USE A DENTAL-FRIENDLY BANK
WHO LEVERAGES DECADES OF INDUSTRY INSIGHTS TO MAXIMIZE YOUR PRACTICE EQUITY
(re)Released by Chris Cochran ~ January 2023, July 2022, September 2018, August 2016
MOST BANKS STRUGGLE TO DETERMINE THE VALUE OF A DENTAL PRACTICE WHEN LENDING FUNDS
Lending to a homeowner is easy. You determine the home’s market value, set an acceptable loan-to-value, and calculate the loan amount accordingly.
But a dental practice is different. There are few tangible assets. Most of the value is in the goodwill — the hard work, sweat, and tears the dentists have put into the practice to build its reputation in the market.
However, it’s difficult to value goodwill and use it as collateral for a loan. Fortunately, since 2002, many of Affinity Bank’s clients have been dentists, so we’ve long figured out how to value a practice.
EXAMPLE
A practice averages $1 million a year in collections over the last 3 years. Further, the average sale price in the designated market area has been 85% of average annual collections - assuming an existing debt of $500,000.
Average Annual Collections $1,000,000
Percentage of Average Collections x 85%
Total Potential Loan $850,000
Existing Practice Debt - $500,000
Total Lendable Practice Equity = $350,000
The formula for potential “lendable practice equity” is the average collections of the practice multiplied by the regional sale-price-to-collections ratio minus the practice debt.
For this example: $1M times 85% = $850,000 minus $500,000 = $350,000. Remember that the lendable practice equity is only one factor in the decision. Also considered are the practice’s profit margins and ability to generate enough cash to cover existing and future debts.
With the lendable equity determined, the practice can apply it to a:
Real estate project - anticipating expansion (most banks require 15-20 % in cash, but we can often provide an alternate solution requiring less down)
Renovation - existing leased space (practice equity can cover these costs)
Student debt - rolling it into the debt of the practice as a potential tax advantage
Credit line and equipment purchase
Factors that are in play:
The average sale price for a healthy practice in your market area.
The bank’s risk tolerance during the current financial environment.
The profit margins and cash flow relative to personal and practice debt.
With our extensive experience in dental practice lending, we work with a practice's CPA or tax attorney to ensure an equity loan can help minimize risk and achieve goals.
Contact Affinity Bank to learn more about Dental Banking Services:
LIZ GALAZKA Executive Vice President, Business Development & Commercial Lending (678) 471-8341 lgalazka@myaffinitybank.com
CHRIS COCHRAN Senior Vice President, Business Development & Commercial Loan Officer (404) 717-4583 ccochran@myaffinitybank.com
TARA GLEASON Vice President, Business Development & Commercial Lending (770) 548-8029 tgleason@myaffinitybank.com
*Affinity Bank accounts and services are subject to approval. *Loan approvals are subject to normal credit qualifications.
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