How To Obtain Financing For Your First Practice
For the young dentist buying, a dental practice is one of the most important career decision one can make. It provides a golden opportunity to practice independently and achieve financial success as well.
The typical purchaser of one’s first dental practice has little or no net worth. The first-time buyer is often 35 years old (or younger), married with children, and is still responsible for dental school loans, anywhere between $100,000 to $300,000. Importantly, these substantial financial obligations will not disqualify a dentist from buying a dental practice. Instead, banks that finance practice acquisitions will first look at the strength and quality of the seller’s practice. These lenders will then focus on whether the practice revenues will support the debt service created by the acquisition.
A key consideration for the buyer is whether after paying the practice overhead and the debt service associated with the purchase, the buyer will be able to earn more income as a practice owner than he does in his current employment.
If these threshold requirements are satisfied, the potential buyer must be prepared to address a myriad of other issues to acquire appropriate financing.
First, the buyer should present the bank with a business plan. The plan should include cash flow projections for the first two years and describe the improvements that the dentist will make to the practice. This may include, for example, identifying the procedures currently referred to specialists that will be performed by the seller; instituting a soft tissue management program; extending office hours; installing cost-saving technology.
Second, the buyer should furnish the bank with the seller’s three most recent business tax returns and a current profit and loss statement. In addition, the buyer must furnish the bank with an appraisal of the seller’s practice.
Third, the bank will obtain the buyer’s credit report. Since the bank anticipates outstanding dental school loans, the buyer should not fear that such loans will prevent the approval of a purchase loan. The bank will examine whether the buyer is current with loan payments. If buyer is delinquent with certain payments, the dentist will have to explain the reason for this.
If the buyer has any assets, such as a home, or securities, the bank may require that the asset(s) be pledged as collateral for the purchase money loan. The buyer’s spouse may also be required to guarantee the loan. This is the case with local banks. However, ‘specialty lenders’ will not require this and will take the practice assets as sufficient collateral.
Fourth, the buyer should anticipate that the bank will request a personal household budget. This budget informs the bank how well buyer’s personal expenses correspond with current income. If personal expenses exceed current income, it is unlikely that the bank will approve financing, fearing that buyer’s personal expenses would drain practice cash flow.
Fifth, the buyer should provide the bank with copies of his dental license, as well as copies of the buyer’s controlled substance licenses, federal and state.
Sixth, banks also request copies of the buyer’s individual income tax returns for the two most recent years, together with a statement that buyer is current with all federal and state income tax payments. Owing back taxes almost always disqualifies a buyer from obtaining purchase money financing
Seventh, the buyer’s production figures from his or her current employment should be provided to the bank. This information is especially important because production figures can determine whether the buyer can handle the work load in the new practice. For example, a buyer whose production does not exceed $15,000.00 a month should not consider buying the practice of a solo-practitioner whose production is $40,000.00 a month?
Eighth, a copy of the Buy-Sell Agreement between the seller and buyer should be provided to the bank. The terms of the transaction between seller and buyer are of interest to the lender. In particular, the manner in which the purchase price is allocated for tax purposes; the seller’s role in the transition; whether the seller will remain with the practice after closing, and whether seller is financing any part of the purchase price are all important considerations.
Ninth, in addition to the purchase money loan, the buyer should seek to establish a line of credit with the bank to ensure a line of credit will be available for initial working capital. Without a line of credit, the buyer may have difficulty operating the practice until accounts receivable are collected, which may take from 60 to 90 days after the closing. Alternatively. a buyer can negotiate with the seller to either borrow or buy the accounts receivables.
Tenth, as a condition to closing the purchase loan, the bank will require the buyer to pledge the hard assets of the practice as collateral. The bank will take a first lien on the dental equipment, furniture, fixtures, and even the account receivables. In addition, the bank will require the buyer to obtain life insurance, and assign the proceeds of the policy to cover any outstanding balance on the purchase money financing. The buyer will also be required to purchase business overhead insurance to cover the monthly bank payment in the event that the buyer becomes disabled.
As further condition to closing on the buyer’s loan, the bank will require that seller sign a Subordination Agreement, if the seller participates in the financing. Such a contract enables the bank to foreclose on the practice assets; liquidate them; and pay the bank loan first, before the seller’s loan is paid.
In the event, the buyer leases the dental office, the bank will also require the landlord to sign a Landlord’s Waiver. The waiver mandates that landlord forfeits any claim to the practice assets.
There are many ‘specialty’ lenders eager to finance dental practice acquisitions beyond traditional banks. There are also ‘specialty’ lenders will also finance 100 percent of the purchase price for a young dentist. In addition, these lenders generally do not require a young dentist to pledge personal assets as collateral. So, these lenders do merit a look.
Clearly, the buyer should not necessarily be smitten with the bank who offers the lowest interest rate. Carefully examine the terms and conditions of each lender’s proposal. Sometimes what appears to be a lower interest rate is not necessarily the best loan for the buyer. In addition, the buyer should inquire about all the costs associated with closing the loan. What are the closing fees? Are there any points? What is the loan documentation fee? Is the interest rate fixed or adjustable? Will the bank be available for other financing needs, such as purchasing new equipment.