Bank Funding for a Dental Practice Purchase
You’ve found the right practice but you need a bank loan to buy it. Where do you go, what do you need to prepare, what types of loans are there and what costs are there to consider? As specialist dental brokers, we can explain. Read on to find out.
Raising Finance – Preparation
Identify your target practice
The bank can only assess your lending against a specific practice as each practice will offer a different level of projected profit. Without it being specific to your target practice, there is no such thing as an Agreement in Principle from a lender stating how much you can borrow.
Prepare your financials
Think of this preparation the same as a residential mortgage – the bank want to see that you can already live well within your means and can afford to take on a new loan. Right before a potential practice purchase is not the time to buy a new sports car on finance or use all of your available cash for a house extension.
Save a cash deposit
Typically you will need 5%-10% cash deposit for your practice purchase. It is rare to be offered 100% finance unless you have enough equity to cover the proposed cash deposit and most banks want a minimum of 5% cash input upfront. Further details provided in the next section.
Get personal projections
You should instruct a dental specific accountant to review the target practice and adjust the P&L to how you will run the practice, if this is different from the sales prospectus and valuation assumptions. The accountant will then be able to tell you what your take home earnings will be, after tax and loan repayments are paid.
PFM Dental Accountancy prepare hundreds of projections for prospective practice owners every year, so they know what to look for. Enquire here for help.
Update your CV
The banks want to know a) you have the relevant qualifications and experience to carry out clinical work at the practice (if that is your intention) and b) if you have any previous management experience which will aid your transition from associate to practice owner.
What do the bank want?
They want to know that the loan can actually be repaid!
The bank will look at the practice accounts, projected P&L done by agent, and your personal projections to determine whether there is enough profit to repay the level of borrowing you are asking for.
Much of this will depend on whether the practice makes enough profit to cover your current personal outgoings and then repay a loan in addition. So really if you are looking for a principal led practice, you need to be looking a profit at least equal to, but ideally higher, than you are currently earning. If the bank can see that you can live off less money that the practice is intended to make – great.
How you manage your money
After looking at the practice, the bank will look at you – do you live month by month off credit cards that are not repaid, do you have a large car loan, have you been saving cash or is everything spent on entertainment each month?
Again, a similar review to when applying for a mortgage, however this is more intense. If your projections say for example that you intend to generate £500k gross fees, but for the last 3 years you have only been generating £200k gross fees – the bank will want to know how you are going to do this, or they may not lend if there is no evidence that you can generate this level.
If you have a cash deposit
The most common question we are asked is “How much cash do I need?”. Our general guidance is as follows:
Goodwill
- Typically, many people can achieve borrowing with as little as 5% – 10% deposit, although it is possible to raise 100% finance, especially if you have equity in a residential property.
Property
- If you are purchasing the practice freehold premises with the business, this will help, as the bank can also use this as security.
- For freehold property, you can achieve 100% finance on the property with some banks. Some lenders do ask for a % deposit across the whole purchase price, so you want to use an independent broker who can look at all of the lenders and different options for you.
Types of loan
Full term committed
Goodwill loans are usually 15 years. Many banks will guarantee the loan for the full term i.e. the repayments are calculated over the 15 years and the bank will not pull the funding back at any point.
Commercial freehold loans are usually 25 years.
Subject to loan serviceability, both the goodwill and freehold loan terms can be adjusted to suit you.
Partially Amortising Loan (PAL)
The easiest way to describe a PAL is that it is similar to a car PCP loan. Your repayments are calculated over the full 15 year period, however the PAL is only guaranteed for say 5 years.
At the end of the 5 years, you either repay the loan in full, or refinance through the same lender, or another lender.
As the bank is securing funds for a shorter period of time, typically PALs benefit from lower interest rates. However please do note that if you plan to finance at the end of the loan, you will incur the initial loan fees again. Associated costs are in the next section.
