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How to a buy a dental practice

Published on 12th June 2019 - Last update on 13th June 2019

As well as ensuring the successful delivery of dental services to your clients, you also need to ensure that your business has the ability to grow and expand into new areas. One way of achieving this goal is by purchasing a competing practice or purchasing an existing practice in another area. However, buying a dental practise isn’t a simple goal to achieve. It requires decisive planning, many hours of research and access to sufficient amounts of capital. Yet, if you’re willing to do the hard work and are resolute in your ambitions, there’s no reason why you can’t succeed. So to get you started, here’s what you need to consider when buying a dental practice.

Why are the current owners selling their practice?

When enquiring about a practice, ask the current owner why they’re selling up. Sometimes it might be down to personal matters, perhaps they’ve achieved their goals or they may just want to move on. However, you should think carefully about buying the practice if it’s loss-making. If you were to take it on, how will you turn things around and how much will it cost to do so?

Likewise, you should also be cautious if the owner is making bold claims about the practice’s potential. If the potential does exist, why haven’t they don’t it?

Thinking about purchasing another dental practice? Lack the necessary funds? Apply for a Practice Loan or learn more about how your practice could benefit  

How well is the practice performing?

Another area you should consider is how well the practice is performing financially. Although the current owner may make bold claims in order to raise the asking price, you need to check whether they stand up to scrutiny. As such, you need to check whether the practice has:

  • Reliable monthly income
  • Reliable source of customers
  • Control over its monthly expenses (ie, isn’t spending more than it earns)
  • Up-to-date dental equipment
  • The potential to expand

Therefore, you’ll need to take a closer look at the practice’s past and recent banks statements, sales forecasts, ledgers, balance sheet, Profit & Loss statements and any other documents that may be relevant. If the current owner is reluctant to show these for any reason, or the figures don’t express the same impression as what they’re claiming, think very carefully before deciding to buy the practice.

Are there any external factors you need to be aware of?

In addition, are there any external factors that may be affecting the practice’s performance, either now or in the near future? Although these might be outside of the current owner’s control, you must ensure that the practice has the potential to generate a return on your investment. Some of these factors could involve anything from local competition, regulatory changes, local economy and politics to advances in dental technology. Therefore, you need to consider what factors are currently affecting the practice and, if there are, how you can overcome them without draining your cash reserves in the process? Although the practice may look at attractive on paper, this can quickly change if any external factors begin negatively impacting the practice’s performance.

What business finance solutions are available?

If, after carrying out all the necessary checks, you still want to purchase the practice, you now need to look into how you’re going to raise enough capital. Purchasing another business isn’t going to come cheap, but there are two ways in which you can handle the costs involved. These are Commercial Mortgages and Bridging Finance.

Commercial Mortgages

Commercial Mortgages are secured, long-term agreements that can last up to 20 years (or possibly more). They’re typically secured against property, which in this case would be the practice that you’re looking to purchase. You’ll also need to place equity into the agreement which, subject to negotiation, typically starts at 20% of the practice’s purchase price. However, if you’re able to offer as much as 40%, lenders may feel more inclined to offer you a more favourable agreement. This will also reduce the amount that you’ll need to borrow, saving you money in the long run. During the course the agreement you’ll need to make fixed monthly repayments, plus interest. However, the interest on these payments can vary depending on whether you’ve chosen to apply for a Variable or Fixed Rate Mortgage.

Bridging Finance

On the other hand, Bridging Loans are known as secured, short-term agreements that can last up to 12 months. They’re typically secured against property and could be approved in as little as 48 hours, making it a source of quick capital. Plus, by choosing to apply for a Bridging Loan, you could borrow up to 80% the seller’s asking price. However, you also need to aware that Bridging Loans arrive in two forms: Open Bridge and Closed Bridge.

  • Open Bridge: With an Open Bridge you aren’t required to fully repay the loan by a specific date. However, you are expected to completely repay the product within the prescribed term or period.
  • Closed Bridge: If you choose a Closed Bridge, you will be expected to fully repay the loan by a set date.

However, although this determines when you need to have the loan settled, you also have the matter of how to deal with the interest. Unlike other finance products where you simultaneously repay both the Principal (money that you’ve borrowed) and the interest, a Bridging Loan requires you to treat these as two entirely different aspects of the repayment process. So in the run-up to the point where the Bridging Loan needs to be fully repaid, you need to have agreed with the lender whether to repay the interest by:

  • Monthly Interest Payments: Using this option, you will be required to make interest payments at the end of each month until the principal on the loan has been fully repaid.
  • Rolled-Up Interest: Here, the total amount of accumulated interest is combined with the total amount of money that you have borrowed. When you’re due to settling the loan, according to which product you’ve chosen, both the interest and the principal are repaid in a single final payment. Note that this will increase the size of the final payment, so you need to be certain that you can afford this option.
  • Retained Interest: With this option you are, in fact, borrowing the interest that would be accumulated for an agreed number of months on top of the money that you are already requesting. The amount of interest that you’re borrowing is then retained by the lender but is designed to offer your business a safety net as you make monthly payments until the loan’s principal has been fully repaid. If you haven’t used up all of the interest that was retained, or you’ve managed to fully repay the loan early, lenders may reimburse a portion of the unused interest back to your business.

Purchasing a dental practice?

In order to run a successful business in the dental industry, you need to be a looking at the various ways in which you can expand your operations. Although requiring access to a large amount of capital, purchasing an existing business is a great way of removing local competition and reinforcing your presence. But rather than drawing on your own savings and risking your financial stability, exploring what funding opportunities are available could be the answer. All you need to do is source an agreement that’s appropriate for your goals.

At Rangewell, we’re an Access to Finance specialist who have mapped over 400 lenders to offer you an overview of more than 23,000 business finance products. Our services are free to use and we’ll also guide you through the entire application process. We’re with you every step of the way. So if you’re looking to purchase another practice but lack the necessary funds, apply for Practice Finance today or find out more with Rangewell.

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David Harrison

David Harrison

Content writer
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