Author: Luke Moore
For any dentists looking to purchase their own practice, effective finance management is vital. This means understanding the options available to borrow money, from who and at what cost. However, the process rarely seems that straightforward and the specialist language used by lenders or in contracts can create significant confusion and frustration. To ensure you’re getting the best deal, and that you know exactly how and when you will be paying back any loans, it is important to demystify the jargon and to work with experts you trust.
In the starting blocks
To get a good head start, it is crucial to understand your current financial situation and to accurately estimate how much you can afford to borrow or pay for a practice. Calculations will include available lump sums to be used as a deposit, savings, investments, assets, and existing debts. When you know your upper purchase limit for a new practice, you can explore the market. Of course, your chosen practice will need to meet much more than your financial criteria, with careful consideration for the existing NHS contract, potential growth, location, size, patient demographic and more.
Once your ideal practice is identified, you will need to assess the numbers in more detail. To determine if you can afford the loan amount, the bank or lender will disregard certain costs to determine the practice’s value should anyone start running it. They will also deduct your current lifestyle expenses to ensure you can afford to maintain these while repaying the business loan.
All of the above will result in an adjusted net profit figure or Net Cash Flow. The bank or lender will then stress test the repayments against your finances – typically with an additional 3-4% on base rate. The amount of times the Net Cashflow goes into Stressed Repayment is referred to as the Debt Service Cover with different banks required a different index of this number to agree lending as first hurdle. The purpose of this is to ensure that you can still afford to pay back the loan even if you have additional personal expenses one month or if interest rates rise. The language used in illustrations can make it seem far more alarming than it is, but ultimately, it ensures you can comfortably afford the loan and is designed to present a worst case scenario.
Combining cash and equity
The good news is that the market has really opened up in recent months with lenders arguably more gung-ho than they have been for the last fifteen years. (As a point of note, this in terms of appetite not the cost of debt.) Larger debts are often being credit sanctioned with a 10% contribution with no other security by multiple different lenders. Further, there are now a number of challenger banks in dentistry who will do deals for applicants that more modal lenders would not consider.
The deposit is commonly provided in the form of cash. However, this is not the only option. It can also be the combination of cash and equity or lending value of any property or other major assets you own. What’s important is that you meet the loan-to-value criteria of the bank or lender.
For example, a mixed practice we recently worked with was valued at £600,000. A loan-to-value of 80% was required by the lender. To fulfil the £120,000 deposit, the buyer needed to offer £60,000 in cash and £60,000 in equity/lending in their house. Alternatively, they could have put down £70,000 in cash and the remaining £50,000 in equity/lending in another property they own.
Expert support
All of the above has been simplified to demonstrate the fundamentals of buying a practice, but in reality, the process can be far more complex, with more considerations, underlying factors and jargon. That’s why it is beneficial to work with experts in the field who understand the ins and outs of dental practice finance, as well as how to optimise your situation. DE Finance offers a comprehensive service that helps individuals and business partners accurately assess their circumstances and then purchase the practice of their dreams in a controlled and profitable way.
A quick glossary
A few key terms explained:
Valuation – the amount a practice is worth based on what someone is prepared to pay for it! Not necessarily the same as the market offering price or the sellers expectations!
EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) – the practice’s estimated operating profitability if fully associate-led.
FMT (Fair Maintainable Trade) – a more accurate estimate of the practice’s operating profitability, with one-off expenses and unusual revenue accounted for, but based on being operated by a full-time principal.
Net Cash Flow – could be either EBITDA or FMT depending on the individual context, but also adjusted for the applicant’s individual financial demands.
Stress test – testing of repayments at a higher interest based on the Net Cash Flow to ensure an applicant can comfortably afford to pay back the loan.
Debt Service Cover – the index computed by putting the Stressed Loan Payments into the Net Cash Flow.
Equity – the unencumbered proportion of an asset.
Deposit – the sum of money put down to secure the purchase of a practice.
Loan-to-value – the ratio of how much you have borrowed compared to how much the practice is worth.
For more information on DE Finance visit www.dentalelite.co.uk, email info@dentalelite.co.uk or call 01788 545 900
