Dental Elite Finance Manager – Becki Barnett
I find that the majority of my time is spent advising dental professionals on how much money they can borrow from the banks. Unfortunately, this isn’t quite as simple as ‘how much money do you have as a deposit?’. It is just as much about ‘how viable is the practice you are looking to buy?’. What’s more, when you speak to the banks they talk about ‘EBITDA this’ and ‘Debt Service Cover that’. This can all be very confusing and to those untrained in the field, it can be a minefield of complicated jargon.
The process is, however, a lot more straightforward than you might initially think.
The best place to start when looking for your new practice is definitely with your financial situation. There is no point wasting your time searching for a practice that doesn’t suit your needs both personally and financially. You need to really understand what it is you want from your new practice: what location you are looking to buy in? What skills do you have in terms of managing a practice? Do you have the relevant dental experience to be able to take over the clinical work? Do you want an NHS, mixed or private practice? These are all questions that you should be able to answer before you decide on viewing a potential practice –the non-financial aspect of acquisition is just as important as the financial side. Think of it like a job interview, make sure the business fits your criteria and that you can bring something extra to the table. The banks like to be confident that you are the right person for the job and that their investment is safe.
When you have found a practice that ticks all the boxes then it is time to look at the figures. It’s worth noting that when a valuation is completed it looks quite different to how the banks will assess the practice, and it is important to get to grips with the numbers in order to understand how your business will run.
During the valuation process the practice accounts are stripped of certain costs so that anyone can step in and run the business, from a large corporate to a single dentist. When the banks look at the accounts they disregard any changes that the valuation has made and realign the figures with how the business is currently running, including some adjustments to ensure a realistic representation in the case of overspending on materials and lab fees or refurbishment etc. They also take into account how the practice will be run and how much you will need to draw to be able to pay your personal bills – you would need to know running costs before you buy a penthouse in Mayfair or a new Aston Martin.
This gives you an adjusted net profit figure called Adjusted EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization) or Net Cash Flow. To then assess the viability of the practice the bank calculates some sensitised repayments on a loan (normally calculated at 7%) considering the size of deposit you have available. The sensitised loan repayments are then divided back into the surplus profit to ensure this equates to at least a factor of 1x although this can vary with different banks having different requirements for this figure, some requiring it to be as large as 1.5x – this is called the Debt Service Cover or DSC. It’s not complicated, it’s just common sense, but the lingo that banks use make it unnecessarily alarming. Remember, if a banker was in your dental practice they would question the materials or techniques you use because they don’t know: don’t be afraid to do the same thing. This is one of the largest amounts of cash you will ever invest, so it needs to be right for you.
You can approach the banks yourself but while you may receive a good response from the manager, how do you know that it is the right deal for you? How do you know you wouldn’t get a better deal from the bank next door or even a manager sat on the opposite desk? The simple answer is you don’t.
If you approach a bank directly, your contact might not be a healthcare specialist and they might not like the type of deal you put in front of them. Looking for lending in the wrong place can potentially jeopardise your chance of securing funding or getting the best interest rates. It also means that you are asking the banks what they can do, rather than determining the best structure of lending for you. Using a specialist practice loan arranger can help you eliminate the majority of these problems; they will often also secure you better lending than you could have of hoped for by doing it yourself. At Dental Elite, the Finance team has extensive experience in this area, and we will contact a wide range of banks on your behalf to ensure we acquire the very best deal for you. Book your finance consultation with us today.
Ultimately, the key elements of buying your new practice include knowing what you want, knowing how you’ll fund it and being flexible with how you are going to get there. The amount of money you have isn’t always the most important aspect in securing a practice – take a step back, look at the bigger picture and take time to learn what it means to buy and run your own business before you bid!