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Professional News Articles : : BUY/SELL by Peter Ackerman, CPA : What’s the best finance option when selling your practice?

What’s the best finance option when selling your practice?

May 4, 2010

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: 

  • The selling dentist owner financing
  • A local bank third party financing
  • A  specialized dental lender third party financing

There are a few unique situations where owners customarily choose to use owner financing:

  • When a selling dentist prefers to receive his/her money over time in order to spread out his/her tax liability (discuss this option with your CPA). 
  • When the selling dentist perceives that receiving principal and interest payments (on his loan) are a good investment.  
  • When an associate buys-into a partnership. Under this scenario, the selling dentist may be the buyer’s only option as a lender. Dental lenders typically place a blanket lien on all of the practice’s hard assets but senior dentists often are understandably hesitant to do this. Instead of mortgaging the practice’s assets, the senior dentist loans the money to the junior dentist for the buy-in. 
  • When a purchaser is unsuccessful in obtaining third party financing because of credit issues or the inability to obtain disability or life insurance. In this instance also, owner financing may be the only option remaining, albeit a risky option.

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. He may be reached at peter@adsmidwest.com or www.adsmidwest.com.

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