Transitions Roundtable: Young dentists and large loans

Keith W. Gruebele

Today’s dental school graduates carry an average of $250,000 in student debt.1 As a result, traditional financing may be more challenging for them, especially in the amount needed to cover the cost of buying a practice and/or a building.

However, this does not mean they should be ruled out as buyers! Creative thinking can reveal different means for a young aspiring business owner to obtain the financing necessary to acquire a business. In fact, a nontraditional approach might actually be a better solution for your unique situation.

Here are a few alternative options to the traditional lending and selling process.

Staggered transition—A staggered transition is selling a business or property in increments, allowing it to be sold piece by piece instead of all at once so that the new dentist takes on debt in smaller amounts over a period of time. For example, the senior dentist might initially sell 25% and develop an incremental schedule (i.e., 25% every year for the next three years) to sell off the remainder.

Seller-held financing—This is where the seller holds the financing and collects payments from the buyer. This can be a comfortable situation for the lender because the seller is still involved in the business and holding some of the debt. Additionally, it spreads the risk between lender and seller, creates a residual revenue stream for the seller, and makes the borrower more credible.

Two buyers—You don’t have to sell both entities to the same person. The building is often under a different corporate and tax ID than the practice, so the two can be separated for different buyers. You can even potentially negotiate lease terms between the real estate owner and the practice owner that are less costly for the practice buyer than owning the building. This minimizes down payment requirements for the buyers and even reduces the debt-to-income ratio, potentially increasing both buyers’ abilities to acquire financing. 

Student loan debt is not going away and may continue to impact the borrowing power of new graduates. However, there are alternate financing options to help you make the smoothest and most beneficial transition possible.

Jan Eriksen

With the increasing student loan debt of most young dentists, this is an issue that we see often today. When you consider the added cost for specialists, the student loan debt can double in some cases. However, there is good news for both sellers and buyers.

From the seller’s perspective, the positive is that the buying pool has expanded from what it was just a decade ago. Corporate dentistry has become increasingly active in acquiring practices that fit their metrics, and established practitioners with multiple locations have become more aggressive acquirers of practices within their specific region of operations. Most of these operators have ready access to funding.

With respect to the young dentists who have a lot of student loan debt, there is also good news when it comes to access to financing. Most of today’s national specialty lenders in the dental space offer 100% financing for practice purchases. The two main criteria considered are cash flow of the practice and personal credit history of the buyer.

Cash flow means the historical cash flow of the practice is sufficient to cover the practice loan and all personal debt payments (including student loans) and expenses. Personal credit history of the buyer is when every lender pulls a credit report on the buyer or borrower and looks for a good repayment history, minimum revolving debt (credit cards), and no derogatory items.

Most of today’s national dental lenders also offer commercial real estate financing and the specifics will vary by lender. Some offer financing through the Small Business Administration (SBA), while others offer conventional financing. As an example, the Wintrust Professional Practice Group offers conventional real estate financing for up to 80% of the appraised value of the real estate, and we will allow the seller to finance the remaining 20%.

There is good news for sellers who want to sell both practice and building to a young dentist with a lot of student debt—there are established national dental specialty lenders with experienced teams that can provide financing options for practice acquisitions and commercial real estate, as well as provide additional resources to buyers.