In this article, we discuss:
- The advantages of buying an existing dental practice
- The cost of buying a dentist’s office
- How to finance a dental practice
Purchasing a dental practice is a smart way to secure a position in the profitable dentistry services industry. The question on the minds of many wannabe business owners is, “How am I going to pay for the practice acquisition?” In this guide, we’ll provide everything you need to know to get started.
Finding the right dental practice financing can be a challenging process, but with the right knowledge and the right lending team, you can become the proud owner of your own business.
Advantages of buying an existing dental practice
Owning a dental office offers professional freedom and nearly unlimited earning potential to entrepreneurs in the dental industry. To become an owner, you can either start your own practice from scratch or buy an existing practice. Many dentists choose to purchase an existing practice because of the following benefits.
Purchasing an existing dental practice comes with the benefit of an established client base. Most patients will remain at their current location, despite a change in ownership. A significant portion of income at a dentist’s office comes from the recurring revenue from the regularly scheduled exams of loyal patients.
An existing practice will often include keeping a large portion of the staff. In fact, continued employment for long-term staff may even be written into the purchase agreement. Being able to jump right in with experienced staff will ensure a smooth transition and help your build trust with your patients. Keeping the same staff through the purchasing process will not only be a good resource for a new buyer but will also encourage patients to stay with the practice.
Often the most significant reason people choose to purchase an existing dental practice is for the immediate cash flow. A profitable, established business will generate the income necessary to cover expenses during the purchasing process, including overhead, payroll, mortgage expenses, and even the buyer’s student loan debt from dental school.
Choosing the right location for any new business is a risk. When purchasing an established dental office, the location has already been proven. The new buyer of a practice that has successfully operated in an office space for years can have confidence that the location will continue to be viable in the future.
When starting a new dental business, it may take a few years to gain a strong ROI and be able to hire additional staff to help with growth. When buying an existing dental practice, the upside potential is immediate. Shortly after transitioning ownership, you can begin investing in marketing campaigns, extended hours, and additional staff that will result in new growth.
How much does it cost to buy a dentist’s office?
The ADA estimates that the average dental practice requires an investment of $500,000. This may sound expensive, but purchasing an existing dental office is more affordable than building a practice from the ground up. The exact cost of a dental practice will vary because each dental office has different strengths that affect its value.
Consider these factors when comparing existing practices:
- Location – The location of the practice determines the value of the real estate and affects income earning potential. Considering the costs of commercial real estate in the area is a great way to make sure the location of the new dental practice is priced fairly. The location also impacts the ability of the business to attract customers. Changes to the area may affect future revenues as well. If there is a new housing development being built close by, that could be good for the practice. However, if there is new construction that obscures the view of the practice, that could have a negative impact on business.
- Time in Business – Dental offices that have been home to a qualified dentist for an established amount of time are often priced higher than newer practices. Dentists that have earned the respect of the community have larger clientele bases that will translate to a higher retention rate for the new owner.
- Growth potential – The future earning potential of any new business can be hard to determine, but at a minimum, you should try to forecast growth based on past performance. Specifics like the number of doctors, office hours, services, and marketing tactics will affect revenue. When shopping for the right practice, it’s important to find one where there is room for growth.
- Equipment – The equipment that is in the practice, like x-ray machines, will affect the purchase price. Considering the length of time the current equipment is likely to last will contribute to the value of the office space. A practice that will require new equipment in the first year may be priced lower than one with state-of-the-art equipment that will last for several years.
How to finance a new dental practice?
Many entrepreneurs have concerns about financing when they are considering starting a new business. There are several ways to finance the purchase of a dental practice. Some business owners choose to bootstrap their practice or get financing from friends and family. This comes with a great deal of risk, though, so most consider a small business loan for all or a portion of the purchase.
Types of loans
There are many loans for dentists available. When considering which dental practice loan will work best, deciding factors may include the length of time to fund, approval requirements, repayment terms, and lender preference.
Let’s look into some of the more common types of financing options for dental practices.
