Until the pandemic is fully behind us, the way lenders finance practice acquisitions will be different from standard procedure. Here are six things you need to know to get your deal done.
LENDERS STILL LIKE dental practices as much as ever—and why not? Dentistry has proven its resilience and emerged from the pandemic with an enhanced public perception as essential health care. However, the way lenders are vetting deals has changed. That’s not necessarily a bad thing. Sellers and buyers simply need to be willing and prepared to assist lenders for a smooth transition.
Financing is now likely to be based on a hybrid of net collections, production and financial data. Lenders are taking the months that offices were closed (or partially shut down) in 2020 and plugging in the financials of the corresponding months of 2019, 2020 and 2021. They then use these hybrid collections and Ebitda numbers—earnings before interest, taxes, depreciation and amortization—to determine a valuation.
Lenders generally want to see an 80 to 85 percent revenue rebound in order to finance an acquisition at prepandemic valuation levels. They’re also looking to finance acquisitions on more of a case-by-case basis. One set of metrics won’t necessarily fit all, as it might have in the past. The makeup of the practice, the percentage of elective versus nonelective procedures and changes stemming from the virus will be scrutinized in more detail.
What can sellers do? Most importantly, make your practice more attractive to lenders before putting it up for sale—and be ready to provide clear, compelling proof.
1. Maximize EBITDA. Work hard to increase production and collections while at the same time controlling overhead. Address high staff salaries (greater than 30 percent of collections) prior to selling. Those salaries are difficult for new buyers to lower without risking the team’s goodwill.
2. Implement robust reporting. Maintain accurate practice reports from your software. Have current monthly P&L statements and keep your reporting clean. Do not run personal expenses through the practice.
3. Unlock all the value. Track the dollar amount of untreated cases, because this has real value to a future buyer. Also, know the percentage of revenue from hygiene. A strong hygiene practice and its recall component increases the value from a lender’s perspective. A good mix of essential and elective dentistry is also desirable. Practices that are heavy on elective procedures can be more sensitive to economic fluctuations.
What can buyers do? The same thing sellers are doing: Be prepared to thoroughly address the new types of questions lenders are asking in advance.
1. Get a revenue and production plan. Lenders want to know if you can reproduce the seller’s production and, if not, how you’re going to make it up. For instance, you may need to be prepared to hire an associ-ate. If this is the case, the lender will factor in the additional expense.
2. Take the lead. Lenders may want to know as much about your management skills as your clinical chops. Be able to articulate your management experience and provide a strategy for running the office. If you have clinical skills the selling dentist doesn’t have, your lender needs to know. A buyer’s ability to add additional revenue from proce-dures not currently being performed will be viewed in a positive light.
3. Keep personal debt low. Lenders aren’t likely to view school debt negatively as long as you haven’t run up significant personal debt. Remember that the focus of the lender is to determine if you can earn a living while servicing the practice debt.
In the end, although transitioning practices may be more of a team effort than it was before, getting past the finish line is a lot easier with some preparation and cooperation. n
JAMES M. CLARK, DMD has filled many roles in clinical dentistry for more than 30 years. Now the head of Practice Transitions at Benco Dental, he can be reached at jclark@ benco.com.