Financing a Dental Practice Acquisition

Bank Financing Basics

Four Phases to Dental Practice Financing

Here are four key steps on the road to financing your dental practice acquisition:

1. Prepare your finances
2. Start the loan process
3. Secure financing and close on the practice
4. Manage your loan

Phase One: Prepare Your Finances

Long before you apply for financing, get your own finances in order. This lays the foundation of qualifying for a loan with favorable terms.

Maintain a Good Credit Score

There’s a magic number here: 680. Most lenders are going to use a credit score of 680 as the cutoff—the do-not-pass-go number for a loan. Above 680? Great. Below? Come back again when you’re ready.

Here are some key practices that can help you maintain a good score:

• Check your credit reports from the three bureaus. Dispute any errors that may be dragging down your scores.
• Pay your bills on time. Enroll in autopay whenever possible to avoid late payments on your credit report.
• Keep credit card balances low. High balances relative to your limits will lower your credit utilization ratio.
• Request increases on business lines of credit and on old cards to lower your overall credit utilization.

With a good credit score, you can qualify for the best financing rates when taking out business loans or commercial real estate mortgages. That way, you get the most bang for your buck.

If you’re feeling overwhelmed, we can guide you on what you should be mindful of to ensure you get the best financing for your dental practice. Contact us today.

Save a Chunk of Cash

Banks are going to want to see that you have at least $50K stashed away, even though you won’t be using it in the purchase. Why? Because they’re taking a bet on you, and they want to know that you’re not living hand-to-mouth. It’s also a hedge for a new practice owner, a bit of a rainy-day fund if needed early on.

Phase Two: Start the Loan Process

Start the lending process early and use expert guidance to set yourself up for dental practice financing success.

Get Pre-approved

A pre-approval for a dental practice loan is not the same as one for a house or a car. The bank hasn’t yet done its serious due diligence on either you or the practice. But you’ve spoken with a banker or two and provided some information and documentation, and the banker has given you a letter that says, more or less, “I’ve gotten to know Dr. Smith, and she’s someone we’re willing to work with.”

Having that letter in hand helps you stand out from other buyers trying to woo that practice owner, but who don’t have anything to back it up. Here’s how to do it:

• Schedule appointments with two or three commercial lenders to compare options.
• Provide tax returns, personal financial statements, and other requested documents for the past two years.
• Discuss maximum loan amounts and projected monthly payments.
• Ask lenders to provide a pre-approval letter you can use when making offers.

With a pre-approval letter in hand, you can show that you mean business—and have the wherewithal to back it up.

Consult with Experts

Engage financial and legal experts when navigating the complex lending process. Guidance from experts well-versed in dental practice lending ensures you find the optimal financing path.

• Meet with a dental loan specialist at your bank to understand the nuances of dental financing.
• Advisers well-versed in practice acquisitions, such as Dental Buyer Advocates, can provide guidance on lending strategies and pitfalls to avoid.

Your accountant and lawyer can also advise you on tax and liability considerations factored into the lending decision.

Apply to Multiple Banks

Don’t settle for the first lender that smiles at you; find the best one. One of the most important steps is to cast a wide net when you look for the ideal lender. In plain words, it’s time to apply to multiple banks.

How Many Banks?

Banks offer different interest rates, loan terms, and repayment plans. Send your application to two or three banks and let them do the negotiating for you. Don’t try to get tons of banks involved, or they won’t think they have a good shot at your business, and won’t work hard for you. Keep it to a couple.

Comparing Apples to Apples

Compare those loan offers. Pay close attention to interest rates—lower is better, of course. But there’s more to the story. Does the bank have good services outside the loan itself? Do you see yourself opening your business checking account there?

Most importantly, is the banker easy to work with? This will be an important relationship, even after the loan is secured. Make sure you get along well with the person on the other end.

Putting Your Best Smile Forward

Once you’ve got your offers, it’s time to make your move. Choose the bank that suits your needs and start the application process. It might feel overwhelming, but remember—you’ve done your homework, and you’re prepared. Keep all your documents organized, and follow their instructions to a T.

