Preparing for purchasing a dental practice

Raising finance for purchasing a practice is becoming more difficult, despite funds being available and European finance guarantees in place to assist.

The problems have arisen because banks were, perhaps, too generous in the past and have incurred bad debts, but also because the price of a dental practice has increased considerably.

Both NHS and private practice values have increased in value in recent years, with goodwill values probably at their highest ever. Lenders look at the ability of the borrower to make the required loan repayments; to service the loan. At current bank base rates, repayment can look easily achievable, but lenders will 'stress test' serviceability at the higher Interest rates which will inevitably occur in the near future.

They then check whether the resulting surplus / profits are worthwhile and sufficient given the applicants personal financial commitments on mortgages, car loans, living expenses, etc. As a potential purchaser, you also need to carefully check the figures to ensure you can make a return on your investment, which is both your time and money. Is the increased profit being forecast, above the profit currently being earned as an associate, worthwhile in return for the long term loan repayments, and the additional practice management responsibility?

Lenders will also look at the security being offered to them as protection against default - i.e. what assets could the bank recover in the event that the borrower defaults on the loan? The only real tangible asset is the value of any freehold property, be that the practice property or the borrower's own home. With commercial property prices having stayed level or fallen, and goodwill values having increased, then the goodwill element of a practice value now represents a far higher proportion of the total.

This, in turn, means that a higher proportion of the required borrowing is unsecured - the bank has little or no chance of recovering that unsecured part if it has to repossess and try to sell the practice. The bank will, therefore, request that you allow a second charge on your main residence. Potential purchasers need to be aware of this and try to prepare. At the time of writing, of the two main lenders in the practice finance market, one will still lend up to 100% of the purchase price if the forecasts support the required borrowings, and the other is limiting finance to 85-90%.

The rates of interest being charged are now higher, at 2.5%-3.25% over bank base, than most practice principals currently enjoy. Potential practice owners need to save towards those costs; the deposit, legal fees, arrangement fees, valuation costs and, if relevant, stamp duty.

Ian Mellors is a Director of IMIC Limited - Independent Medical IMIC Limited is an appointed representative of Falcon Group Plc, which is authorised and regulated by the Financial Services Authority. These articles are for information purposes only and should not be viewed as any form of advice. The points raised reflect our current understanding of the subjects and do not, in any way, represent any personal recommendation.

Your home is at risk if you do not keep up repayments on your mortgage or any other debt secured against it. Information in relation to practice valuations, sales, purchases and commercial mortgages is not regulated by the Financial Services Authority.