Many potential dental practice purchasers are under the impression that they need a large cash deposit. In some cases, they believe they need up to 20% of the practice price. This is not always the case. For some buyers, we can secure loans for as little as 5% cash deposit, providing they have enough equity and assets behind them.
Benefits of being asset rich
Many banks are currently very happy to lend to dentists, with the industry remaining a relatively low risk for them. But that’s not to say that there are no challenges to overcome.
The potential to secure a loan will depend significantly on what sort of assets an individual has in the background. Most dentists in a position to consider buying a practice will have a fairly substantial amount of cash saved. However, they might not have any solid assets with equity to their name and this makes them a higher risk for banks to lend to. As such, these individuals will need a higher cash deposit in order to mitigate the risk perceived by the bank.
In contrast, anyone with more assets behind them will likely have the opportunity to put down a lower deposit, provided there is significant equity in these assets after consideration of bank debt.
Affordability
Rather than running out to buy a practice, it’s important to first speak to finance experts in the field. They can assess your specific circumstances and provide bespoke advice to ensure you give yourself the best possible chance of securing a loan at a decent rate. They can also create a finance model on any opportunity you are interested in to give you an idea of what profit the practice will make; dental workload required; repayments on the bank loan; deposit the banks will require; and, more importantly, what salary you can take.
Part of this initial assessment is to determine your affordability. Many dentists get this the wrong way round by going to look at a practice, falling in love with it and then going to find out whether they can afford it or not; if they can’t this can make for a difficult situation. As such it’s important to understand your budget before you start searching the market. It should be approached in the same way as buying a house – you see a mortgage provider and apply for a mortgage in principle before actually looking at houses.
Affordability can be worked out quickly by finance teams based on a simple form they’ll ask you to complete. This will then give you an idea of what you can and cannot afford, so that you can better tailor your search and manage your expectations. Given that serviceability of the debt is key, it is never as simple as saying you can afford ‘£x’ – it will only provide a guide in the first instance.
However, this isn’t the end of the story. In order to determine an accurate affordability limit, it is crucial to set aside a lump sum for all the additional costs that buying a practice incurs. These include legal fees, bank fees, valuation costs etc. Say someone has £50k cash saved; some finance teams would say they could afford up to a £500k practice. However, if they find a practice marketed for £500k, they will have no cash left over for any of the additional fees they will receive throughout the acquisition process. This can cause problems later down the line. It is therefore highly recommended to keep some money back to cover all the extra fees – we would usually suggest around £15k as this should be the top end of what might be needed and therefore provides a cushion.
Top tips
- Speak to dental finance experts before looking at practices.
- Factor in all potential costs when determining affordability.
- As a rough rule of thumb, mixed or NHS practices under £600k require approx. 10% deposit if no assets.
- Mixed or NHS practices over £600k require approx. 20% deposit if no assets.
- With enough security, loans are available for 10% cash deposit.
A trusted expert team
It’s important to work with a finance team that has experience specifically in dentistry. The dental profession is unlike any other, so knowledge of the various working processes is crucial if they are to successfully secure a loan on your behalf. At DE Finance, we only work in dentistry and will manage the whole transaction for you, liaising with the bank managers during normal working hours and chasing up the relevant parties for a smooth and efficient process. In addition, the service is completely free for the dentists we work to secure funding for, because the bank pays our fee. We have a strong relationship with a wide variety of healthcare lenders to try and ensure we get the very best deal for you. Further still, we can work on the behalf of all purchasers, regardless of which practice sales broker you are working with.
Be prepared
Being prepared for a practice acquisition with accurate affordability figures and an awareness of the different fees involved will help to encourage a successful practice acquisition. Where you have assets supporting your application for a loan, many banks are also willing to accept a lower cash deposit, bringing that new practice closer than you might think!