Step Three: Secure Financing

Once you’ve decided on the best financing option, you’ll need to secure that financing. This applies whether you’re buying a practice or starting one yourself from the ground up.

Does Buying or Starting Have the Best Financing Prospects?

Banks perceive an acquisition as significantly lower risk than a startup. 

With an established practice, banks can review past tax returns and financial statements to assess historical revenues, costs, profitability, and cash flows. The prior operating history provides greater certainty around likely future results. An existing practice includes intrinsic assets like staff, patient relationships, and referral networks that provide value. 

Banks recognize that a practice with proven results and underlying goodwill poses less risk than the hypothetical projections of an unproven startup. 

When you fund the acquisition of an existing practice, you’re more likely to get great terms.

Financing for an Existing Practice

Acquire an existing dental practice with an established patient base for immediate cash flow and an operating revenue stream. This route often provides better financing terms and approval rates than loans for unproven start-ups. The benefits of buying a dental practice include:

• Immediate patient base and cash flow from day one
• Lower risk than a start-up with proven practice financials
• Potential for more accurate practice valuation than building new
• No construction costs associated with build-outs
• Existing staff and systems to maintain continuity
• Opportunity to grow practice with proper transitions
• More financing options than start-ups, often with better terms
• Seller financing possible by structuring a buyout over time

Careful due diligence, astute negotiation, and prudent financing enables a strategic acquisition of an existing dental practice aligned with your goals. Take the time upfront to thoroughly evaluate, negotiate effectively, and shop financing to set the stage for a successful purchase.

And, if you need help any step of the way, contact us. We can help you make sense of the numbers during valuation and advise you on the best negotiation practices and financing options. Check out our dental practice acquisition checklist page to learn about the step-by-step process of purchasing an existing practice.

Evaluate the Practice

Protect your investment and determine a fair price aligned with the practice’s true value by completing comprehensive due diligence—thoroughly evaluating the practice’s financials, patient base, systems, and staff.

Covering all angles in your evaluation minimizes surprises and positions you for success after acquisition. Here are some tips on how to evaluate a dental practice:

• Review 3+ years of revenue and expenses to analyze profitability trends.
• Verify patient numbers, retention rates, and procedure mix to assess stability.
• Inspect equipment, technologies, and physical office space.
• Assess staff costs, roles, capabilities, and potential patient retention after acquisition.
• Validate practice growth potential based on patient demographics and competition in the area.

We’re here to help you make sense of the quantitative valuation data. We’ll let you know exactly what a dental practice is worth based on financial performance metrics, profitability analysis, market comparables, and other quantitative factors. We’ll also advise you on what to look for in a thorough qualitative valuation.

Negotiate the Purchase Price

Effective negotiation leads to a price and deal structure that satisfies both the buyer and seller. Keep negotiations cordial and objective to put yourself in the best position to reach a fair agreement. Here’s some advice on how to negotiate:

• Support your price position through careful validation of the practice valuation.
• Structure a creative deal with seller financing, earn-outs, or retention bonuses.
• Be prepared to compromise to land on a fair price acceptable to both parties.
• Avoid overpaying by sticking to valuations supported by meticulous due diligence.

Secure Financing

Assess multiple lending options to find the best terms and loan amount. Explore all financing avenues for a higher chance to find the capital needed to smoothly fund the practice acquisition. 

• Compare loan rates and terms from bank lenders.
• Consider seller financing and promissory notes to offset bank funding.
• Talk to dental practice finance specialists about tailored lending products.
• Apply with 2-3 lenders to determine the optimal financing package.

Financing for a New Practice

A brand new dental practice provides tremendous flexibility but is riskier than an acquisition. As a rule, I highly recommend that dentists purchase an existing practice rather than start one from scratch. But a startup can be a valid choice for some dentists, and in some areas.

It can be challenging to finance the capital expenditures and operating losses during the start-up phase, but building a practice from scratch offers the reward of full creative control in building your ideal practice. Careful planning and realistic projections are key when seeking start-up financing.

