Question:
I would like to own multiple offices in the future. Will the major dental lenders still offer financing or do I have to find alternative means, like private equity?
Answer by Tom Snyder, DMD, MBA
Yes, several dental lenders are providing funding for multiple office purchases. However, the number of dental lenders that provide this specialized lending decreased slightly this past year as a few banks left this market. If you are planning to purchase just one or two practices this year, your task will be considerably easier than if your goal is to purchase more than five practices.
As your number of office locations increases, funding opportunities may become more difficult to find. Banks want to be sure that multiple acquisitions can be financially successful. Before approaching any lender, you must have a clear vision of what you are trying to accomplish. For example, is your goal to ultimately own five practices or do you envision owning 10 or more practices? If your plan is to have a bigger number of locations, establishing an infrastructure is a must.
For example, you will need to hire a CEO and a CFO for a large practice network. As you continue to grow and the amount of debt on the books increases, cash flow management becomes critical. A lender may "put on the acquisitions brakes" for future acquisitions until you can demonstrate that your current portfolio of practices is under sound fiscal control. Some lenders may place a limit on the number of practices you can own under their loan portfolio. Others may place a specific dollar amount on the debt that your company can incur.
In most instances lenders require that a dentist be in control of the company. This does not mean someone has to be the sole owner, but at least 50% ownership participation may be required. Some lenders might require the owner to practice at each location, and this will have an impact on the number of practices you can ultimately own. You might also find that once you reach a threshold of $15 million to $20 million of outstanding acquisition debt, it might be difficult to raise additional capital. This might be the point where you choose to entertain a private equity partner to take you to the next level.
Answer by Angela Baker, MBA
If a dentist owns multiple locations, can he or she still receive 100% financing? The answer is usually yes. Every dentist has a different business model, so it is very hard to put such parameters around this type of lending. There are many variables that surround multiple practices. These variables include how many practices are currently owned, how much debt is outstanding, whether the business model makes sense, how much money the business will need in the future, and how fast the business will grow.
There are qualities in the business model that can help a lender feel more comfortable with the strength of the business. For example, geographical detail-is it possible for the dentist to commute to all the practice locations? Although this is not necessary, it is helpful for many reasons. An associate could get sick, or a large case could require assistance. Another quality would be cash on hand. This is important for planning and emergency purposes.
There are a few key items lenders like to see in a business plan. These may include items such as a diagram to show the layout of the locations and all entities. Lenders also like to see the marketing plan in order to understand where marketing dollars are going, and hopefully to see consistency in the marketing plan.
It is very important when approaching lenders to ask, "Do you finance multiple practices?" The answer should be a firm yes or no, nothing in the gray area. It is important to keep your financial package fresh and up to date when you're speaking with lenders so you can easily send them your financials.
Do not be scared of the lending process when you need to find a financing partner, and try not to piecemeal transactions. While I tell my clients that rate and program are very important, what's more important is getting to know your banker and building trust with the right partner.
Tom Snyder, DMD, MBA, is the director of transition services for Henry Schein Professional Practice Transitions. He can be reached at (800) 988-5674 or [email protected].
Angela Baker, MBA, is vice president of the Professional Practice Group at Village Bank & Trust, a Wintrust Community Bank. She has been working with dentists for over 15 years, helping them with financing for their practices. She has a master's in business administration from Dominican University in River Forest, Illinois. Contact her at (847) 385-7011 or [email protected].
