Finance can make or break a practice purchase at any one of three key stages. Jon Drysdale considers each stage and what potential buyers need to consider.
Stage 1 – Before making an offer
We are currently in a seller’s market and NHS practices in particular are attracting multiple offers. Where demand outstrips availability, the seller can select their potential buyer. When a practice is sold by ‘best and final sealed bids’ there often won’t be much between competing offers. In this case, the sales agent will relay to the vendor the background to each potential bid, including their finance position. If you haven’t considered your finance position in detail you will more than likely be out of contention.
Discuss your plans with a broker involved with dental finance – with only a basic financial profile, they will tell you if you are in a position to buy and, if not, what you need to do to get there. They will help you understand what level of finance might be available and narrow down the type and size of practice you feel is affordable. Practice sales agents know who the specialist brokers are and their support of your application can be crucial where you are competing with less well prepared buyers.
Consider the strengths and weaknesses of your financial and professional position. This centres on three areas: existing debt (credit profile), the size of deposit or security at your disposal and your relevant experience. You will be expected to have at least two to three years post-qualifying experience. Where your role in the new practice requires you to perform a certain number of UDAs, a bank might expect you to demonstrate a track record of doing so. The bank might be able to overcome your limited deposit resources if you have a strong credit profile and strong experience. However, a basic standard is expected in each of these areas and a good broker will know what is required.
Where a practice you plan to purchase has been underperforming or has profits below average, the bank will usually demand a higher overall standard in your financial and professional profile. You need to demonstrate you are the person that can turn things around and make sufficient profits to service the loan.
Stage 2 – Submitting a full proposal
No legal adviser will let a vendor or purchaser exchange contracts until a formal finance offer has been received, so obtain this as a priority. Once your offer has been accepted, legal ‘heads of terms’ (a pre-agreement on the price and outline of the deal) are drawn up. The vendor will require a formal written finance offer within a reasonable period. This is an important stage as, so far, vendor and purchaser remain legally uncommitted.
Submitting a full proposal involves gathering information on the target practice – typically accounts, NHS schedules, staffing details and more. You should have well prepared projections to show the bank your business plan under new ownership, including what level of personal fees you intend to perform – this impacts directly on profitability. The major healthcare lenders tend to give more credence to projections from a specialist dental accountant than the alternative. Depending on how the target practice trades (limited company, partnership or whatever) a bank may also require you to ask questions of your accountant: Are you buying a company or the assets of the company? Do the accounts for the target practice ring true? Are they comparable to other practices of a similar scale? Again, the bank will expect you to have sought specialist advice.
While you can prepare some of your financial profile in advance, it isn’t possible to pre-prepare much of the information the bank will require on the target practice. Having someone (a specialist broker and/or a dental accountant) who regularly advises on such applications will allow you to ‘hit the ground running’.
Stage 3 – Meeting bank preconditions
All being well, the bank will issue a formal offer but with some attached conditions. Several of these you will be expected to fulfil before completion. The pre-conditions will include a valuation of any property you wish to buy and often goodwill and equipment valuations. The bank will expect you to use (and pay for) someone from their panel of preferred valuers and you should take their instructions on this. Where the practice is being sold through an agent, you need to request further information – such as inspection reports. It is quite common to offer residential property (equity) as a deposit and this will require a separate valuation and, if it is jointly owned, independent legal advice.
The bank will specify a life cover policy to match the loan amount and term and usually income protection and practice expenses insurance to cover your repayments in the event of ill health. These will be required before funds are released and insurance applications should be made early as delays due to medical underwriting are not uncommon.
In summary, being prepared and knowing when to taking the appropriate specialist advice should ensure you achieve a successful purchase. Some consideration of stages 1 and 2 is worthwhile before making an offer to buy a practice, especially where you are dealing with a sales agent – they are unlikely to take you seriously unless you can demonstrate some relevant preparation.
About the Author
Jon Drysdale is an independent financial adviser for Chartered Financial Planners PFM Dental. He specialises in financial, pension and wealth management advice exclusively for dentists. PFM also offers a dental-specific chartered accountancy service.
For more information, visit www.pfmdental.co.uk