30 Mar Starting a Dental Practice: Avoid Costly Finance Mistakes
Starting your own dental practice is an exciting opportunity.
Not only do you get to shape it exactly how you want, but the cost of entry can be far lower than buying the goodwill of an established practice.
Why? Because when buying an existing practice, your costs include the goodwill that someone else has built up. On average, the typical goodwill value for a first-time buyer is between £750,000 and £1.2 million. By contrast, the costs of the build and equipment for a new practice can be much lower, depending on the number of surgeries you are setting up, typically between £350,000 and £500,000.
We have recently worked on a few cases where clients have set up their own dental practice without the input of a broker at the start. While there are many successful practices that have been established without the assistance of a broker and have grown into well-run, established practices, there are unfortunately also some that struggle.
It is often only when things hit a bump in the road that we tend to get involved. So, what was the issue? In short, it was the structure of the finance.
There are many lenders in the market who will lend to dentists without too many questions, especially for short-term finance for equipment. Short-term finance certainly has its place in a start-up project and can be very useful, but too much debt to be repaid over a short term can tip the scales. It can stop a practice from growing and establishing itself because high monthly repayments hold back further investment.
In one case, we worked with a practice that looked great and was performing well in terms of fee generation, but finance costs were so high that the Clients were simply working hard to service the debt and not expanding. All debt had been arranged over five years, and the total loan size was significant, resulting in monthly repayments of around £11,000. That is a lot for a new business that is trying to grow, even before considering other day-to-day costs.
So, how did we help?
Because we understand the dental market, we are fully aware of what is available to dental practices. We restructured the lending facility to align with the length of the lease, allowing the Clients to spread the cost of finance over a 15-year period.
All short term finance was repaid and we also arranged new funding so that an additional surgery could be added. The new surgery would allow additional fee generation but had been impossible to create and kit out due to the level of debt being serviced.
The new funding package reduced monthly finance costs from £11,000 to £4,500. We also arranged a two-year interest-only period on the facility, added the arrangement fee to the loan, and avoided the need for a valuation of the practice goodwill.
An additional benefit of this action was that cashflow was freed up to also undertake more marketing and employ a new member of staff, which would assist to increase fee income even further.
If you are planning to set up a practice or have recently done so and think you may be overpaying on your monthly repayments, it is worth speaking to a broker to explore better finance options.
Please get in touch to discuss alternative solutions.
Assisting with the set up, purchase and expansion of healthcare businesses is what we do.
Contact Saroma, for an initial conversation to explore your options.
