We ask two experts the same question to give you two different answers on a complex issue
QUESTION:
"I want to sell my practice to my associate. He told me that he owes more than $450,000! Will he be able to get a bank loan?"
By Gary Schaub
Excessive buyer debt can really foul up a transition. Buyer debt is usually due to dental school loans. According to the ADA, the average dental school graduate debt is $225,000. Dr. Stephen Persichetti, associate professor, Department of Community Dentistry, Oregon Health & Science University, believes "this debt is closer to $300,000, based only on students who graduate with debt. The lucky ones who don't have school debt are known as DMDs (Daddy's My Dentist)."
Now let's do the numbers. Dental practice lenders are looking for cash flow from the practice to service the practice acquisition debt plus meet the buyer's personal income needs. My average general dental practice collects $900,000, has $375,000 in operating income, and sells for about $630,000. The buyer will need to borrow about $700,000 including working capital. At an interest rate of 6% and a 10-year payout, the debt service is about $93,000 per year. Including the $450,000 in existing debt results in total payments of about $153,000. Thus, the buyer should still have about $375,000 to $153,000, or $222,000 in operating income.
What problems can occur? Most lenders will require a buyer to write a business plan that accurately forecasts future production, overhead expenses, and operating income. They will want proof that the buyer can meet those production goals. If the practice is smaller than average, has a higher than average overhead, the seller wants to continue working, future production is uncertain, or interest rates increase, then financing the practice sale can become a challenge.
Gary Schaub is the founder of HELP Appraisals & Sales Inc., a dental and medical appraisal and brokerage firm in Portland, Ore. He is a member of American Dental Sales and can be reached at (503) 223-4357 or (855) 463-0101.
By Tom Snyder, DMD, MBA
Many young dentists are convinced that due to their sizable education debt, they will be unable to obtain financing from a bank. This is a myth, as all major dental lenders are aware of recent grads' high educational debt. As long as certain criteria are met, your associate should be able to get a loan.
First and foremost, good credit is key! Most lenders want their applicants to have FICO scores of 680 or higher. In some instances, if the scores fall below this range, it may result in such things as collateral requirements, a cosigner, or a seller carry back. Most banks want the doctor to have one to two years of experience. More importantly, proof of the purchaser's clinical production is especially required if the seller is retiring after the sale. If the purchaser's clinical production is considerably less than the seller, there may be a requirement of the seller to hold a promissory note possibly up to 20% of the sale price and for a period usually lasting between 12 to 18 months, until such time that the purchaser's production increases. Once the criteria are met, the note is paid off by the lender and the note's remaining principal is added to the original practice acquisition loan of the purchaser. Cash flow of the practice is also a critical component for any lender. Lenders run projections to ascertain if there are adequate funds to allow the purchaser to live comfortably, pay educational debt, and of course, pay the bank! So, in the end, if these criteria are met, your associate should be able to obtain funding for the purchase of your practice.
Tom Snyder, DMD, MBA, is the director of transition services for the Snyder Group, a division of Henry Schein Professional Practice Transitions. He can be reached at (800) 988-5674 or [email protected] .
