Practice Transition Deal Killers – An Article in Five Parts – Part Four

The understandable choice of the wrong bank is another deal killer

Many people assume that the sale and transition of a dental practice is a small and simple process. After all, how difficult can it be for a Mom and Pop sized business to transfer to new ownership? Well the fact is, there are many long and tedious steps involved in getting from a listing to a closing, directly involving the lives of the sellers, buyers, office staff and often thousands of patients. While most issues can be resolved by negotiation in good faith, there are a few things that can pop up which will have a direct effect on the value of the transaction and often, the feasibility of a sale. In some cases a little pre-sale planning might have averted disaster but often the problems are inherent to the business. In this series of posts, I’ll take a look at five elements that effectively kill off a practice transition. In it, we’ll examine a few circumstances that bubbled to the surface in the past – but rest assured, there are probably other land mines waiting to be discovered.

Part 4:The understandable choice of the wrong bank is another deal killer.

I say this is understandable because most of us live our entire lives not really understanding the different types of banks and bankers. Personal relationships with very pleasant bankers might seem like a smooth and easy way to do business but the world of dental practice finance is actually a relatively small niche in a specialized area of banking. Going to the wrong teller’s window may not only prove to be a waste of time, it may actually torpedo your deal.

For our purposes, there are two general types of lenders or lender divisions. The most common and the type a dentist has generally done most of their business with deals with hard assets like cars, boats, houses and dental equipment. These are known as Asset Based Lenders and their business model is based primarily on the value of collateral offered by the buyer. Even when referred to as “Small Business Lenders”, they frequently look to cover their loan with additional assets or guarantees such as co-signers or assistance from the Small Business Administration. While these are great folks to visit with when you want to buy a new car or some equipment upgrades, they will not be very helpful with practice acquisition funding. For that type of funding you need the services of a bank whose model is based on Cash Flow and understands that the vast majority of the purchase price of a dental practice is almost always made up of intangible assets. If you are not dealing with the right type of bank, believe me you are headed for disappointment.

The problem comes when Asset Based lenders get involved and really, really, really want to be helpful.  As the process works its way through the various management layers and loan committees, the buyer and seller are left treading water, waiting to see if funds are ever going to be available to consummate their transaction. Weeks turn into months and ultimately the lender reports that they will not be able to do the deal without the personal guarantee of most of the buyers’ family tree. Sensing that something must be wrong, the buyer freaks and withdraws their offer when in fact the right bank could have given them a tentative approval for funding in just a few days. Smaller and/or small town banks are particularly known for this, again because they want to be helpful. On rare occasions they will have some Community Development Funds that they can use for an acquisition but even then the terms will be very restrictive.

Dr. Steve Wolff – UMKC Class of 1977