David Brewer is managing director of FTA Finance and over the past 12 months arranged 250 separate funding proposals linked to dental and associated healthcare professions. He has worked with dental professionals for the past 20 years and for those of you thinking about making an acquisition, find David’s brains, suitably picked, below.
What do the banks look for in terms of lending criteria?
Most people do not realise that their CV is the most important document. Banks will require you to have suitable managerial experience to be able to run/manage the practice in question. You are probably underplaying this — there will be elements of managerial experience in your normal day to day activities that you may not even realise. They will also want to see a summary of your asset/liability profile, a breakdown of your past earnings and most importantly details of exactly what you are considering purchasing: the strength of the business and can any loan be repaid based on how you are proposing to run it?
We would prepare a forecast to see if it is profitable. Quite often we would prepare two forecasts for the bank: a worst case scenario assuming in year one the top line turnover remains similar to the previous owner, and a year two model that shows the full impact of any proposed changes you intend to make. All of this is to ensure you as client, the bank and also the CQC can see this is a viable purchase.
Do all banks look for the same thing?
Credit criteria varies markedly from lender to lender. Some banks prefer experienced practice owners and shy away from first time buyers. Some are happy to consider a much lower cash contribution going in, others prefer predominantly NHS practice and attitudes to freehold/leasehold also vary sizably from lender to lender. This is where an individual trying to arrange funding direct may become unstuck. We work with 14 high street banks and a number of smaller niche lenders. Even within the same bank we know we will obtain a different lending decision based on which individual managers we approach. We know the ‘pro-active’ managers and exactly who to approach.
Are there regional differences?
In theory, no. A bank’s lending criteria to acquire a practice in Cornwall for example would be the similar to one in the South East. That said, with much higher goodwill and property prices in the South East it actually makes it slightly more straightforward to purchase outside of the more popular areas — with the prices generally lower and as a result the cash contribution you have to make correspondingly lower and potentially more affordable.
Do lenders prefer NHS to private?
In general, the answer here is yes. The majority of banks prefer the guarantee of NHS income and as such their lending criteria is positively weighted towards such practices. My personal view however is that this is not the best approach — if I was buying I would ideally acquire a well-established suburban private practice because I know I am in control and will not have the NHS breathing down my neck, potentially changing my terms at some future date.
How do rates and terms vary — and why?
In the past week we’ve had loan margins ranging from a low of 1.9% up to a frankly ridiculously 9.4%. In the 1.9% case there was an element of property security available as well as goodwill. With the 9.4% case — which was for £350k of borrowing — we thankfully secured an alternative deal at 3.25%, so you can guess what offer the client is proceeding with. There is huge variation between lenders which is time consuming for an individual dentist to navigate. Even as a commercial mortgage advisor, when my fixed rate house mortgage expired I engaged the services of a specialist independent personal mortgage advisor to seek the best deal for me. I did not have the time to research the personal mortgage myself and certainly would not have obtained the terms my mortgage broker obtained.
What are five things an associate needs to get funding?
- Polish up your CV. Most people are fine on clinical experience but need to build in managerial aspects.
- Ensure your credit profile is clean. It is not a problem to have background debt (study loans and mortgages, for example) as long as repayments are up to date and you operate within agreed limits.
- Please DO build up a level of savings. You will be expected to contribute something towards the purchase. The bank of mum and dad often comes into play here.
- It helps if you own a property. Not essential though.
- Your accounts. Ensure you have them, ensure you engage a specialist to prepare them such as Hive Business rather than a generic local firm. Ensure the level of turnover in those accounts is as high as possible. So, if you’re thinking of buying, don’t take it easy for a year.
Are banks the only funders?
For smaller practices and start up situations it is sometimes possible to obtain short term borrowing elsewhere, but it could be expensive. The most common alternative we see is the bank of mum and dad. Increasingly for larger purchases we’re seeing VC money. Do remember though the VCs are not a charity and they are not investing for fun — they want their pound of flesh and will be expecting tangible returns from the business (often MUCH more p/a than a conventional bank loan would cost). Most associates thankfully would not need to go down the VC route and should be able to secure their own funding via the conventional bank options.
When is it not a good idea to buy?
When there is little or no profit… If you’re buying a practice, as a bare minimum, after all costs including loan repayments, you are ideally seeking a higher level of bottom line profit left over compared to when you were an associate. If not you need to ask yourself ‘what is the point’? Are you taking on the headache of owning a business to be financially worse off? However, I do acknowledge it is worth sometimes accepting a short-term reduction in your income to secure a business because as an associate you remain vulnerable employment-wise.
Most associates are self-employed and as such have little in the way of employment rights. Your current principal could look to change your payment terms or worst case could ask you to leave with little or no notice. The only way of being in control of your future is as a practice owner. It is a huge jump from associate to practice owner and we would always suggest a prospective purchaser engages the services of agencies like Fine Company who can assist with business development and growth plans.