With the new year just around the corner, almost everyone in America is anxiously awaiting the end of 2020 and anticipating the beginning of 2021. It can only get better from here, right? Though the global pandemic may have caused changes in various industries, dental practice transitions are still going strong. Dentists continue to transition their practices, and some markets are even seeing an increase in buying and selling. If you’re thinking about buying a dental practice, don’t let current worldwide events be a reason to delay. The market continues to be strong for buyers, and lenders are still willing to loan the money for such transactions. Dental practices have some of the lowest loan default rates at around .03%, meaning many banks see it as a high gains, low-risk opportunity.
But don’t run off to the bank just yet. There are a few changes you should make note of if you’re thinking about a dental practice transition.
One significant change we’ve seen? Different banks are using different criteria and lending methods than they’ve used before. Here at ddsmatch Four States, we’ve noticed that each bank is different in their approach. If you call a local or regional bank, you’re going to get one method. If you call Lendeavor, it’s another method. If it’s Bank of America, it’s another method.”
We’ll go over some of these changes so you can have realistic expectations about the current economic situation, and you’ll be steered in the right direction for your dental career.
Reasons Why We’re Seeing Shifts in Bank Lending
It’s probably not a shock to you that banks are choosing to loan based on new criteria, but it is helpful to know exactly why. This information can allow you to figure out your financial plans for the future and guide you forward.
Most people view the Bank of America as a dependable financial source for dental lending. In fact, in a recent Dental Economics article, Bank of America reported over 20,000 loans in the year 2019. But in March of 2020 (the beginning of the pandemic panic), Bank of America stopped lending on all new practice loans. The Dental Economics article goes on to explain that many dental practices with existing loans decided to pause their loan payments during this time, accepting the 90-day relief offered by Bank of America.
A banker employed by Bank of America explained to Dental Economics that, “This is not a fundamental shift in our view of the dental lending marketplace. We simply have to dedicate all our time to servicing the thousands of borrowers who had their loans on hold and ensure they have all the support they need to succeed after opening back up, including help with PPP [Paycheck Protection Program] loans.”
Out of the 15 largest banks in the United States, Bank of America ranks #2, with $2.16 trillion dollars in assets. Their influence in the dental industry is profound. Therefore, it may seem like other banks would’ve also followed suit and stopped issuing new loans. However, not every lender has reacted in the same way to the COVID-19 pandemic.
For example, Leandeavor, the second largest lender for dental practices, has taken the opposite approach, and is now ramping up operations and increasing their lending. Sean Simon, Lendeavor’s vice president of credit, told Dental Economics, “Our outlook on acquisitions, and more broadly, the dental industry, remained bullish even at the height of the shutdown. We expect practices to remain more resilient than nearly every other industry in small business during a post-COVID recession . . . The PPP program caused most banks to divert all available personnel to areas that would help support processing PPP applications. We didn’t have that same limitation.”
The good news is, the dental industry is not suffering from the effects of the pandemic in the same way other industries are. For example, in the leisure and hospitality industry, 68.89% of people faced either a reduction in hours, a workplace closure, or a layoff due to COVID-19. The food services industry saw 63.83% of workers experiencing closures, layoffs, or reduced hours. Both the construction industry and the retail industry have also been hard hit as non-essential construction projects have been postponed and stores have had to reduce their hours or switch to curbside delivery for a lengthy period of time.
Not everyone needs to go on a vacation, eat at a restaurant, or buy a new shirt, but almost everyone needs to go to the dentist on a regular basis. Right now, dental practices are averaging 76% patient volume as compared to their pre-pandemic levels, and “staffing in dental offices was at 90% of pre-pandemic levels and one-third of dental practices reported ‘business as usual’ in terms of patient volume.” — (from an HPI poll by the ADA)
The health crisis has proved that the dental industry is able to flourish and acclimate to new circumstances. As new state and local regulations for infection control came out and strict guidelines for social distancing were implemented, dental practices around the country handled these new challenges with ease, putting patients’ safety and well-being above all else.
Keep Calm, Press On, Be Patient
Given the new changes in both standards of practice and lending, don’t be discouraged if one lender decides to decline your application. Because each lender out there is doing things a little differently, you may be turned down by one lender only to be approved quickly by the next. If you are considering buying a dental practice, you can still get a loan, it may just take more time and patience. If at first you don’t succeed, try, try, again!
