Ranjit Virk, financial adviser at Wealthwide, looks at the key stages for first-time buyers looking to buy a practice.
Buying a practice is an important decision. It involves moving from the relative security of an associate to the risk of becoming a practice owner. It is important to note that there is a risk. You will usually need to borrow a substantial amount. There is a lot more paperwork, as well as additional responsibilities for managing staff in the practice.
If you are not driven by any of the above and are prepared to take the risk, how do you buy your first practice? Assuming you need to borrow money, a lender will look at two aspects. First, your financial situation and the practice you are looking to buy. Second, they will want assurance that clinically, you are ready to run a practice.
The bank will ask for a copy of your CV; this will show your clinical ability. It is important to have a strong CV as the bank needs to be confident that you can not only run a practice, but you may need to manage the work of other dentists. Any additional courses or specialties always help. You should be qualified for a number of years before you consider buying an apprenticeship.
This is the main area where you can have a big impact. Make sure you can demonstrate to a bank through a CV that you are ready to run a practice.
finances
Financially, there is little you can do. The main thing is to create a good and independent buying team.
Your accountant and financial advisor are crucial in helping you assess the value of an internship. After years of helping clients buy a practice, the experience of your accountant and advisor can guide you in assessing the value of the practice and point out any anomalies.
Always seek independent advice and try to surround yourself with a team whose agenda is to help you.
Once the decision has been made to buy the practice, you will also need a lawyer. A dental specialist is crucial in this area. There is no substitute for experience!
Approaching banks
After discussion with the accountant and adviser, if all the figures make financial sense to proceed with the purchase of the practice, the next stage is to approach the banks.
There are a plethora of options in raising finance and all banks have strengths and weaknesses. An adviser can help you find the bank that suits your situation. Banks have different criteria for deposits, additional security, loan term and a host of other features that require navigation.
The most important is the fee on offer, but this is not always the main focus. For example, the bank with a lower rate may require a higher deposit and with the value of practices this can be a significant barrier. Also, banks’ willingness to lend to the dental sector may change over time. By using a trusted advisor, they can help you find the most suitable bank for you and give you the best result in buying a practice.
You will need to draw up a business plan; this is a crucial document. You should do research on internships in the local area. What is the potential for growth and how will you achieve it? Detail any plans for renovation or redecoration; perhaps a color theme or staff uniforms. Simple ideas will show the bank that you have considered how the practice will develop under your leadership. It will also help you think about whether the practice aligns with your goals and values.
The stress test
The bank will then look at the stress test. This is the first major hurdle to overcome (there are many more to come). Think of buying an internship as a steeplechase and you’ll get a picture of how the process will work. The stress test is the bank looking at your personal situation and the level of income you need to survive and profit from the practice.
Practice accounts will need to be able to demonstrate that after receiving your drawings for your personal expenses, the debt can still be serviced if the cost were to increase by one and a half to two times.
This means if your monthly payment is £50,000 for the year, the practice should show a profit after your drawings of £75,000 to £100,000. This is the stress test. If all this is satisfied, the bank will then agree to the loan in principle and provide a list of supporting documents needed to move towards completion. This will not be a quick process and most purchases will take six to nine months.
Additional costs
Once the bank has agreed to the offer in principle, things start to move quickly and you will find yourself spending money, so be prepared. The bank will need an appraisal, the lawyer will need money in the account, and there are always costs that you can’t always predict.
It will seem very fast at first and then slow during the middle part of the process. This is where the NHS, CQC and solicitors will work to check all the points the bank must have completed. An independent appraisal will also be required for the bank and be consistent with the agreed purchase price.
Once all parts have been agreed upon, an exchange and completion date can be set. After the middle part of the process calms down, everything will pick up speed. It’s almost always a pretty stressful process and will most likely represent the biggest investment you’ll ever make at that point in your life/career. The main message is to get help along the way.
Positive points for dental lending
- Banks are looking to increase health care lending; this works in your favor as they want to lend to dentists
- 10% deposit on goodwill and 100% freehold lending
- Terms can be up to 20 years to help with affordability (this will be limited to the length of the lease unless you buy the freehold)
- Banks are looking to lend to first-time buyers
- Additional security is not always necessary
- Fixed and variable rate options are available so you can manage your risk.
If you feel that buying a practice is the right option for you and would like independent support from a specialist dental adviser, please get in touch and we can help you start planning a successful purchase. To book a phone call to talk about any of these issues – click here calendly.com/wealthwide/initial-phone-call-website.