Key points to in favor of a startup:

• Complete flexibility in location, build-out, systems, and branding.
• Ability to implement the latest technologies and equipment.

Key points against startups:

• You have no patient base to start, so you must market and attract all new patients.
• There are significant construction costs for new office build-out and fittings.
• Lenders have higher risk, with no existing revenue or cash flow.
• You must finance operating losses until patient base builds.
• You may have more difficulty finding financing compared to an existing practice purchase.

Research Location and Demographics

Thorough location research ensures your new practice is situated in an area with sufficient demand potential to sustain your envisioned practice size. Choose the right location based on rigorous research for a solid foundation to build a thriving new patient base over time. Here’s how to do it:

• Analyze area demographics like household incomes and population growth.
• Estimate number of potential patients based on drive time access.
• Scout proposed locations for visibility, parking, public transit access.
• Talk to brokers familiar with dental market conditions.
• Try to avoid oversaturated areas with extensive competition.

Create a Detailed Business Plan

A comprehensive business plan is essential for convincing lenders to finance new dental practice startups. Demonstrate expertise in all aspects of dental practice management to mitigate the perceived risk associated with starting a new practice. A polished, thoughtful business plan addresses any concerns and strengthens your case for financing. Create it by doing the following:

• Outline your credentials, experience, and team qualifications.
• Describe your practice vision, services, and target patient demographics.
• Provide detailed operational plans covering staffing, systems, and technologies.
• Explain your marketing strategy leveraging SEO, social media, and digital marketing.
• Include 3-5 year financial projections with revenue, expenses, and profit.
• Seek input from accountants, consultants, and business owners when creating your plan.

Project Costs and Revenue

Convince lenders to finance your start-up costs by showing them conservative cost projections and realistic revenue assumptions. Your financial diligence must account for the lead time needed to establish a sustainable patient base. Accurate cost and revenue projections demonstrate expertise critical for securing start-up financing.

• Estimate costs for equipment, technology, office build-out and working capital.
• Research lead times for procuring necessary dental equipment and financing options.
• Phase equipment purchasing to conserve early capital if possible.
• Project patient numbers and revenue conservatively, allowing 6-12 months to build.
• Account for operating losses until the practice gains patient volume and referrals.
• Seek expert guidance from brokers experienced with practice financials.

Secure Financing

To finance a start-up dental practice, explore multiple funding sources beyond conventional loans, which may be difficult to secure. Cast a wide net to increase the chances of assembling the necessary financing.

• Consider equipment loans for dental equipment financing or leasing to conserve upfront capital.
• Explore alternative small business lenders and investment platforms.
• Get creative with personal loans, retirement account loans, and credit lines.
• Seek support from family members or business partners to strengthen loan applications.
• Apply widely to improve chances, given start-up lending challenges.

Persistence and creativity in exploring financing options reduces the burden of funding a practice from scratch.

Allow for Gradual Patient Growth

When budgeting and forecasting, allot ample time for steady, sustainable practice growth rather than expecting overnight success. It takes careful financial planning and a commitment to gradual, lasting growth to start a successful practice from the ground up. Patience and diligence leads to lasting success. Here’s how to grow your dental practice:

• Avoid excessive spending before revenue materializes.
• Focus initial marketing on established referral channels.
• Leverage digital marketing and social media to attract new patients.
• Provide exceptional service and follow up rigorously to retain patients.
• Control costs with judicious staffing and phased equipment purchases.
• Be prepared to self-fund shortfalls until reaching break-even.

Step Four: Manage the Loan

Once you secure financing and complete the purchase, ongoing loan management is critical to minimize interest costs, avoid fees, and maintain a healthy dentist-lender relationship. Proactively communicate with your lender and optimize payments for the best loan experience.

Provide Ongoing Documentation

Provide complete, timely documentation to strengthen trust with your lender and ensure efficient processing of your loan. Be organized and responsive to demonstrate that you are a low-risk borrower.

