Buying a practice is a competitive business these days.
In the last 12 months, almost every NHS practice and many of the private practices we handled had so many interested parties that they were sold by ‘best and final’ sealed bids. The clamour for practices shows no signs of abating and vendors can be selective of their buyer. Fine if you are the vendor but not so good for prospective buyers.
So, as a buyer how do you differentiate yourself from the crowd? Prepare early is the best advice in all aspect of buying. There is a significant amount of leg work that can and should be undertaken before you identify a practice to buy. When the right practice does come to the market you will need to move quickly.
Prepare your finance application
If you intend to borrow for a purchase, the bank will assess you and the target practice. In the absence of a target practice (I’m assuming you haven’t yet found one) you should ensure your finances are in order and prepare in other ways as follows.
1. Financial background
The bank will expect your financial background to justify the lending. By way of example, it is easier to point out the potential negatives rather than the positives here. So a negative might be an individual with a significant amount of unsecured credit. By this we mean car loans or other personal loans. The bank will expect you to have a car, probably on finance, however the greater your personal financial commitments the more you will need to draw from your business to fund your lifestyle. Often the bank will gauge what is acceptable here by considering your savings and asset position. If you have unsecured loans but have still managed to accrue savings, then they may accept the monthly loans commitments as entirely reasonable.
Another quite common scenario is where you have little cash but can explain this – perhaps you have recently bought a residential property and used cash savings to fund your deposit? In fact, the banks quite like lending to individuals with a residential mortgage. A home is a financial commitment you will work hard to keep. A car is probably not.
In summary, relatively high levels of unsecured debt commitment (let’s say in excess of 25 per cent of net monthly income) is a negative, and certainly so if you don’t have any savings or assets to offset this. Prevention is the best cure here, however, if you do find yourself in this position consider what steps you can make to improve things. Repayment of the unsecured debt may be the best approach or at least having a well-documented reason for your position e.g. ‘£15,000 loan in respect of recent funding of postgraduate training.’
2. Deposits and lending limits
I often get asked these questions: “What amount of deposit is required?” and “What is the maximum I can borrow?”. There are no definitive answers, especially where the buyer hasn’t yet found a target practice. However, from experience the following points commonly apply:
- Banks will usually lend 100% of the value of the freehold property - i.e. the practice premises.
- Banks with non-specialist commercial divisions will usually only lend a maximum of 80% of the value of goodwill. I’m still unsure why people use these banks and I can’t name them here.
- Some banks with specialist healthcare divisions will lend 100% of goodwill. This is usually only if the practice and the potential buyer tick all the boxes in other areas – such as high levels of practice profitability, appropriate buyer experience and skills.
- Lending is not limited to income multiples such as with a residential mortgage. The amount you can borrow will reflect the serviceability of the loan. i.e. does the target business make enough profit to cover your loan in additional to any earnings you need to take from the practice?
- Interest rates reflect risk rather than the size of your deposit. Rates typically range from Bank of England base rate plus 2.0 to 3.5%
- If you are prepared to offer alternative security, such as a main residence, the bank will usually accept this in lieu of a cash deposit.
3. Professional background and experience
How does your CV look? The bank will want to see how you might fit into a new business venture. The more fees you intend to perform/generate yourself, the better the profitability – associate-led practices can make the serviceability of the loan difficult. That said, your skills and experience should reflect the practice you are buying, so you need to be realistic with this. For example, if your business plan requires you to perform 9000 UDAs and your current or past jobs haven’t been at this level, the bank may query the plan.
Similarly, a specialist practice requires specialist skills. If the income of the practice you intend to buy has been largely supported by a specialist (outgoing) principal, how do you intend to continue this? The bank will expect a proposal for the transitional period in your business plan.
In summary, consider the type of practice you intend to buy and how your skills match – taking action where possible to adapt. Undertaking some management experience where the opportunity arises will also strengthen your professional CV.
4. Professional advisers and a professional approach
A vendor may well have a number of very similar offers from which to choose. My practice sales colleagues advise that potential buyers conduct themselves professionally at a practice visit. Cancelling a viewing last minute, turning up late or not at all will probably put you to the back of the queue.
A bank is far more likely to accept a finance proposal from a potential buyer who uses appropriate professional advisers. Using a specialist dental accountant can be an advantage. If a friend or relative prepares your accounts, they probably won’t be able to produce credible projections to support your business plan. Using a broker for your finance application will also be helpful and may not cost you any more than going directly to the bank. A broker will probably approach more than one lender on your behalf – allowing you to compare deals. On that point, I strongly advise that you don’t go to the commercial lending department of your current account provider. They may be the correct bank to approach but probably the wrong department. You will more than likely waste valuable time whilst they pass you onto the correct manager.
If buying through a sales agent, your offer will be vetted and this is communicated as such to the vendor. It is apparent who is prepared and who isn’t and the agent will more than likely recommend the latter.
About the author
Jon Drysdale is an independent financial adviser for Chartered Financial Planners PFM Dental – which is running a series of buying a practice events around the country.
For more information visit www.pfmdental.co.uk