Financing the Purchase of a Dental Practice
Dentists who are recent graduates of dental school or who are presently employed within a dental office are often faced with the process involved in trying to obtain financing to purchase their own practice, or to buy into a retiring dentist’s practice over a period of time. The use of a number of professionals, including an accountant, a dental broker, an attorney, a practice valuation consultant, and a banker or lender, is essential to making the right preliminary steps towards finalizing the goal of solidifying a successful dental career through ownership of one’s own practice. The first professional who should be consulted is often a bank loan expert or other lender, who can determine whether you are financially ready to make a large purchase such as your own practice. Those who head into a purchase thinking they can work out a self-financed agreement with the prior owner may be headed for legal and financial disaster with poorly written documents and inadequately researched finance alternatives. Starting out with a well prepared application to present to a prospective lender can vastly improve the possibility of gaining good financing.
There are some documents which should be assembled by a prospective purchaser even before talking to the lender and can be prepared in narrative form to display to the lender how well thought out the purchase plans are. Start with an introduction and the general request for funds, include a resume and business history (if there is one), contribute a strategic practice plan, contribute yearly balance sheets, cash budgets and income statements (from a prior business as well as estimates for a new practice), three years of federal tax returns, a personal financial statement (with net worth, or assets minus liabilities, and sources of income), a list of collateral, references, and the designation of assets to be purchased with the loan(such as dental equipment).
A number of aspects of the sale must be weighed in determining the amount and type of financing required. Look at how the assets of the practice to be purchased can be worked into an agreement as a security for the price (a first lien against practice assets). Look at what liabilities need to be assumed by the buyer in evaluating the amount needed to be financed. The history of accounts receivables left outstanding by the selling practice must be looked at carefully to determine how much the buyer is willing to take on as a liability or as an asset (depending on how hard it has been to collect in the past and the age of the receivables). The lender will want to know this information as well to allow them to fit it into the amount they will finance and whether they will take some of those receivables as security.
A key part of any purchase is how the real estate part of the practice purchase is to be dealt with. Is the buyer willing to assume a mortgage on the premises where the practice is located, or will a commercial lease be structured? Financing a mortgage as part of the purchase can complicate the transaction, although commercial leases are notoriously complex and can trigger unexpected restrictions on expansion or future sales, buy-outs, or buy-ins.
Beginning dentists are more and more starting out as employees of other practices rather than make outright purchases, particularly because of the cost of dental school, and the likelihood that significant student loan burdens will still be present for some time after graduation. But a phased in buy-out of a practice by the younger dentist can be an attractive alternative, if you can come up with a lender and an attorney who can work together on fashioning a long term option to buy agreement. An attorney should definitely be consulted to take care of a number of situations which may arise interfering with predetermined financing arrangements. This includes disability, early retirement of either the seller or the buyer, future employee hiring and expansion plans, bankruptcy or countless other unforeseen circumstances.
Overall, financing a practice purchase is complicated enough so that assembling professionals who are comfortable with working with you and each other is key. Teamwork is the best way to achieve goals involved with ownership.