into account. For example, if the landlord is providing a 100K fit out incentive for a 5-year lease then the rental rate is reduced by 20K/year. Generally, for a practice to be profitable from a business sense, rent including outgoings needs to be under 10% of total turnover. If we take a 120SQM tenancy that can fit 4 chairs at $600/SQM as an example, then the start-up needs to bill at least 720K/year to be profitable (as an approximation). In growing areas, this may not be achieved within the first few years. However, eventually it will and as long the billings are at least 720K/year on average it will make sense to chose this tenancy. On the flip side, choosing a 180SQM site at $600/SQM as a start-up in an area with limited growth means the surgery will need to bill on average 1.08Million/year. Further, if the SQM rental rate is higher than $600 then this need to bill 1.08Million/year increases. We have analysed potential tenancies as well as existing practices for clients with large rent expenses that will never achieve business profitability due to choosing a larger than appropriately sized tenancy and/or excessive per square metre leasing rates. This can lead to substantial financial trouble with having to inject significant cash into the business and/or placing significant downward pressure on the value of the business and/or being stuck with paying out a lease.
Fit out costs obviously increase with the size of the tenancy as well. We typically only fit out the 1 room initially and leave the remaining potential rooms as an empty shell. However, we do put the plumbing points in initially. Nonetheless, fitting out a 180SQM space vs a 90SQM space can almost be double the cost. If not controlled, the cost to setup the practice can blow out leading to significant upfront costs that will take many years (if at all) to be recouped.
To summarise, choosing an adequately sized tenancy is essential in order to generate business profitability as well as to accommodate growth and avoid paying for space that may never be needed.
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We cover this and much more at our practice ownership seminars. Our next practice ownership seminar is coming up in Melbourne on the 15th and 16th of October 2022. This seminar has sold out in previous years – please register ASAP to avoid missing out.
https://practiceownership.com.au/dental-practice-startup-buying-seminar-2022-melbourne/
We also offer expert guidance in various areas of practice ownership. Please see the below link for more information.
https://www.practiceownership.com.au/expert-guidance/