Ranjit Virk, financial adviser at Wealthwide, looks at the key stages for first-time buyers looking at buying a practice.
Buying a practice is a significant decision. It involves moving away from the relative safety of an associate to the risk of becoming a practice owner. It is important to stress that there is a risk involved. You’re typically going to have to borrow a significant amount. There’s a lot more paperwork, as well as the additional responsibility of managing staff in the practice.
If you are not put off by any of the above and you are prepared to take the risk, how do you buy your first practice? Assuming you need to borrow the money, a lender will look at two aspects. Firstly, the financial situation of both you and the practice you are looking to buy. Secondly, they will want assurance that clinically, you are ready to run a practice.
The bank will want a copy of your CV; this will demonstrate 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 have to manage other dentists’ work. Any additional courses or specialities always help. You need to be qualified for several years before considering buying a practice.
This is the main area you can have a big impact on. Make sure you can demonstrate to a bank through a CV that you are ready to run a practice.
From a financial perspective, there is little you can do. The main thing is to put together a good and independent team for the purchase.
Your accountant and financial adviser are crucial in helping you assess the value of a practice. After years of helping clients buy a practice, the experience of your accountant and adviser can guide you through 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.
After the decision has been made to buy the practice, you will also need a solicitor. A dental specialist is crucial in this area. There is no substitute for experience!
After discussion with the accountant and adviser, if all the figures make financial sense to pursue the purchase of the practice, the next stage is to approach the banks.
There is a plethora of options in raising the finance and all banks have strengths and weaknesses. An adviser can help you to find the bank that complements your situation. The banks have different criteria for deposits, additional security, term of loan and a myriad of other idiosyncrasies that require navigation.
The most important is the rate on offer but this is not always the main focus. As an example, the bank with a lower rate may require a higher deposit and with the value of practices this could be a significant barrier. Also, a banks inclination to lend to the dental sector can change over time. By using a trusted adviser, they can help you to find the most appropriate bank for you and give you best outcome in buying a practice.
You will need to put together a business plan; this is a crucial document. You need to do research on practices in the local area. What is the potential for growth and how are you going to achieve this? Detail any plans for renovation or re-decoration; maybe a colour theme or uniforms for the staff. Simple ideas will show to the bank you have considered how the practice will be run under your guidance. It will also help you to consider if the practice is in line with your own aims and values.
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 a practice as steeplechase and you will 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 the profit from the practice.
The practice accounts will need to be able to demonstrate that after you have taken your drawings for your personal expenditure, that the debt can still be serviced if the cost was to increase by one and a half to two times.
This means if your monthly repayment is £50,000 for the year, the practice must demonstrate a profit after your drawings of £75,000 to £100,000. This is the stress test. If all of this is satisfied, the bank will then agree the loan in principle and they will provide a list of supporting documents needed to move to completion. This will not be a quick process and most purchases will take between six to nine months.
After the bank has agreed the offer in principle, things start moving quickly and you will find yourself spending money, so be prepared. The bank will need a valuation, the solicitor will need cash on account and there are always costs that you cannot always predict.
It will seem very quick at the beginning and then slow during the middle part of the process. This is where the NHS, CQC and the solicitors will be working to check all the points the bank needs to have satisfied. An independent valuation will also be required for the bank and be in line with the agreed purchase price.
Once all the parts have been agreed, an exchange and completion date can be set. After the lull of the middle part of the process everything will then gather speed. It is almost always a fairly stressful process and will most likely represent the largest investment you will have made at that point in your life/career. The key message is to get help along the way.
Positive points for dental lending
- Banks are looking to increase healthcare lending; this works in your favour as they want to lend to dentists
- Deposits of 10% on the goodwill value and 100% lending on freehold
- Terms can be up to 20 years to help with affordability (this will be restricted to the length of the lease if you do not buy the freehold)
- Banks are looking to lend to first time buyers
- Additional security is not always needed
- Fixed and variable rate options are available, so you can manage the risk.
If you think that buying a practice is the right option for you and you want some independent support from a specialist dental adviser, please get in touch and we can help you start planning for a successful purchase. To book a call to talk through any of these issues – click here calendly.com/wealthwide/initial-phone-call-website.