A lender’s prospective: Putting yourself in the best position to acquire a practice:
If you've been looking to acquire a practice, you've likely realized that we are still very much in a "sellers market". This means that practice values are high & the competition with other buyers is stiff. The more proactive you are as a buyer will help ensure that you are in a position to capture the right opportunity when it comes along. As a lender that works strictly within the private practice lending space, I've been fortunate to be a part of hundreds of successful transitions. Here are a few bullet points to help aid in your efforts:
- Understand "Debt Service Coverage Ratio" (DSCR) and what it means to you: When you hear the term "cash-flow", it's typically "DSCR" that is being referred to. Most lenders in this private practice finance space need positive cash-flow (DSCR) at a ratio of 1.25 to 1. In very simple terms, this means that your monthly ownership compensation after all business overhead needs to outweigh your personal monthly expenses by 125%. Here's an example: If your personal monthly expenses including mortgage/rent, vehicles, student loans, credit cards, etc add up to be $10,000/month, your bank will want to see that you are earning at least $12,500 of monthly income. This buffer allows for you to sufficiently pay your bills but also allows for you to put some money away or invest back into your practice. If a practice is not putting off enough cash-flow on it's own to support you at this ratio, you may be able to bring on a co-applicant if they provide additional income. Having and outside associate position may be another way to get over the cash-flow hump if your target practice is falling short. Each lender treats these scenario's differently so ask these questions early in the lender vetting process.
- Have a solid understanding of what the "right fit" practice is for you: Practice CFO and your lender will be able to help you understand the range of practice size that you should focus your search on. This is both on the high and low side. To determine what your low range should be, you need to first figure out how much income you need to earn in order to achieve sufficient DSCR. Referring back to the example in the first bullet point: you would need to find a practice that is putting off $150,000 in ownership compensation. ($12,500 x 12 months) Knowing that you need to find a practice that puts off 150K of ownership compensation should tell you that you need to find a practice that is likely collecting between 450 - 600K/year depending on how efficiently the practice is being operated. All practices and overhead are not created equal which is why there is a relatively large gap in that range. Conversely, you need to understand what your borrowing limits will be based on your borrower profile. How much money could you borrower if you found a large practice? All banks have different guidelines but here are factors that will help determine your borrowing power: Liquidity (cash and securities on hand), production history/capability, management experience, and DSCR. Liquidity is a current hot button for most lenders so even if you have the production capability and sufficient DSCR, once you look to borrow over a million bucks - banks want to see that you've put some money away. Every situation is unique so we don't have a set percentage of the loan amount that we wan to see in true liquidity, but it's got to make sense. If you've been practicing for 20 years and don't have any cash to show for it, we are not going to be as aggressive lending to you as a doctor that's only been out a few years but has managed to put 30 or 40K in the bank. A lender can look at how long you've practice and compare that to a personal financial statement to get a pretty good idea if you're a "spender" or a "saver". Credit underwriters love "savers" for obvious reasons. As far as production history goes, a lender won't want to put you into a practice where you'll have to produce a million dollars in dentistry if you haven't shown the ability to carry that kind of robust production. Keep this in mind as you settle in on associating positions. If you can be a high producer and have access to production reports - it will help you qualify for those larger opportunities when they come along.
- Get "pre-qualified" with a reputable lender before you have a target practice chosen. The term "pre-qualified" gets thrown around a lot with credit cards and home mortgages, so the term is watered down at this point. However, we can get you pre-qualified very quickly for a practice purchase and this will help solidify yourself with the practice brokers and/or sellers that you are targeting. For example, you are able to go to our website and within 15 minutes we have the info needed to help you understand the two bullet points above. Once pre-approved, we can give you a letter that says as much and also gives a target range that you are pre-qualified for. Having this letter in hand when you find a practice to pursue will show that you are a serious buyer and you've gone through the due diligence it takes to move quickly.