Purchasing a dental practice is a huge personal investment as well as a major financial investment. One of the primary factors involved in the dental practice purchase process is securing financing. Understanding your financing options and doing your due diligence is key to establishing a great financial foundation for your dental practice. In order for a bank to confidently offer you a loan, you must first understand your personal debt as well as the anticipated profitability of the practice you are looking to buy.
The Practice’s Cash Flow – When evaluating which dental practice is a great value, understanding the practice’s cash flow will help to determine if the practice is a good investment. Of course, a practice that appears to be a good investment is more likely to secure financing from a bank. Cash flow tells the story of a company’s financial health. A successful business has healthy cash flow. Reviewing cash flow will identify potential issues such as high overhead costs or other financial risks. Look at income and business expenses to help you determine if can you make a living, pay your dental practice loans and pay your personal debt.
Personal Debt – Personal debt includes student loans, your mortgage, car loans, credit card debt and other monthly financial obligations. Once you have determined your monthly obligations, multiply that by 12 to determine how much you need on a yearly basis to cover your personal debt.
The Debt to Service Ratio – A bank will typically look for a debt to service ratio of 1.20:1. What this means is that for every $1 in expense, which includes the loan for the practice and personal debt, the practice has to make $1.20. For example: if a practice has cash flow of $200,000 and the buyers total yearly obligations are 152,000, the debt service coverage is a 1.32:1 ratio. This is above the ideal ratio, so this practice would support the buyer and their debt and this buyer would likely receive a loan.
To put yourself in a good position to get financing, try to keep personal debt to a minimum and save as much money as possible prior to pursuing a purchase. In this case, paying down student loans in an aggressive manner is not as important as having cash in the bank. One thing to remember is that the stronger you look on paper the more likely you will receive financing from a lender.
Our Preferred Lenders – The team at ADS offers a network of relationships with major lenders throughout the country. Our preferred lenders are established leaders in the industry, demonstrating an understanding of the unique dental practice transition process. Our preferred lenders include Bank of America Practice Solutions, Huntington Practice Finance, and Provide.