The interest rates for practice financing have remained stable for the last couple of years, and the margins are starting to come down. This is after remaining at ultra-low levels since the financial crisis of 2008-9. The Bank of England's base interest rate is expected to rise during 2011, meaning that dentists looking to set up their own private practice may be well advised to consider fixed-rate deals on their financing to ensure greater stability.
The prospect of a rise in rates is just one of the unknowns that dentists who make the decision to go private face. Naturally, the financial expertise of most dental professionals is not in the same league as their medical knowledge; the intricacies of issues such as practice finance can be mystifying to many dental professionals, making the assistance of independent financial advisers (IFAs) necessary.
Increasing interest rates mean that dentists would be well advised to take even greater care with assessing the viability of their proposed practice as an investment. The historic performance of a business should be a matter of careful study for those wishing to join an existing practice as an associate or buy in as a partner; a precise and detailed overview means that they can ascertain the value of their financial investment.
It is not uncommon for the purchase price of a dental practice to exceed £400 or £500k. The scale of this life-changing investment makes a 100 per cent bank loan, or the combination of a loan with alternative finance, necessary for all but the wealthiest.
Business plan
Dentists wishing to acquire a practice must make sure their venture is worth the money they are putting into it based on its present situation. To receive financing from their creditors, clinicians must come up with a sound business plan detailing how they intend to create a lucrative practice in the future.
A good business plan will provide valuable information such as:
1. the sales particulars of the business in question, the cost of buying and/or refurbishing the practice, the reason/s why the practice is up for sale.
2. Detailed accounts for the last three years.
3. Reasoned predictions about the direction of the practice over the next few years.
4. The financial situation of the acquiring dentist (their current income, the length of time they have been practising, and so on).
The primary method used by financial advisers to give clients an overview of their fiscal situation is 'asset liability' or income and expenditure analysis. Once armed with a clear picture of their finances, dentists can use the analysis to plan for the future. They can write this statement themselves if they wish, but appropriate documentation is also available from their IFA.
A bank will take a number of factors into account when deciding whether a practice is suitable for a loan. It is possible that such things as the value of a property's freehold or its fixtures and fittings, or the practice's 'goodwill', will result in a large personal investment on the part of the dentist not necessarily being essential for financing. Independent financial advisers must use all the existing assets of a practice to negotiate the most advantageous terms with specialist lenders.
A business plan needs to be forward-looking, giving an exhaustive preview of the dentist's aims for the practice over the next few years and how he or she intends to bring these goals to fruition. An impressively detailed outline of the dentist's intended introductions, refurbishments, upgrades and purchases is necessary, with accompanying forecasts relating to cash flow, potential profits/losses and balance sheets showing the achievability of these goals.
Patients are the lifeblood of any practice, and the validity of a dentist's ideas on how to maintain his existing customer base and/or acquire new patients is of paramount importance. One area that it would be useful for dentists and IFAs to assess are the level of commitment to the practice from the local primary care trust. If this commitment is perceived to be lacking, it may be worthwhile to consider how effective a local marketing campaign aimed at persuading former NHS patients into private dentistry would be.
Offering extra and more sophisticated services to patients, for example, Botox or implantology, may also be well-received and profitable. Such measures are also useful in differentiating the practice from nearby competitors that may not offer such a wide range of services.
Just as important as the range of services is the variety of skills contributed by the dentist's colleagues. A team that complements each other's abilities well is important for success. If practicable, the employment of one or more specialists is a good method by which clinicians can grow the practice and possibly gain referrals.
Whilst dental professionals may have a meticulous and sophisticated plan for their practice's future, it is also important not to forget mundane details when putting forward a business plan to a lender. For example, neglecting to prove that one is a registered dentist through including their registration number is a common mistake amongst those submitting their own plans. Independent financial advisers can proofread plans and avoid such irritating pitfalls; their experience is often invaluable in finding solutions to previously unforeseen financial challenges.
Objective analysis
Once a dentist has completed a business plan, they will need to consider the viability of their funding request.
Generally speaking, a bank will lend money against the practice's freehold (often up to 100 per cent of the value) as well as much as 70 per cent of the existing turnover of the practice (in London and the south east, this percentage may be even greater). Proactive professionals will factor a range of costs into their calculations; the cost of interest and capital must come under scrutiny, as well as their own salary.
A typical example of practice funding would be a deal offering 100 per cent financing on an original purchase of £500k. The loan would be paid back over a period of 20 years. Capital and interest costs would be payable immediately; therefore, monthly repayments would amount to £3,038.81, with the annual cost ending up at £36,465.72. Of this sum, a hefty £19,500 would be interest.
The salary of the dentist and his colleagues is another significant cost for practice owners. The gross generic income for a current associate could well reach £75k; in this case, it is advisable that practices put aside around £115k (excluding tax implications) so commitments can be covered without difficulty.
Dentists must make an objective analysis of the likely cost of acquiring the practice, and make the decision to go ahead based on the business's likely return on the original investment. Maintaining a close working relationship and communicating well with colleagues is also crucial to making the practice a success, alongside diligent management of income generation.
The assistance of a professional team can greatly reduce the stress and confusion experienced by dental professionals trying to draw up an effective financial plan for their practice.