From Associate to Owner: How to Buy a Dental Practice in Today’s Economy
September 22, 2022
At a glance
- The main takeaway: Many dental students and dental associates have dreams of starting or buying their own dental practice, but don’t know where to start.
- Impact on you: Practices are hard to find in today’s economy so it’s critical for buyers to be prepared with the right professional team, loan prequalification and the documentation necessary to prove their production abilities to lenders.
- Next steps: Aprio’s National Dental Practice provides sophisticated resources and guidance to put aspiring owners in the best possible position to start or buy a practice in today’s economy.
The full story:
One of the most common questions we get asked by young dental professionals is, “How do I become the owner of a dental practice?” It can feel like a daunting dream, especially in today’s economy. What’s more, dental students are graduating with anywhere from $300,000 to $600,000 worth of student loan debt. Faced with numbers like this, the thought of simply paying back debt — let alone becoming a business owner — can feel futile.
I’m here to tell you the good news: it’s entirely possible for you to become the owner of a dental practice. But there are several key steps you should take to properly prepare yourself for the purchase process to ensure you don’t miss out on the right opportunity.
1. Find your team of trusted advisors
Before you do anything else on your road to buying a practice, you need to hire a group of qualified and experienced professional advisors. These advisors will not only help you lay the groundwork for ownership, but they will also educate you on how to embody the role of an owner based on their years of experience (they should have a strong background in working with dentists specifically).
Your team should include a dental CPA, an attorney and a financial advisor, as well as business-specific advisors like equipment and supply representatives. If you have this team assembled prior to initiating your search, you will have the financing ready to go and be in the best possible position to seize opportunities as soon as they arise. Practices are hard to find these days, and the doctors who are the most prepared are the ones who will close the deals.
2. Organize your financial house to qualify for a loan
Prior to joining Aprio, I worked for a dental-specific lender and was involved with billions of dollars’ worth of loans for dentists. I saw that in lenders’ and banks’ eyes, dental practices are some of the best credit risks a portfolio can have. But how do you actually qualify for a loan to buy the practice you have been eyeing?
First, make sure your personal credit score is clean; banks and lenders like to see scores above 680 when evaluating lending opportunities. They also like to see doctors who are savers, and not spenders, particularly when they are fresh out of dental school and working as an associate.
Banks and lenders also want reassurance that your current production levels will be high enough to qualify for a practice loan. In other words: buyers need to ensure their production numbers are aligned with what sellers have historically produced in their practices.
For example, if you’re looking to buy a $1 million practice and 30% of the practice’s revenue is hygiene, that means the seller has done $700,000 worth of dental production per year. Thus, as a potential buyer, you need to prove to your lender that you can continue to produce $700,000 or more to qualify for the loan and buy the practice.
To prove your abilities to lenders, you must compile production reports from your previous years of practice. It’s a good idea to ask your current employer for production reports on a monthly basis. Lenders will also want to see your personal financial statements, which include your credit score (as mentioned above), your savings and your current debt load. You can also produce pay stubs to show a lender how you are getting paid and prove you have the personal finances to support a loan.
Providing lenders with this financial “paper trail” will help convince them of your credibility as both a borrower and a practice owner, which will help you secure the most advantageous deal.
Quick tips to keep in mind before a practice purchase
Before you start the preparation process, be sure to remember the following:
- Wait to refinance or pay down large amounts of your student loans until after you purchase a practice to ensure you have ample, liquid cash flow during the preapproval phase
- Avoid making large personal purchases that could drain your liquidity (e.g., buying a house or an expensive new car)
- Review your current associate contract and noncompete agreement; many of these contracts require you to provide a 30-, 90- or 180-day notice to your current employer before departing, which is something a lender and seller would want to be aware of
The bottom line
Whether you’re six months out of dental school or five years into your career as an associate, becoming a practice owner is a goal you can achieve with the right preparation and trusted team in your corner.
When you are ready to start the preparation process, reach out to Aprio’s National Dental Practice. We work closely with dentists seeking to buy into or purchase practices, as well as owners planning for practice sales, and bring decades of industry-specific experience to the table.
If you’re thinking about buying a practice and want to get started today, schedule a free consultation with our team.
About the Author
Justin is a recognized dental industry leader with more than 12 years of experience guiding clients through practice transitions, mergers, real estate purchases, banking, debt restructuring and practice financing. His experience with financing dental transitions for two of the largest dental lenders in the nation have provided him with both buyer and seller perspectives on virtually every type of transaction imaginable. Justin helps dental practice owners understand the valuation of their practices for potential sales and the financial impact of selling on long-term personal wealth.