A Guide to Dental Practice Purchase Finance
Purchasing a dental practice has so many facets so it is important to know what to do and when to do it. When identifying a dental practice and making an offer you want to provide the reassurance to the vendor that you have dental practice finance in place. It’s also important is to ensure that you have this agreed upon before placing any deposit and therefore the timeliness of getting the approval is vital.
The Finance Proposal
To ensure that you put your best foot forward with the banks, it is important to provide all of the information which they will need in assessing both you, as the borrower, and the practice that you are looking to purchase. Furthermore, they will also need to consider how the practice would work under your ownership, which may be very different from how the practice worked under the previous principal (different gross fees, days worked etc). The most important part is the affordability of the loan which will be based on the profitability of the practice, after tax, personal income requirements, and loan repayments.
We are actively putting finance cases forward on a daily basis, we know exactly what information to put to the banks, giving them clear concise information to make the assessment. The lending report will be provided to many banks, to ensure that we get as many offers for you to choose from.
Business Projections
Where the buyer is not simply taking over the days worked/income of the retiring principal the financials can look very different to those of the practice. As such, having some projections or forecasts for the bank can be vital to support the bank’s assessment. This can mean a difference of the bank feeling comfortable in lending or not, or even offering better rates.
The projections are not only useful for the bank but should be used as the buyers first checkpoint to ensure that the practice will work for them. It may change the way in which the buyer views how they will work the practice, as they may need to take on more income to make the practice work for them, or actually give them reassurance that they can drop a clinical day to concentrate on the management of the business.
With PFM Accountancy looking after over 950 dentists, we have seen this being a real strength of our offering, being the only dental practice sale agent with the ability to provide these from a Chartered accountant, which is the credentials that the bank require. We are now typically producing 2-3 forecasts for clients looking to purchase practices each week.
Agreement in Principle (AIP)
The agreement in principle (AIP) is the first step to getting the go-ahead and seeing the interest rates that are being offered. Once the report has been sent, each of the banks will come back with confirmation of whether they would lend, based on your scenario and the interest rates. This then enables you to confirm to the agent or vendor that the finance has been agreed in principle.
You would then determine which bank you wish to use, which most times would be based on the most competitive interest rates and charges of the bank.
Credit Sanction
On choosing the bank, this is when you will have the first contact with them. They will require some additional paperwork, mostly in their own format to ensure that they can put the relevant application to their credit team. They may also ask for some more detailed information of the practice such as Vital Signs and NHS schedules. The process would normally take around a week from the getting the information to writing up their report to credit. Once this has been approved then you have a ‘credit backed’ offer, which now is subject to the valuation.
Valuation
The bank, like with a residential mortgage, will want to send a surveyor to value both the business and the property, to ensure that they deem that the practice is worth what you are paying. The process will involve them writing out to a number of valuers with instructions and getting quotes from these. The bank would then provide you with a number of surveyors to choose from. Once you have chosen which surveyor you wish to use and they have been instructed they will make contact with the vendor or agent and arrange a suitable appointment, most instances this will be a few weeks in time. The valuer would normally issue the report 2-3 weeks after the visit.
It is incredibly important that the valuation is instructed as early as possible, as in most instances from the day in which quotes are requested to getting the report back, 2 months will pass.
Insurances
The bank will insist on certain insurances being in place and there are also some others that you may wish to consider. The main ones being:
- Life cover/Critical Illness for the loan amount and term – this is a requirement for most banks to ensure that in this event, the loan would be repaid. Often the policy will need to be assigned to the bank meaning that they are the automatic beneficiary.
- Adequate income protection – the banks generally would not confirm the amount, but ask that you speak with a financial advisor to assess the need. Bear in mind that the projected income on owning the practice may be more than your current earnings, and therefore this needs to be assessed by someone with the relevant experience.
- Surgery insurance – Most people liken this to a buildings and contents policy, although they generally have a number of other aspects such as public liability and employers liability, which are both legal requirements. They can also usually have the addition of the annual inspection of pressure vessels (another legal requirement).
- Practice overheads insurance – As you are now liable for the practice overheads of the practice, such as staff, rent, utilities, and loan repayments regardless of whether you are well and working or off ill these costs are still due. Whilst some confuse this with duplication of income protection, this is not the case. If you had no income coming into the practice then the overheads insurance covers the costs of the business but does not leave you with any profit to cover your personal requirements such as mortgage and food, which is what the income protection cover.
- Partnership life cover – Whilst this one is not normally a requirement of the bank, this can be incredibly important for those that are buying into or creating a partnership. The idea being that should a partner die, then this leaves the remaining partner needing to buy them out (and possibly trying to finance – which may be maxed out already) or having the share of the practice being sold on the open market meaning an unknown new partner comes in. Therefore the life cover allows the remaining partner to buy out the other share from their estate using the life proceeds. The life policies are normally written in trust and require expert advice. There is also the option to have critical illness on this type of policy.
PFM Dental are independent financial advisors and regularly advise on all of the above. Understanding the importance of ‘own occupation’ definitions is vital to ensure that you are adequately protected. Whilst the likes of the surgery insurance and practice overheads take a few weeks to arrange, the life cover, critical illness, and income protection can take significantly longer, especially if high levels of cover are required or there are pre-existing medical conditions.
Formal sanction
Once the bank have received the valuation back form the surveyor they will review and confirm that the valuation has come in okay. It would normally take a further couple of weeks from receiving this back to going through and being reviewed by the banks credit team.
Bank Instructions
After having the valuation come back okay, the bank will then send instructions to the purchasers solicitor. The solicitor will need to report on the title of the property for example, again confirming to the bank that this is okay to lend on. It should be noted however, that in most instances the property solicitor will only undertake the searches for the property once they have received the bank instructions. If a residential property is being used as security then further searches would need to take place for this also.
NACFB
PFM are members of the National Association of Commercial Finance Brokers (NACFB). For the finance negotiation PFM Dental do not charge a fee, as we would receive a commission from the bank, although this does not affect the rate or charges that you would pay.
Timescales
The timescales from start to finish should not be underestimated and should be one of the first things that a buyer looks at. In reality, a vendor will be busy for the first 4-6 weeks preparing all of the due diligence for the buyer and their solicitor. This is the perfect time when a purchaser does not have to involve themselves in the legal part of buying so the time should be used wisely. With the timescales or getting an agreement in principle, credit sanction, valuation being instructed and carried out, further credit check, bank instructions to the legal team, then the legal property work, if this is delayed it will invariably push back the sale.
As part of the finance negotiations and service, PFM will monitor the progress and ensure that this keeps moving as it should. In addition, having the Chartered Accountants who can produce forecasts for you (and look after your accounts after purchase), independent financial advisors to look at insurance requirements, buyers can pick and choose what services they need assistance with from PFM Dental. Even further, the legal team at PFM Dental can also undertake the necessary legal work to purchase.
With the ability to cover all aspects of the purchase, you could not be in better hands.
