- Lending to Dentists
Dental practice sales involve large sums of money changing hands. Hundreds of thousands (if not millions) of dollars that usually need to be financed by a bank or other lending institution. There are a lot of misconceptions out there about the ease with which a dentist can borrow funds for the purposes of buying a dental practice. Misconceptions that have led to many buyers being overconfident about their proposals and to many solid deals falling apart after much time and effort and thousands of dollars in legal bills. With this in mind, it is important that buyers and sellers alike both have a solid understanding of what is involved in dental practice finance. Understanding how a financier looks at a buyer, vendor and practice, and what deals they will and won’t lend for, can save a lot of wasted time, energy and expense along the way.
Practice Sale Search recently sat down with Credabl, an independent specialist financier, to discuss some frequently asked questions that dental practice buyers and sellers ask when entering into a transaction.
Q1. We often have buyers coming to Practice Sale Search saying that they have “pre-approved finance” from their lender to buy a dental practice. What does this “pre-approval” mean?
A1. Usually “pre-approval” means that a financier has looked at the buyer’s income, wealth and circumstances and feels that they COULD lend to the buyer, as long as the practice they are buying is a sound investment.
HOWEVER, approving the financing of a dental practice acquisition doesn’t just involve knowing the buyer’s financial position. It also involves knowing the details of what they are buying and knowing that the buyer has a good chance of making the business work, so they can make the repayments. There are red flags that could occur in the assessment of the business itself, or in the compatibility of the borrower and the business, that could cause the financier not to lend.
Pre-approval of a buyer does not mean pre-approval under all circumstances, regardless of what they are buying and their suitability.
The same thing happens with home loans. A lender will look at a buyer’s income and wealth in order to give them a home loan, but the loan is only approved after the lender does a valuation of the property itself.
Q2. People think that it’s easy for a dentist to secure a loan. In reality, what information does a lender need about a dentist (other than the “Dr” before their name)?
A2. A lot of factors are considered by a financier when making a decision on whether to lend. At Credabl, we generally look at what is known as the “5 Cs of credit” to work out the creditworthiness of potential borrowers. The “5 Cs” are Collateral, Character, Capital, Capacity, Capability. These attributes weigh up characteristics of the borrower and conditions of the loan, to estimate the risk of financial loss for the lender.
- Character refers to a borrower's reputation and track record for repaying debt. A definite red flag for us is a history of unexplained defaults on payment or a court action, worrying AHPRA conditions, etc.
- Capacity measures the borrower's ability to repay a loan by comparing income against recurring debts, assessing the borrower's debt-to-income (DTI) ratio. We also look at the purchaser’s previous ability to generate income and clinical range. An ability to match or enhance the clinical range over what the vendor is currently offering is seen favourably.
- Capital refers to any capital the borrower is putting towards a potential investment. A large contribution by the borrower decreases the chance of default.
- Collateral can help a borrower secure a loan. It gives the lender the assurance that if the borrower defaults on the loan, the lender can repossess the collateral.
- Conditions refer to the market conditions (interest rate, economy, dental industry), but also how a borrower intends to use the money. In this regard, we look at the plan of the purchaser and the appropriateness of the purchase – the purchaser’s ability to perform the same services. How similar they are to the vendor and the likelihood that they will be accepted by the patient base. How far the purchaser may be relocating is also taken into consideration. The risk increase correlates to the distance they are moving to purchase the practice.
Q3. What information does a lender need about a transaction, other than the financials and assets involved?
A3. At Credabl, we like to know:
- The reason for the sale and how genuine it sounds. Reasons like “retirement”, “life change” and “to focus on other business interests” carry different risks.
- Is the selling dentist/s staying in the practice post sale? A transaction that has the dentist/s staying on post sale (even in a reduced capacity) carries less risk of patient attrition.
- The restraint period and radius that they are agreeing to – if the dentist/s is not staying.
- Are the staff staying? There is goodwill attached to staff as well as the principal. A practice transaction that is retaining staff is seen as less risky than one where the staff and dentist are leaving post sale.
- How secure is the lease on the real estate? A practice that may have to relocate in the near future is seen as very risky. Typically, we would like to see at least six years of a secure lease post sale.
Q5. Does it get easier to borrow for your second and third practice if the first one is financially stable?
A5. Not necessarily, it depends. On the one hand, if the borrower already owns one practice, they are more likely to have a stable secure income. This would help with the application for the second practice.
On the other hand, the law of diminishing returns often applies. Usually the income of the first practice is highly dependent upon the dentist being in that practice. When we look at additional practice loans, we need to take into account that he/she only has two hands and can only be in one place at a time.
Second practices are rarely twice as successful as the first practice (and so on).
Q6. Does it help the loan for the practice if the practice’s real estate is for sale?
A6. If the lease being offered on the real estate is long and secure, then being able to buy the real estate doesn’t make the loan any easier.
Q7. How long should financing take?
A7. Finance approval should take less than 48 hours from when the lender’s requirements are provided. HOWEVER, this doesn’t mean that the money is available 48 hours after application. Depending on the type of facility and the need for the involvement of lawyers/advisors, this can take a little longer. For simple things like cars and equipment it can often be available the same day, but for a practice purchase or commercial property it usually takes at least 3-5 days from unconditional approval to get the transaction parties together in one place.
If you’re looking to buy or sell your practice, the teams at Credabl and Practice Sale Search understand the process you need to undertake and the key considerations to get the desired results.