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Obtaining funds to purchase a dental practice on reasonable terms and in an efficient manner is of utmost importance to both the buying and selling professional in any practice transition. When purchasing a practice, dentists have three possible sources for practice purchase financing:
There are a few unique situations where owners customarily choose to use owner financing:
In many parts of the country, local banks have qualms about lending money for the purchase of dental practices because they aren’t comfortable with the lack of collateral in most dental practices. The hard assets of a dental practice consist of dental equipment and supplies. Together, they comprise less than 50 percent of the practice’s value. On the other hand, the practice’s intangible assets or goodwill make up a significant portion of the practice’s overall value. Moreover, the average dental school graduate has in excess of $100,000 in student obligations. Taken together, the lack of collateral and the purchaser’s weak financial statement makes most bankers hesitant to loan money to dentists. In an attempt to strengthen the loan application, some parents of purchasing dentists are willing to co-sign the practice loan.
Of course, certain banks do undertake lending to purchasing dentists. Usually this opportunity becomes available when a special relationship exists between a dental practice broker and a bank or lending officer. This relationship, and perhaps the bank’s positive experience of doing previous dental loans, causes certain banks to enter the third party financing business.
To help fill the need of young dentists for practice financing, specialized dental lenders are willing to make loans for one hundred percent of sales price of the practice plus working capital. These loans generally have fixed rates and can be for five, seven or 10 years. Most importantly, these specialized third party lenders understand that dental practice loans are about the cash flow of the practice being purchased versus the collateral. The young dentist and spouse are the only two signatory to most loans and rarely require home equity as collateral. By understanding the dental market, these specialists make doing business easy and efficient.
Third party financing today, either through a local bank or by a specialized lender, is the preferred method of financing in almost every circumstance. As previously mentioned, one exception relates to a partnership buy-in under which circumstances the seller commonly finances. This situation does not necessarily arise because it is a better option, but because this is a relatively new state of affairs that makes many lenders wary. Time will bear witness, but I predict that financiers will continue to evolve to address buy-ins and co-ownerships, eliminating the need for seller financing all together.
Peter J. Ackerman, CPA, is a certified public accountant, licensed real estate and business broker and national speaker on business issues affecting dentists. For more information, email Mr. Ackerman or visit www.adsmidwest.com.
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A tradition of working for the dental profession. The Chicago Dental Society was organized in 1864 and incorporated in 1878. The objective of the Chicago Dental Society is to encourage the improvement of the health of the public, to promote the art and science of dentistry and to represent the intrest of the members of the profession and the public that it serves.
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