Working with your Independent Financial Adviser to negotiate the best private practice by Richard T Lishman, principal of money4dentists
As specialist independent financial advisers to dentists, we deal with all aspects of financial planning for dentists, but recently dentists are finding it more difficult to arrange practice finance due to the "credit crunch". So lets look at practice finance and what you should consider to make the transition as smooth as possible.
There are as many financial challenges for dentists looking to go private as there are opportunities. These are often compounded by the reality that whilst the majority of dentists are excellent physicians, they may have limited financial experience.
Any dentist who wants to buy a practice or who wishes to join an existing practice as an Associate or buy in as a partner, should study the historic performance carefully.
Although the acquisition price of a practice can vary significantly, it's not unusual for the purchase price to be upwards of £400,000.00 - £500,000.00. In appropriate cases this can be addressed either through a 100% bank loan or a combination of bank loan and other financial sources.
The essential elements of your 'Business Plan'
In order to confirm viability, it is important that the acquiring dentist consolidates their understanding in a suitable business plan. Core elements in this plan include:
- The sales particulars of the business in question –
- what the practice is costing to buy and/or refurbish,
- What are the reasons behind the sale,
- Three years historic accounts for the business in question,
- Forecasts and narrative for the next few years,
- Some background on the acquiring dentist's own personal accounts –
- Are they a high earner,
- How long have the been practicing.
Your personal account perspective can be easily identified as part of the 'Asset Liability' or Income and Expenditure analysis, which helps clients review where they are financially. This 'snapshot' can demonstrate the sound platform off which the dentist seeks to build. Dentists can either prepare this statement themselves or their independent financial advier can help facilitate this with appropriate forms which can be completed with ease.
Generally speaking a bank will lend to a practice against a combination of the freehold property value, the practice's 'goodwill' and its fixtures and fittings, so personal investment is not always necessary, so its vital that your independent financial adviser negotiates the best terms with all the specialist lenders.
Other key elements to feature in the business plan would include:
- What do you want to achieve with the practice? What stepping stones do you need to take things forward over the next few years?
- How are you going to achieve these goals? What will you need to set-up, refurbish, upgrade or purchase in order to realise this and how much will this cost? This then needs to be supported with financials including cash flow, profits and loss and balance sheet forecasts. How do these fit into your forecasts?
- Where are your future patients going to come from? – Can you acquired more commitment from the PCT? Will you be looking to convert them from the NHS to private plans or are there planned 'local marketing initiatives'?
- How are you going to differentiate your practice? Will you be offering cosmetic surgery such as Botox or Implantology in addition to your day-to-day dental services?
- Who will be working with you? Other Associates? What specialities do they offer? Will you employ a specialist to attract different types of work to compliment the rpactcie and receive referrals?
- How will your practice be different from the competition? What will set you apart?
- Last but not least, proof that you are a registered dentist! This can be easily achieved by citing your registration number within the business plan.
Developing a robust business plan will often throw up new challenges and opportunities that you had not considered before. However, you can work many of these through with your independent financial adviser to find a bespoke financial solution to each one.
Calculating the financial realities
Once you have developed a business plan you will need to consider whether your funding request is financially viable.
Typically a bank will lend money against both the practice's freehold – often up to 100% of the value - as well as up to 70% (or possibly more in London and the South East) of the practice's existing turnover.
You need to ensure that you build into your calculations not only the interest costs, but also other key factors like your own salary and capital costs.
Let's look at an example:
- Assuming 100% finance on a purchase of £500,000,
- Twenty year period,
- Capital and interest payable from day one,
- Monthly payments of approximately £3,530.00 per month or £42,360.00 per annum,
- Interest only in year one would be around £29,000.
Add to the monthly payment a sum equal to the generic income for a current associate of say £75,000 gross, then from year one the practice needs some £122,000 (excluding tax implications) on the bottom line to cover its commitments without discomfort.
As such, dentists should look realistically at the value of the practice balanced by the return on the investment it offers.
Management of income generation together with cost control through great teamwork and understanding within the practice will be vital to making the success the dentist seeks.
Let's look at the structure
The structure of the facilities the banks will provide to meet a successful funding application will depend entirely upon your individual circumstances. Typically such dentists will come to us with a global sum that they need to raise. We will alalyse the case to see If the banks can provide this funding with a capital loan for a prescriptive period. A small overdraft, may also be provided to help cover any emergencies in the practice's cash flow and banks readily work with specialist equipment providers when required. On the few occasions when banks cannot provide enough traditional loan finance we usually can help dentists acquire an additional loan from an alternative source.
One of the unknowns in any business is future interest rate movements. To mitigate against possible rises you should consider the options around variable rate and fixed rate at the outset. For the more financially sophisticated practices you can consider tailor-made packages to suit individual needs.
A growing number of dentists we deal with are focussed on taking their practices into almost purely private income either through a monthly payment plan like Denplan or pay per item.
An increasing number of clients are setting up their own bespoke payment schemes that compliments their practice, and a number are introducing these schemes which are essentially a hybrid which they are developing in-house on the basis of cost savings. This approach does require the upfront purchase of specialist billing software as well as bank approval to underwrite the direct debit patient payments.
Working with a professional team
We recommend you work with specialist accountants and solicitors such as a member of NASDA (National Association of Specialist Dental Accountants) or ASPD (Association of Specialist Providers to Dentists) as they have a detailed day to day knowledge of the intricacies of the dental world. They will be able to share their vast experience and knowledge in this area, which in turn will save you time and money.
Also work with specialist independent valuers to evaluate freeholds as they have their finger on the pulse of the dental marketplace and can accurately assess goodwill, equipment, fixtures and fittings. They will ensure you are not paying over the odds!
In order to secure the best possible funding targeted to your specific requirements, you should also ensure that you look to establish a solid partnership with a bank that has its own Specialist Healthcare Managers who can provide a creative and effective response to your requirements.
We look at what the banks offer regarding flexibility in its financial structures allowing clients to fix rates for new entrants to create some security around initial repayments and always try to present the best options to clients within 48 hours which helps you move quickly and with confidence.
Whilst the majority of dentists may have modest financial expertise, it will be a relief to learn that there are specialist independent financial advisers available to do all the leg work for you, whilst guaranteeing to provide you with the best overall deal available. As if buying a practice isn't stressful enough, at least with the right professional team working with you, you can consider putting your feet!