• Compile requested tax returns, financial statements, and dental practice reports.
• Meet lender deadlines for submitting documentation to avoid delays.
• Over-communicate about your practice’s finances and growth trajectory.
• Ask your lender to outline the full documentation timeline upfront.

Maintain open communication and promptly provide requested documentation to get your loan funded faster and build goodwill.

Expect Some Flexibility in Loan Allocation

Understand that lenders allow for some flexibility in how the loan is allocated, though the overall amount is fixed. Negotiate a loan allocation that matches your evolving needs to ease constraints.

• Discuss wiggle room for adjusting allocation between equipment, working capital, etc.
• Renegotiate allocation if practice needs change during the purchasing process.
• Don’t take unnecessary loans for excess capital you won’t fully utilize.
• Track allocated spending to avoid misuse of specified capital.

Though loan amount is fixed, some recalibration of allocation between permitted uses is often negotiable. We can talk you through how you can make this process work in your favor.

Make Payments on Time

File this one under “no duh.” Never miss or delay payments, to avoid fees and penalties. Set up autopay to minimize the chance of human error impacting your loan balance.

• Enroll in autopay from your business account to automate on-time payments.
• Build in calendar reminders before each monthly due date as a backup.
• Be transparent with your lender about any issues threatening your ability to pay.
• Watch for escrow changes and interest rate adjustments that could increase payments.

A perfect on-time payment history keeps your rates low and your relationship with the lender strong. This will aid you in the long run, especially if you plan on buying more dental practices.

Refinance when Possible for Better Terms

After 1-3 years of consistent on-time payments, consider refinancing for better interest rates or re-adjusted allocation. Here’s how you can do it:

• Discuss refinancing options with your banker after establishing payment history.
• Consider refinancing when interest rates decline significantly.
• Adjust allocation if practice growth requires additional equipment financing.
• Add real estate to the loan if you initially only financed equipment.

Prudent refinancing saves money long-term. Strategic refinance options improve cash flow and finance growth once the practice is established.

Looking to buy a dental practice? Our practice acquisition checklist gives a good overview of the process.

Key Factors in Choosing a Loan

Several critical factors should be evaluated when researching dental practice loan options to determine the optimal financing path for your acquisition. Weigh pros and cons of terms, rates, flexibility, fees, and other variables to make an informed decision on the best type of financing for your needs.

Dental Practice Loan Terms

Loan terms dictate the period over which the principal must be repaid. Longer terms reduce monthly payments but increase interest costs over the life of the loan. Evaluate loan terms as a whole to find the ideal repayment schedule, balancing affordability and overall interest.

• Most practice purchase loans are for a 15-year term. Ten-year terms and others still happen, but 15-years has become the norm.
• 20-25 year terms are common for commercial real estate loans.
• Compare monthly payments for different term lengths.
• Weigh higher long-term interest costs against lower short-term payments.

Loan Amount

The loan amount must cover the purchase price, equipment, working capital, and other transaction costs. Get the right loan amount to minimize financed capital while still funding the full purchase smoothly. Ensure the amount adequately funds the practice acquisition without excess unused capital.

• Verify the largest loan amount you qualify for based on collateral value.
• Scrutinize all acquisition costs to tailor loan amount tightly to actual funding needs.
• Avoid unnecessary interest payments on borrowed capital beyond your requirements.

Interest Rates

Practice loan interest rates determine the relative cost of different loan programs. Lower rates save substantially on interest expense over the loan term. Prioritize low interest rates from the start to minimize interest costs and maximize profitability.

• Compare fixed vs variable rate options. Fixed rates are almost always preferable for their predictability.
• When possible, opt for the lowest competitive rate available for your situation.

Fees

While lower rates are better than higher ones, don’t let a lower rate blind you to potential fees that could make a loan more expensive and less attractive.

Upfront fees like application, underwriting, or origination fees vary amongst lenders. High fees inflate the true cost of a loan. Keep the fees low to ensure more capital goes directly towards establishing your new practice.

• Ask lenders to provide full fee estimates in writing early in the application process.
• Weigh origination fees and closing costs into the total cost comparison.
• Opt for loans with lower fees, even if it means slightly higher rates.
• Take advantage of lender fee waivers if available.

