Show me the money!

Dr. Michael Gradeless

One of the greatest concerns when purchasing or starting a practice is where to get the money. To get the straight information about dental practice loans, I recently interviewed David Catalano, CEO of Midwest Bankers Group.

First of all, Dave, tell us about Midwest Bankers Group.

"We are a niche lender. We operate on a nationwide basis. Since 1991, we have served as a kind of financing specialist in the dental industry."

What are the sources of lending for a young or new practitioner?

"New dentists have a limited number of sources for financing. They will find it difficult or almost impossible to get a conventional business loan through a bank. In a traditional lending environment, you have to have a secondary source for repayment of the loan, like a piece of equipment or some real estate or an automobile as collateral. However, the way a practice is purchased is a function of its ongoing value. It creates cash flow, and as long as the practice is up and running, it creates income for the dentist. A traditional lender will look at this and say, 'You are spending $500,000 here and your equipment is worth $100,000. We'll give you $80,000 against your equipment.' So you have to find a lender with experience in the ongoing valuation of a dental practice.

Due to market demand, specialty lenders have sprung up to serve the dental community. Some of the nationwide lenders are Matsco, Sky Financial, HPSC, Midwest Bankers ... and there are some smaller niche lenders as well."

It is not uncommon to see new graduates with $100,000 or more in student loans and a negative net worth. How does that affect their ability to finance a practice?

"It is not necessarily how much student loan debt they have, but how they have paid it back and how they pay their bills. Typically, new dentists will work for a year or two before buying or starting a practice. You can learn a lot about them from how they spend their money. Ideally, they will not have bought a new car and a big house or run up credit card debt. The best thing new dentists can do to improve their chances of getting a loan is to avoid revolving debt. Don't buy something you can't pay for today!"

In the practice-acquisition process, when should a dentist contact a lender?

"At the beginning. Nothing gets done without the money. We can do a quick calculation based on your current lifestyle and personal debt load to tell you what type of practice to look for. You may find a great practice, but if it is too small to create enough income to support your current debt load, you will not qualify for the loan. The prequalification process for a practice acquisition is more than just running your credit score. There are things on the due diligence side that must be addressed for the buyer. Remember, the broker works for the seller. Many brokers claim dual representation, but you have to follow the money. Who pays them? The lender is the only one who is truly on the buyer's side, aligned with the ongoing cash flow. The broker has his money out, and the seller has his money out. In order for the lender to get his money out, the dentist must be successful."

What is the biggest mistake you see young practitioners make?

"Not investing in a qualified retirement plan from day one! They build a lifestyle on 100 percent of their free cash flow, plus a little more with credit. They need to be disciplined on the front end. Most dentists love what they are doing. They can help people, be creative, and be their own boss, but eventually they have to stop.

"To summarize the process:

1 Don't take on new debt just before you plan to borrow money for a practice.
2 Look for the alignment of cash flow. Your best advice should come from those who have an alignment with your future cash flow.
3 Ask questions. Don't sign anything you don't understand.
4 Build retirement planning into the deal from the beginning."