It’s not always easy to keep putting yourself out there, and it can be disheartening when banks tell you “no”. Sheryl Garfinkel, of ddsmatch Mid-Atlantic, told of an experience with one buyer who went out to four banks: “He went to a local bank that was non-dental. He went to Bank of America, which is basically not lending right now. Then he went to one that looks at the rolling 12 month financials, taking the COVID shutdown months as part of those numbers…so he was not getting approved. So he concluded, ‘I guess I just can’t buy this practice.’ He was discouraged about the prospects because the bankers wouldn’t lend on the practice, but he didn’t understand the landscape. He wasn’t willing to call another lender that we knew would lend, as some lenders are basing their potential analysis off of pre-COVID numbers.”
When your loan application is rejected over and over again, just remember to be patient and persevere. Once you have your loan application completed and all your documents in order, it’s just a matter of time before one bank decides to approve it.
While the banks are taking different approaches—and some are clearly more risk-averse than others—they are all essentially looking for the same information. One bank might say, “we want to look at the financials from the last 12 months,” which obviously takes into account three months during which the practices were closed. That’s pretty conservative when compared with another bank that wants to look at 2019 and compare it month to month. But they all want to see that the practice is back to closely earning what it was doing before the pandemic.
When it comes to sending out your loan application, trust the advice of your experts and press forward when the going gets tough. Most importantly, don’t give up!
Prepare Yourself for a Longer Process
Just like the housing market crash in 2008 caused banks to look much more closely at home loan applications, you should prepare for the fact that your bank will go over your application with a fine-toothed comb. They’re going to study and survey your application from every angle to make sure you have the financial capability to pay back your loan. They’ll look much closer at your production ability, liquidity, and your overall global cash flow.
Lenders are asking “How qualified is the buyer, and then, how qualified is the practice? And how do those come together?” If a doctor who is producing $300,000 a year is looking at buying a dental practice that produces $1,000,000—they are going to have a problem, because they can’t do the work. Lenders will say, “You’re not going to be able to fulfill the numbers that we’re used to seeing in order to vet this practice.” So, you may have a buyer in this marketplace who in the past would have qualified for this practice, but might not qualify now due to productivity concerns.”
Lenders are also taking a loan applicant’s cash liquidity more into account. They’ve gotten a bit tighter with their guidelines. They might say, “We need between five and ten percent liquidity in the bank”—meaning they want that much cash relatively easily available to the buyer now. The buyer won’t have to put this cash as a down payment, but simply show it is available to them if needed. In the past lenders might have been a little loose about how much you needed exactly, and how easily you could access the funds in a pinch. However, now we’re seeing that they are being very specific and applying clear criteria, such as, ‘You need to have 10% liquidity.’”
We also have seen a change with what the banks want in terms of global cash flow (an analysis used by lenders to assess the cash flow of a business to get an overall picture of its ability to service the proposed debt over time). Global cash flow looks at the dental practice earnings, its expenses (including the doctor’s and staff salaries), and its projected ability to have enough left over to repay the practice loan. Essentially, global cash flow is a ratio of the number of times the financial obligations of a dental practice is covered by its earnings. A ratio of 1:1 or higher indicates a practice in good financial health; lower than that is typically an indicator that bankruptcy could be on the horizon.
In the past, banks looked for a global cash flow ratio of 1:1.2 for dental practices. This translates to the buyer being able to meet all of their financial obligations, including the practice loan, and still have money to spare. When dealing with lenders currently, the ratio is now between 1.25 and 1.4.
Each Bank May Request Different Criteria
When buying a dental practice, keep your documents accessible and in order. When we here at ddsmatch Four States look at the larger picture, the surprising thing is that each one seems to be doing things slightly different than every other. Some are doing things a little bit more drastically different than others. This can range from “We’re using 12 months of financials rolling,” which cuts right through the shutdown COVID months, to, “Hey, we’re doing business as usual and as long as everything seems in line, we’re fine. We just want to know that the practice has a plan for handling COVID and getting back to where they were pre-pandemic.”
These latter lenders, in general, are looking at month-over-month for 2019 versus 2020. They want to know how the practice is growing. They’d simply like it to be back to 80% to 85% of where the practice waspre-COVID, or possibly higher, depending on the bank. Some banks are looking at a production level. Most banks are looking at a collections level—the actual money they bring into the practice.
If national, well-known institutions like the Bank of America refuse your loan application, your next step should be to check out a local or regional bank. Smaller banks are sometimes able to be more flexible, because of the level of personal relationships and the fact that, to them, your story matters—it’s not just numbers, numbers, numbers. Although, when it really comes down to it, the numbers do have to support the loan because they’re in the business of risk management.
Thinking About Buying a Dental Practice? ddsmatch Four States Has Practices Available
At ddsmatch Four States, we know you have a certain vision for your future professional life, and we want you to achieve your career goals. We serve dentists looking to buy or sell a practice in the Kansas, Western Missouri, Arkansas, and Oklahoma areas. For more information on our available practices, or if you have any questions, contact us today!