GAP Australasian-Dentist Issue 80 Jul-Aug 19

Category 126 AustrÀlÀsiÀn Dentist Lending to dentists By Simon Palmer and Stafford Hamilton Stafford Hamilton Simon Palmer Ào n tÀ D ental practice sales involve large sums of money changing hands. Hundreds of thousands (if not millions) of dollars that usually need to be financed by a bank or other lending institution. Àhere are a lot of misconceptions out there about the ease with which a dentist can borrow funds for the purposes of buying a dental practice. Àhese are misconceptions that have led to many buyers being overconfident about their proposals and to many solid deals falling apart after much time and effort and thousands of dollars in legal bills. With this in mind, it is important that buyers and sellers alike both have a solid understanding of what is involved in dental practice finance. Ànderstanding how a financier looks at a buyer, vendor and practice, and what deals they will and won’t lend for, can save a lot of wasted time, energy and expense along the way. Here are some frequently asked questions that dental practice buyers and sellers ask when entering into a transaction. 1 We often have buyers coming to Practice Sale Search saying that they have “pre-approved finance” from their lender to buy a dental practice. What does this “pre-approval” mean? Àsually “pre-approval” means that a finanÀ cier has looked at the buyer’s income, wealth and circumstances and feels that they CO D lend to the buyer, as long as the practice they are buying is a sound investment. HOWÀV , approving the financing of a dental practice acquisition doesn’t just involve knowing the buyer’s financial position. Àt also involves knowing the details of what they are buying and knowing that the buyer has a good chance of making the business work, so they can make the repayments. Àhere are red flags that could occur in the assessment of the business itself, or in the compatibility of the borrower and the business, that could cause the financier not to lend. Pre-approval of a buyer does not mean pre-approval under all circumstances, regardless of what they are buying and their suitability. Àhe same thing happens with home loans. A lender will look at a buyer’s income and wealth in order to give them a home loan, but the loan is only approved after the lender does a valuation of the property itself. 2 People think that it’s easy for a dentist to secure a loan. In reality, what information does a lender need about a dentist (other than the “Dr” before their name)? A lot of factors are considered by a finan- cier when making a decision on whether to lend. At Credabl wee generally look at what is known as the “5 Cs of credit” to work out the creditworthiness of poten- tial borrowers. Àhe “5 Cs” are Collateral, Character, Capital, Capacity, Capability. Àhese attributes weigh up characteristics of the borrower and conditions of the loan, to estimate the risk of financial loss for the lender. a.À Character refers to a borrower’s reputation and track record for repaying debt. A definite red flag for us is a history of unexplained defaults on payment or a court action, worrying AHPÀA conditions, etc. b.À Capacity measures the borrower’s ability to repay a loan by comparing income against recurring debts, assessing the borrower’s debt-to- income (D ) ratio. We also look at the purchaser’s previous ability to generate income and clinical range. An ability to match or enhance the clinical range over what the vendor is currently offering is seen favourably. c.À Capital refers to any capital the borrower is putting towards a potential investment. A large contribution by the borrower decreases the chance of default. d.À Collateral can help a borrower secure a loan. Àt gives the lender the assurance that if the borrower defaults on the loan, the lender can repossess the collateral. e.À Conditions refer to the market conditions (interest rate, economy, dental industry), but also how a borrower intends to use the money. Àn this regard, we look at the plan of the purchaser and the appropriateness of the purchase – the purchaser’s ability to perform the same services. How similar they are to the vendor and the likelihood that they will be accepted by the patient base. How far the purchaser may be relocating is