Variable Loans
Assuming a variable loan, some banks also guarantee their interest rate for the full term, some only guarantee it for a certain period of the loan, for example 5 years, so always ask. Please note that on a variable rate loan, the Bank of England (BOE) base rate is always subject to change and it is only the bank’s margin that is guaranteed. E.g. Assuming a bank variable interest rate of 2.5% plus BOE base rate:
2021 – 2.5% plus BOE base rate of 0.01% = 2.6% total interest
vs
2025 – 2.5% plus BOE base rate of 4% = 6.5% total interest
Fixed Rate Loans
With the recent increases to the BOE base rate, many purchasers are now considering fixed rate loans. This gives many people reassurance that they know what their loan repayments will be for the next few years.
As the lender must factor in potential cost of funds rises during the fixed rate period, fixed rate options have typically been much higher than variable. However, we are currently seeing a close in the gap between the total variable rate and fixed rate options, with some only 0.01% apart.
Loan Application Process
Getting Loan Offers
Your first point of call should be an independent finance broker who is experienced in dental practice sales. It is unlikely you will have time outside of work to liaise with 6+ potential lenders, ask a broker to do this for you.
At PFM, we will ask for details of the target practice and your personal details before putting a lending proposition together for the lenders. This will then be issued to all of the main healthcare lenders.
If the bank are happy to lend, you will receive loan offers to review. We will talk you through each offer and answer any questions you may have.
Agreement in Principle (AIP)
Once you have decided which loan offer to accept, you will receive an AIP confirming the offer and borrowing amount. This can then be provided to the sales agent as proof that funding is in place, subject to credit.
The AIP is usually valid for 6 months however lenders are aware that dental practice sales often take longer and some will honour the terms for longer if needed.
Credit Application
You will then provide any additional information needed for your credit application. Usually this includes your last 6 months’ personal bank statements, latest accounts/tax returns and further details of your business plan.
The bank manager will write your credit application and submit this for you. We allow up to 4 weeks to hear back from credit.
Pre-conditions
Once approved, you and your advisors will need to satisfy all of the bank’s pre-conditions before they will release the funds. Pre-conditions are specific to each case, but general terms include:
- Bank valuation of target practice and any related business property
- Bank valuation of any existing practices and properties (including residential, buy to lets etc)
- For any property leases – lease term to be in line with loan term
- Latest practice accounts
- Proof of cash deposit
- Accountant to confirm:
- Taxes are paid up to date
- Breakdown of purchase price
- Solicitors to confirm:
- CQC is in place
- NHS contract is in place to be transferred (if applicable)
- Satisfactory warranties are in the sale agreement
- Security complete to bank’s satisfaction e.g. second charge taken over your residential property
- Life insurance in place to cover borrowing amount
Exchange
Once all of the pre-conditions have been satisfied and the purchase legal process has been completed, the bank will provide a ‘safe to lend’ document to the solicitors, confirming that they will release funds on the day of completion. Usually this is around 1 month before the day of completion.
Completion
Funds are sent to your solicitor and then the seller’s solicitor ready for you to complete your practice purchase.
Associated costs
Bank Arrangement Fee
Usually 1% – 1.5% of the total borrowing amount, most lenders can add this to your loan and therefore this isn’t usually a sum you need available in cash.
Bank Valuation
Most banks will want their own valuation of the practice (and property if you are buying the freehold). They want to make sure that they are not lending you more money than either are worth.
The bank will provide you with valuation quotes from their panel members, which are often in the region of £1,700 – £2,250 plus VAT. This sum needs to be paid upfront to the bank before the valuation is instructed, so you will need this available in cash at the beginning of the purchase.
Bank Solicitors
Some lenders will be happy for your dental specialist solicitor to act on their behalf as well. Some will want their own third party panel member solicitor to be instructed. The bank will provide quotes for this, however we have typically seen this in the region of £3,500 plus VAT.
Insurances
Although the bank will ask for you to have life insurance in place to repay the loan should the worst happen, in the case of you falling too ill to work, your loan repayments will still need to be met. Some of the following insurances should therefore be seriously considered.
Critical Illness Cover
Critical illness cover insurance will pay a lump sum to you if you are diagnosed with a serious illness or disability.
Practice Overheads Insurance
In the event that you are unable to work for a period of time, you may need some help covering business costs. Staff, rent and utilities will still need paying, practice overheads insurance can help cover this.
PFM Dental are practice sales agents, finance and insurance brokers, dental specialist accountants, financial advisors and dental specialist solicitors.
Don’t go it alone, contact us for help with your practice purchase finance.