SBA loans are a great option for many small business owners because of their low down payment requirements and fair repayment schedules. The programs are backed by the Small Business Administration but financed by a traditional or alternative lender.
The SBA will guarantee up to 85% of loans through one of their approved lenders. This makes the loans low risk, so lenders can offer more attractive repayment terms and better interest rates. With an SBA loan, payments are made to the lender each month and rarely have prepayment penalties.
While many business owners consider SBA loans to be the best financing option for ventures like a new dental practice, they have some drawbacks as well. The application for SBA loans is one of the lengthier financing processes. The approval requirements for an SBA loan are stricter in comparison to other loan applications. The SBA prefers to work with business owners that have a proven credit history, solid business plan, and documented income potential. And they often require that the cash flow of the business is 125% of the owner’s salary and debt service payments, which can be tough for new business owners.
Term loans are the most common type of financing used for the purchase of a new business or to refinance a current loan. A term loan allows the borrower to receive a lump sum of money for the full loan amount, which is repaid over time with a set number of payments. Repayment terms can be flexible for borrowers, so many new business owners consider them a great option for purchases like a dentist’s office.
With a term loan, the borrower can expect to agree to either a fixed or variable interest rate. With a variable interest rate, the interest portion of the monthly payment will fluctuate and is determined by the market rate and the term of the loan.
The approval requirements vary for term loans. Creditworthiness is used to determine the amount, if any, of the required down payment. Borrowers with less than good credit history may also consider a term loan that is secured, using a personal guarantee or asset as collateral. Obtaining a copy of your credit report is recommended before beginning the application process.
Short term loans
Traditional term loans do not work for every business owner. Some individuals considering purchasing a dental office want loan options that offer more flexibility or are short-term. Options for these business owners include term loans with repayment terms of less than five years, business lines of credit, and working capital loans.
A business line of credit is often considered a short-term loan. This type of revolving credit offers borrowers the capital they need when buying a dental practice, along with a great deal of flexibility. Lines of credit offer fast funding, so they are a great option for purchasers that want a safeguard against unexpected expenses.
The interest rates for a line of credit are typically higher than those of traditional term loans, but interest is only paid on the amount of credit the borrower has withdrawn. Once the balance is paid off, the credit becomes available again, just like with credit cards. This type of financing is common for cash flow fluctuations and large purchases, like purchasing dental equipment.
Working capital loans can be another great financing option for dentists. These loans are generally used for short-term small business ventures. Working capital loans are often recommended to borrowers that have occasional cash flow shortages. They offer fast funding times so are great for borrowers that need to act quickly on a business opportunity.
Where to get a loan for a dental practice?
Traditional banks are sometimes referred to as brink and mortar institutions. This category represents lenders at both national and local banks and credit unions. Traditional lenders, like Bank of America, Wells Fargo, and U.S. Bank, are attractive options to borrowers because they are trusted brands with good name recognition. These big banks can occasionally offer lower interest rates than alternative lenders. Bank loans are not a viable option for many people wanting to purchase an existing practice though, because the application process can take up to two months and the approval requirements are tougher for many small business owners to meet.
When exploring options for the best business lender, many individuals decide to work with alternative lenders or online lending institutions, like Biz2Credit. Online lenders can fund loans much faster than traditional banks, sometimes as quickly as 1-3 business days, and they offer an expedited online application process. They are also a great option for startup businesses and borrowers with a less-than-perfect credit score because of their flexible eligibility requirements. The interest rates at online lenders do typically range higher than those at traditional banks but can be very competitive.
Owning a dental practice is an exciting venture. Whether you are considering building a new practice from the ground up or purchasing an existing practice, there is excellent earning potential in the dental industry.
While using personal funds is a great option for those that can afford it, purchasing a dentist’s office requires a dental loan for most new business owners. Choosing the right loan for your practice is easy when you are working with an experienced lender.
The best financing option is the one that will work best for both your individual credit needs and the goals of your new dentist’s office. Working with a lender that understands dental financing will help make the transaction stress-free. Just ask Dr. Gautum, who was able to secure dental office financing with the help of experienced lenders at Biz2Credit.