Repayment Terms

Repayment terms dictate the flexibility and constraints on how principal and interest must be repaid. Understand grace periods, accrual options, and repayment flexibility. Loan terms with customized repayment flexibility provide helpful options to manage cash flow.

• Request clear explanations of repayment schedules, grace periods, and options.
• Consider interest-only periods to manage short-term cash flow.
• Prefer loans allowing additional principal payments to accelerate repayment.

Prepayment Penalties

Prepayment penalties for paying loans off early create risk. Prepayment flexibility provides valuable options if your financial situation evolves. Seek loans that allow you to pay off without penalties to retain flexibility.

• Avoid loans charging prepayment fees or exit penalties.
• Opt for loans allowing additional payments without penalty.
• Review fine print on prepayment clauses in loan contracts.
• Consider shorter term loans to avoid being penalized for prepaying.

Best Dental Practice Loans

Several leading lenders offer customized dental practice loans with competitive rates, terms, and fees. The optimal choice depends on your specific acquisition financing needs and qualifying factors. Review options thoroughly to identify the best aligned loan for your specific practice and financial circumstances.

For a good practice, most lenders should offer financing for 100% of the purchase price, and often even more, as a way to have some operating capital right from the start. Wells Fargo, Chase, Bank of America, and other big banks love lending to dentists, so you’ll have options.

Do You Want to Purchase a Dental Practice?

Ready to purchase your own practice? Contact our team today to schedule a consultation. Together, we’ll make sure your finances are in place and ensure your acquisition goes smoothly.

We quarterback the entire practice purchase so you can invest in an established practice with confidence. Our start-to-finish support enables smooth acquisitions on the best terms, so you can focus on patients and growth from day one.

With Dental Buyer Advocates supporting you through valuation, due diligence, financing, negotiations and more, you can realize your vision of practice ownership and leadership. Let us guide you on the fast track to owning your own thriving dental practice.

We offer comprehensive guidance through every step of the acquisition process. Our team of experienced consultants provides tailored advice on:

• Initial practice search and identification
• Due diligence validation of financials
• Practice valuation and pricing negotiation
• Securing acquisition financing
• Finalizing purchase contracts and paperwork
• … and anything else you need throughout the acquisition process.

Frequently Asked Questions on Financing a Dental Practice

Are dental practices profitable?

Dental practices can be highly profitable businesses due to the recurring revenue from patient visits and consistent demand for oral care services like cleanings, fillings, and oral and maxillofacial treatments. The key is to run an efficient practice with a loyal patient base and skilled associate dentists and supporting staff.

What is the richest type of dentist?

Orthodontists and oral surgeons tend to be the highest earning types of dentists due to specialized skills. However, general dentists can also earn very high incomes by building a thriving, patient-focused practice.

Is owning a dental practice stressful?

It can be stressful to own a dental practice, especially when it comes to managing regulations, staffing, marketing, and business aspects outside of clinical work. Dental business resources like the American Dental Association business resource center provide guidance to make operations more manageable.

Is dentistry more lucrative than medicine?

On average, dentists earn higher incomes than many physicians and surgeons. However, specialists in high demand areas like anesthesiology can out-earn dental industry specialists. Auxiliary staff like dental assistants are paid approximately the same as other healthcare assistants.

How can I make my dental office profitable?

Focus on operational efficiency, cost control, customer loyalty, and diversified services. Work with consultants or advisors with business administration expertise to properly manage the practice as a thriving small business.

Can I get 100% financing for a dental practice?

Yes, most lenders provide 100% financing for purchasing a practice. Sometimes they’ll go even further, providing more funds as operating capital for the new owner. In some circumstances lenders will not provide 100% financing, usually for sub-par practices.

What is a dental practice loan calculator?

A dental practice loan calculator is an online tool that allows you to enter your estimated practice purchase price, down payment, credit score, interest rate, and other variables to calculate projected monthly loan payments for a practice acquisition.