How to Prepare Financially to Buy a Dental Practice
Buying a dental practice is a major financial decision. Before beginning an acquisition, dentists should evaluate their personal finances, understand the expected investment, and prepare for the costs associated with becoming a practice owner.
For dentists considering dental practice financing, preparing financially before searching for a practice can help establish a realistic acquisition budget and make the financing process more organized.
1. Review Your Personal Finances
Start by reviewing your current financial position.
Consider your income, savings, investments, existing debt, monthly obligations, and available liquidity.
Having a clear picture of your finances can help determine what type of acquisition may be realistic.
2. Check Your Credit
Review your credit reports before beginning the financing process.
Look for inaccurate information, unexpected accounts, late payments, or other issues that may need attention.
Understanding your credit profile early gives you more time to address potential problems.
3. Understand Your Existing Debt
Dentists may have student loans, mortgages, auto loans, credit cards, or other obligations.
Create a complete list of existing debt, including balances and monthly payments.
This can help you understand how a new business loan could fit into your overall financial obligations.
4. Determine How Much Liquidity You Have
Available cash can be important during a practice acquisition.
You may need funds for a down payment or other transaction expenses, but preserving sufficient liquidity after closing can also be valuable.
Avoid assuming that every dollar of available cash should be committed to the purchase.
5. Establish a Realistic Acquisition Budget
Determine what you can reasonably afford before beginning your search.
Your budget should consider more than the practice’s purchase price.
Potential expenses can include:
- Down payment or equity contribution
- Working capital
- Equipment upgrades
- Renovations
- Professional fees
- Technology
- Other transaction expenses
6. Calculate Your Expected Owner Compensation
Buying a practice is not simply about whether the business can generate revenue.
You should evaluate whether the practice is expected to provide enough cash flow to cover operating expenses, debt payments, and reasonable compensation for you as the owner.
7. Build an Emergency Reserve
Unexpected expenses can occur after an acquisition.
Equipment failures, staffing changes, slower-than-expected revenue, repairs, and other costs can affect cash flow.
Maintaining an appropriate reserve can provide additional financial flexibility during the transition.
8. Understand the Practice’s Financials
Once you identify a potential practice, carefully review its financial performance.
Look at revenue, expenses, profitability, cash flow, accounts receivable, and other important financial information.
The practice’s historical performance should support the assumptions used in your acquisition analysis.
9. Estimate Post-Acquisition Expenses
Your expenses may change after becoming the owner.
You may want to upgrade equipment, remodel the office, increase marketing, hire additional staff, or make other investments.
Include potential post-acquisition expenses in your financial planning rather than focusing only on the initial purchase.
10. Get Familiar With Financing Options
Dentists may have several potential financing options depending on their qualifications and the structure of the acquisition.
These can include SBA financing, conventional loans, equipment financing, commercial real estate financing, and other business financing programs.
Understanding your options before making an offer can help you evaluate practices more effectively.
11. Get Your Documents Organized
Financial preparation also means having your documentation ready.
Depending on the transaction and lender, you may need personal tax returns, financial statements, bank statements, information about existing debt, and other financial records.
Organizing these documents early can make the financing process more efficient.
12. Know Your Numbers Before Making an Offer
Before committing to a purchase, understand the expected purchase price, financing amount, estimated monthly debt payments, operating expenses, and projected cash flow.
The goal is to determine whether the acquisition makes financial sense both at closing and over the long term.
Final Thought
Preparing financially to buy a dental practice involves much more than saving money for a down payment. Dentists should evaluate their credit, existing debt, liquidity, income, acquisition budget, expected cash flow, and potential post-closing expenses.
Taking these steps before making an offer can help dentists approach an acquisition with a clearer understanding of what they can afford and how the practice may fit into their long-term financial goals.
