One of the biggest decisions that a dental professional may face is the decision to acquire an established dental practice. A big part of this decision entails understanding the financing options available to make this dream a reality.
The financial relationship you are about to enter is long-term, and therefore it is vital that you find the right financial partner. Here are some critical questions to consider as you evaluate potential partners:
- Do the banker and bank have experience in healthcare and, more specifically, the dental industry?
- Does the banker have a role in the lending decisions being recommended and made?
- Is there flexibility regarding repayment schedules? What are the prepayment penalties?
- Will the financial institution provide sufficient working capital to you as you transition into ownership?
- What are the rates? Are they fixed or floating, and what is the fee structure?
- Do the terms of your loan require you to conduct your day-to-day banking with your lender?
- Can the banker provide introductions to other industry experts such as a CPA, attorney, insurance provider, consultant, contractor, etc. who also have experience with the dental industry?
- Can they provide additional financing to purchase the building your practice occupies?
- Will the bank continue to support you in the future with your growth objectives such as a practice relocation, addition of new operations or equipment, or purchase of an additional location/ patient base?
- What other intangible benefits can they offer you?
As you are weighing your options, you’ll also want to understand what the requirements are for the loan, including liquidity in the bank, a down payment, and if the seller will need to finance some of the purchase. In addition, how transparent is the financial institution in communicating these requirements? Effective communication with your banker throughout this process is critical. You may want to ensure that the banker is accessible, consultative, and understands the underwriting and closing process.
Once you’ve decided, there are several items that you and your team of advisors (including your banker) will want to review as you move forward in your due diligence process. Here are some questions that will help you and your advisors evaluate the viability of a practice acquisition:
- How much cash flow is available to service the proposed debt, your existing personal debt, your living expenses, and investment goals?
- How does the practice overhead stack up to industry standards?
- What type of opportunities are there for growth via increasing new patient numbers or keeping additional procedures in-house?
- Are the demographics and competition favorable in the area you are looking to purchase?
- What percentage of revenue comes from PPO, Fee for Service or Medicaid/HMO? Will you be able to be credentialed with all the same plans and with the same fee schedule?
- What does cash flow look like if there is patient attrition? This sensitization exercise is a good way to understand the risk to your future cash flows.
- What is the condition of the equipment, and will you incur the cost of replacements or upgrades in the near future?
- If the practice has experienced substantial growth over a short period, is that growth organic and sustainable or manufactured by over-treating and marketing ploys that do not attract recall patients?
- What is the transition plan as the buying dentist enters the practice and the selling dentist exits?
While the practice you are purchasing is an important part of the financing decision, your banker will also want to build a relationship with you. Understanding your personal work experience, clinical skill set in comparison with the subject dental practice, personal financial profile and credit history, and your vision for the practice are all important components of building this relationship.
Banks continue to be willing to lend to dental professionals. Historically, medical and dental practices have some of the lowest default rates in the nation. Plus, it continues to be a growing field with spending on dental at about $124 billion annually with this trend likely to continue.
As you move forward in making this big decision, you will be wise in choosing your business advisors carefully. Having a consultative, engaged relationship with your advisors, including your banker, is important and can save you time and money as you march towards making your dream a reality.