For Associates who aspire to ultimately become practice owners there is good and bad news.
The good news firstly is that the banks very much view dentistry as a ‘green light’ sector and are prepared to offer generous terms to first time buyers for both NHS and Private practices.
The bad news is that there is currently an undersupply of practices coming to the market to keep pace with the demand for Associates seeking to purchase. Unfortunately for purchasers under the law of supply and demand this has resulted in higher and higher goodwill values to such a level that in certain cases the subject practice may not now be a viable acquisition.
That said the majority of practices are ‘fundable’ although key for any purchaser is to ensure they plan and prepare in advance to present the bank with a comprehensive a proposal as possible. This should reflect both purchaser and the practice in the best possible light, to outline how you will run the business and to demonstrate the practice is (or will be) profitable to ensure a positive lending response and to secure best funding terms.
Where do I start ?
Before you even view or place an offer on a dental practice you need a rough idea of the level of finance you could raise. Can you purchase a practice for £250,000, £500,000 or £1M+?
By asking a number of questions about your clinical and employment background together with details of your personal financial position most advisers should be able to provide a guide as to the level of bank support you can expect – which in term can steer you towards suitably sized practices.
It is vital to ensure you work with an Independent Adviser who is authorised by the FCA and as such can work with ALL of the banks. There are currently 13 high street banks who have a policy to lend against dental goodwill together with a number of smaller ‘niche’ lenders.
Do not make the mistake of approaching just one bank direct though as they will only outline what their own lending guidelines will permit which may not be the most favourable – the banks are all different and there are currently some very competitive and flexible terms available but only if you approach the right lenders.
What do I need to prepare ?
A CV is quite often overlooked by clients who approach banks direct but it is one of the most important items the banks consider. Yes – this will include your clinical background especially covering any specialisms but most importantly should cover aspects of managerial experience be it in dentistry or elsewhere. You need to clearly demonstrate to the bank you are a serious business prospect and can take the step up from an Associate to owning and running a business and to cope with all of the headaches that will entail. It would be prudent to run your CV via your business adviser who can provide the necessary ‘enhancements’ the banks like to see.
Your personal financial position – the banks will very much focus on your personal assets & liabilities as well as your personal drawings requirement. Please take your time and detail everything on these forms and do not try to gloss over certain areas you feel may be an issue. Fully acknowledge that not everyone’s personal finances are perfect but a big no-no is to keep certain information back only for it to be ‘spotted’ by the bank at a later date. Disclose everything – but again speak with your adviser in advance who should be able to put a positive spin on most situations.
Cash savings – In almost every case you do need to ensure you have funds put aside to put towards a purchase. For smaller sub £500,000 purchases a cash contribution of between 5% and 10% may be possible and indeed on smaller Freeholds 100% funding may still be achievable. For £500K+ purchases as a 1st time buyer you need to budget for 10% to 20% unless of course you have additional security to offer. Bank of ‘Mum and Dad’ has come in to play in recent years – If you are in a fortunate position where family financial support is available DO ensure you let the banks know as in most cases they are happy to use this as your contribution towards the purchase.
Your earnings as Associate – In most cases the banks would want to see a set of accountant prepared accounts to verify your income/earnings as Associate. If you are taking over a practice where the current principal grosses £250K however if you as Associate only grossing £100K (before deductions) this is a big step up and you would need to convince the bank you can do this.
Business Plan and Forecasts
You need to demonstrate firstly to yourself and then the bank that the practice is worth purchasing – and it is true to say that not all are.
Compiling a Profit & Loss forecast (P&L) is vital. You would normally take the vendors most recent accounts as a starting point (or average of last 3 years if available) and effectively personalise it to show how the business would look financially if you took over. You would add back costs which are personal to the current owner (depreciation, spouses wage, vendors finance costs and possibly part of Associate costs as you could be replacing them under your ownership). You must then include your own costs – largest of which is likely to the bank loan repayments. It is the all important bottom line profit after all deductions that both you and the bank will focus on – are loan costs comfortably covered and is there enough left to cover tax, your drawings requirement and for future investment back in the business.
Most banks would also expect to see a business plan which is effectively a summary of the above points covered in this article. Background on you (CV, financial position and earnings), background on the practice you are looking to purchase, the changes you are looking to make and the impact this will have on practice income and profits (the P&L).
Working with experts
Working with an FCA registered independent adviser will not only give you the peace of mind of a whole of banking market overview they will help you prepare your business plan and P&L. They should also negotiate on your behalf with the banks to ensure flexible and competitive terms and then hold your hand to the very end liaising with Accountants, Solicitors, Sales Agent, the bank, the bank valuer and also nowadays the CQC to ensure a smooth and seamless purchase.
The current market dynamics and high values certainly do make it challenging for first time buyers, however it is possible and hopefully these tips and suggestions will assist you achieving your dream of practice ownership.