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Due to the strong performance of dental practices during COVID-19 surges, coupled with a huge increase in patient demand, often outpacing pre-pandemic production levels, there is an expanding consolidation market for private equity and new group practice purchasers. Although many dentists may already own two or three practices, there are important considerations they should keep in mind when developing a longer-term plan to continue to scale up their group practice. In fact, it is critical for entrepreneurial dentists to align their long-term business vision with a lending partner to ensure the availability of accessible capital.
Even if your group practice growth plan feels like it is not in the immediate future, there are critical steps dentists can take now to ensure they can build a successful long-term banking relationship.
Tip #1: Understand your bank’s debt ceiling for expanding group practices.
All banks have certain lending caps, or a debt ceiling, for expanding group practices, whether it is loan exposure levels or number of practice locations, that can severely limit your lending runway. Prior to planning to build or acquire additional locations, you should talk with your banker to understand the bank’s debt ceiling and ensure you can secure the funding to add all the necessary dental practice locations to meet your acquisition growth strategy.
It’s also important to understand your bank’s key performance indicators and their definition of leverage, debt service, and financial covenants before applying for additional capital to ensure you can clear these financial and production hurdles annually. Most dentists are not used to asking for this information up front; however, understanding this information is critical because it will help determine if a financial institution is the right partner for your business.
Tip #2: Scale and centralize your lending services and other operations.
It is beneficial to consolidate your lending activities with one financial institution and focus on revenue generation and cost reduction. Through this consolidation, your financial institution will have a holistic view of your performance, while centralizing operations will provide the economies of scale to reinvest in the business and maintain strong profit margins.
There are typically obstacles when growing a group practice. For example, oftentimes the dentist who previously served as the primary clinician will assume more of a management role and associates will take on the clinical work. This can impact cash flow because ownership now needs to pay associates to perform this clinical work. As a result, due to tighter margins, it would be difficult to finance this location as a standalone practice. To offset these additional associate expenses at a new location, dentists can leverage the larger group practice model economies of scale to negotiate lower prices for medical supplies as well as lab fees and insurance reimbursements due to the scale of their operations.
Tip #3: Ensure you have high-quality financial statements.
The quality of your financial statements is critical to banks as well as preparing to provide reviewed and sometimes audited financials down the road. Along with ensuring financial statements are up to date, by consolidating your financial statements, bankers and dentists can work together to look at the practice’s overall health. Viewing the business from both a standalone and consolidated basis helps the lender feel more comfortable because they can see the profitability and performance metrics of each location, individually and combined. Partnering with the right long-term financing partner also helps dentists avoid refinancing and pre-payment penalties that occur when working with multiple banks and eliminates the pitfall of trying to find a bank to finance individual new practices that do not have strong cash flow on a standalone basis.
Tip # 4: Leverage your banker as a resource.
Bankers with strong expertise and knowledge of the group practice model, like our Healthcare Practice Solutions Group, have in-depth industry insight and can serve as trusted advisors as you grow. They can help execute against your strategic growth plan and ensure you understand the requirements to continue to grow and fulfill your long-term business strategy.
Specialty healthcare bankers can also assist by providing ways to unlock your group practice EBITDA valuation multiples, build equity on your balance sheet, and put you in contact with other important emerging group practice resources including consultants, attorneys, CPAs, etc.
To learn more, please contact Dan Croft at Daniel.Croft@td.com
or visit https://www.td.com/us/en/small-business/healthcare-practice-solution/.
Written by Dan Croft, Head of the Healthcare Practice Solutions Group, TD Bank. Dan has been the Head of TD Bank’s Healthcare Practice Solutions Group since 2014 and is responsible for overseeing and growing TD Bank’s healthcare practice finance business, which assists dentists, veterinarians, optometrists, physicians, and podiatrists in choosing sound financial solutions for their practices.
Dan has more than 25 years of experience developing fully customized financial product suites, specialty credit teams and industry expert specialists supporting healthcare, pharmaceutical and CPA businesses.
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