Funding a practice purchase
Dental Practice Finance - Funding a practice purchaseCase Study by MediFinancial Ltd - John Peter, South West
PlanOur client, John Peter’s approached us regarding a single surgery mixed practice that he was actively seeking in a town in the South west and we began our discussions on his plans for this exciting opportunity. Principal led, the current established the practice over 30 years ago and was selling due to retirement. The setting for the practice was a characteristic 3 storey traditional detached cottage only stone’s throw from the local town. The building was also available for sale and benefited from a flat above the practice that was rented to tenants which further attracted John. This of course provided ample opportunity to convert the flat into a surgery at a later date in order to grow the business.
The principal was happy to remain at the practice for 2-3 years post completion allowing for a smooth transition. This also presented John with the prospect of remaining in his current part time role whilst working at the target practice part time providing him with an additional income which he would live on, allowing him to draw little from the practice whilst establishing himself within it. Currently opening only in the week, John planned to open the practice on weekends in order to provide flexibility for existing patients whilst attracting a new patient base.
Furthermore, John was qualified in Implantology, implant treatments were previously referred out and so this allowed for John to retain these patients. He also planned to take on specialists in Periodontics, Endodontics and oral surgery in order to provide patients with a vast array of treatments whilst ensuring continual growth at the practice.
Practice FinancialsThere was stability in the income provided by way of an NHS contract if £125,654. The practice delivered a consisted private income of around £71,459 year on year with additional income of £8,485 which included a rental income of £520 per month from the flat above. As the existing principal performed the majority of the work at the practice, direct costs were kept to a minimum. It was important to take into consideration the remuneration of the existing principal post completion during the transitional period but this was offset with John maintaining his existing position and drawing very little from the practice whilst establishing himself there. The current material and lab costs at the practice were relatively high which enable John to negotiate such costs or use other providers in order to keep costs to a minimum. The net profit, with a margin of 50.8% and an adjusted net profit of 53.9% reinforces the practices excellent financial status and consistency was proven with similar net and adjusted net profits recorded historically.
Lenders FeedbackRunning with the opportunity, John placed an offer of £288,000 for the purchase of goodwill, fixtures, fittings, equipment and freehold (broken down as £138,000 for the business element and £150,000 for the freehold). John’s offer was accepted and at this stage, he instructed us to approach the lenders for him for which he benefited from responses and preferential rates from our exhaustive panel of 15 healthcare specialist lenders. We are able to use our expertise to present a case in the most favourable way to the banks, obtaining preferential rates that may not be attainable for those who apply directly.
Lenders OfferThe lender with the most favourable indicative terms moved forward to their credit team who indicated that they were happy to proceed with the proposed offer as all aspects of the plan satisfied the lenders criteria; this allowed them to provide credit backed terms. The lenders arranged for a valuation of the practice and property; the surveyor presented their findings indicating that the purchase price of £288,000 was fair. The below offer was then approved:
Commercial mortgage of £150,000
Business Loan of £100,000
Commercial Mortgage of 25 years
Business Loan of 10 years
Commercial Mortgage rate of 2.44% above base rate
Business Loan goodwill rate of 4.54% above base rate
1st legal charge over a *Life policy for £250,000 reducing over a 25 year term
*We at MediFinancial Ltd perform research using a range of providers in order to source the most competitive quotes