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Forcing the Value to Cash Flow

Buying a Dental Practice? Does the Practice’s Cash Flow Support the Financing Terms?

Have you recently started shopping for a new car and asked the salesperson how much the car will cost? The salesperson doesn’t give you the price of the car any more but does let you know that there are financing terms that allow your monthly payments to fit into your budget. The salesman knows that confronting you with the total cost of the car is usually beyond the ability of most purchasers today. However, if he can reduce that cost to a manageable monthly figure, you will drive out in that new car.

All dental practice finance companies look to the cash flow of a dental practice to repay the acquisition loan. The industry standard for moderately priced practices right now is a 10-year financing term with rates in the 5-6% range. In the past, the standard was a 7-year financing term, but that term is rare these days.

There is a handful of banks that offers a 15-year, or more, financing term to accommodate the buyer’s cash flow, but still wants the analysis to be able to pay back the loan over no more than 10 years. If the cash flow does not support those requisites, the practice either is priced too high or is the wrong one for the doctor.

Are the Financing Terms for Buying a Dental Practice Realistic?

At Henry Schein Professional Practice Transitions, we have recently seen that some transactions regarding buying a dental practice are predicated on ideas which must have been learned from car salespersons. If the cash flow of the dental practice will not support the needs of the doctor, why not simply extend the payments up to 15 years? That sounds like it should work, doesn’t it? If you can reduce your monthly acquisition loan payments enough, anybody can certainly afford to buy the dental practice. In looking at the numbers, consider the following table:

Principal Amount $500,000.00 $500,000.00
Interest 6.0% 6.0%
Term 10yr (120mo) 15yr (180mo)
Monthly Payment $5,551.03 $4,219.20
Total Interest Paid $166,123.01 $259,471.15
Total Cost $666,123.01 $759,471.15
Cost Differential $93,348.14

 
When you look more closely at the real cost of dental practice financing, this is what you will see:

By extending your loan for buying a dental practice from 10 years to 15 years, you will pay an additional $93,348.14 for a $500,000.00 loan! Although you can afford the monthly payments, you have spent additional money for the original purchase that could have better served you by going into your retirement account.

If you must finance your dental practice purchase over 15 years just to make the cash flow work, the purchase price is probably unrealistic for you. Additionally, if a valuation is predicated on similar financing terms, the validity of the suggested purchase price should be questioned. This is why you’ll want the guidance of Henry Schein Professional Practice Transitions when you’re ready to buy. From identifying real opportunities to obtaining financing and finalizing the transaction, an experienced consultant at Henry Schein PPT will get you answers and invaluable advice about achieving your goal of buying a general dental practice.

Greg Auerbach, MBA
Financial Services Sales Rep
Henry Schein Professional Practice Transitions

 

Henry Schein Professional Practice Transitions, Inc. is a national leader in dental practice transitions. A subsidiary of Henry Schein, Inc. they provide expert guidance for selling and buying dental practices, dental practice fees and management, assessing partnership and associate-ship opportunities, and performing dental practice appraisals and valuations.