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Buying a small business can be a great opportunity for entrepreneurs, but it isn’t always a straightforward process. In specialized industries like medicine, buying an existing office allows you to bypass some of the tedious startup costs and hiccups, but it won’t come cheap.

For instance, buying an existing dental practice is a good way to secure a space in the profitable dentistry services industry. But a profitable, established dental practice won’t come cheap. That’s where dental practice purchase financing comes into play.

This article will explain:

• The benefits of purchasing an existing practice
• The best business loans for buying a medical practice, like a dental office
• Learn the process of getting a loan for dental clinics

Advantages of buying an existing dental practice

Whether you’re a practicing dentist or a savvy healthcare entrepreneur, owning a dental office can offer professional freedom and profit potential. Rather than start a new practice from scratch, many dentists choose to purchase an existing practice for these reasons:

Established patients

An existing dental practice has an established client base. A significant portion of a dentist’s office's income comes from the recurring revenue from the regularly scheduled exams of loyal patients. Most patients will remain at their current location despite a change in ownership.

Whether you specialize in basic oral health, cosmetic dentistry, or oral surgery, it’s much easier to add dental services to an existing office than it is to start from scratch and try to attract new patients.

Existing staff

When you buy an existing practice, you can keep a large portion of the staff. In fact, continued employment for long-term staff may even be written into the purchase agreement. Being able to jump right in with experienced staff will ensure a smooth transition and help you build trust with your patients. Keeping the same staff through the purchasing process will not only be a good resource for a new buyer but will also encourage patients to stay with the practice.

Hiring a new general dentist or dental hygienist can be a tedious, time-consuming task. We hesitate to compare it to a filling or a root canal, but it’s much easier to keep qualified staff rather than interview and hire new staff.

Cash flow

Often the most significant reason people purchase an existing dental practice is for the immediate cash flow. A profitable, established business will generate the income necessary to cover expenses during the ownership transition, including overhead, payroll, mortgage expenses, and even the buyer’s student loan debt from dental school.

Moreover, you’ll likely have to use dental practice purchase financing, which will incur even more debt. Immediate cash flow will help ensure you don’t fall behind on your monthly payments.

Growth potential

When starting a new dental business, it may take a few years to gain a strong ROI and be able to hire additional staff to help with growth. When buying an existing dental practice, the upside potential is immediate. Shortly after transitioning ownership, you can begin investing in marketing campaigns, extended hours, and additional staff to spur new growth. 

How much does it cost to buy a dentist’s office?

The American Dental Association (ADA) estimates that the average dental practice requires a $500,000 investment. That’s more than the cost of buying a general medicine practice, due in large part to the amount of specialized equipment required in general dentistry offices.

Despite that, buying an existing office can be more affordable than building a practice from the ground up.

Factors influencing the cost of a dental practice

The exact cost of a dental practice will vary depending on several key factors:

• Location: Commerical real estate costs will vary widely based on location. Additionally, the clients in more affluent areas are more likely to pay for additional services like luxury treatment plans like teeth whitening, Invisalign, and other nonessential dental needs.
• Time in business: Dental offices that are home to a qualified dentist for an extended amount of time are often priced higher than newer practices. Dentists that are known for delivering high-quality treatment will likely translate to a high retention rate for the new owner.
• Growth potential: The future earning potential of any new business can be hard to determine, but at a minimum, you should try to forecast growth based on past performance. Specifics like the number of doctors, office hours, services, and marketing efforts will affect revenue.
• Equipment: The equipment that’s already on-site, like x-ray machines, will affect the purchase price. A practice that will require new equipment may be priced lower than one with new equipment that will last for several years.
• Dental practice financing rates: Business loan interest rates can present challenges for some borrowers. Depending on your creditworthiness and business history, you may face higher interest rates than you expect.

How to finance a dental practice purchase

There are several ways to finance the purchase of a dental practice. Some business owners choose to bootstrap their practice or get financing from friends and family. However, this comes with a great deal of risk, so most consider a small business loan for all or a portion of the purchase.

Both traditional banks and online lenders offer dental practice purchase financing. Typically, traditional banks and credit unions offer lower business loan interest rates than online lenders, but that’s not always the case. The primary advantage of online lenders is that they may have less strict eligibility requirements for financing.

For instance, if you’re a new business owner with bad credit but you have your DDS or DMD and experience in family dentistry, an online lender is more likely to emphasize your professional credentials rather than your financial ones.

That doesn’t mean you’ll automatically get a loan, of course, but alternative lenders can be a better option for new business owners or borrowers with bad credit. Likewise, they can often provide funding faster than traditional banks with lengthy application processes and underwriting periods.

Types of loans for dental clinics

While there’s no specific dental practice loan, there are several types of loans for dentists looking to buy an existing practice. When considering which dental practice purchase financing option will work best, deciding factors may include the time to fund, approval requirements, repayment terms, and lender preference.

SBA loan

SBA loans are a great option for many small business owners because of their low down payment requirements and fair repayment schedules. The programs are backed by the Small Business Administration but financed by a traditional or alternative lender.

The SBA will guarantee up to 85% of loans through one of its approved lenders. This makes the loans low risk, so lenders can offer more attractive repayment terms and better interest rates. With an SBA loan, payments are made to the lender each month and rarely have prepayment penalties. 

The application for SBA loans is one of the lengthier financing processes and the approval requirements are stricter than other loans. The SBA prefers to work with business owners who have a strong credit history, solid business plan, and documented income potential. They often require that the business's cash flow is 125% of the owner’s salary and debt service payments, which can be tough for new business owners.

Term loan

Term loans are a common type of financing used to purchase a new business or refinance a current loan. A term loan allows the borrower to receive a lump sum for the full loan amount, which is repaid over time with a set number of payments. Repayment terms can be flexible for borrowers, making them good options for buying existing businesses.

With a term loan, the borrower will have either a fixed or variable interest rate. With a variable interest rate, the interest portion of the monthly payment will fluctuate and is determined by the market rate and the loan term. A fixed rate retains the same interest rate for the entire loan term.

The approval requirements for term loans vary. Borrowers with less-than-good credit history may also consider a term loan that is secured, using a personal guarantee or asset as collateral. You should obtain a copy of your credit report before beginning the application process.

There are no restrictions on how you use the money, so whether you need to purchase dental insurance, finance materials purchases for dentures and veneers, or want to increase your marketing efforts by broadcasting testimonials, term loans can help.

Short term financing

Traditional term loans only work for some business owners. Some individuals considering purchasing a dental practice want loan options that offer more flexibility or are short-term. Options for these business owners include term loans with repayment terms of less than five years, business lines of credit, and working capital loans.

A business line of credit is a hybrid of a loan and a business credit card. This type of revolving credit gives borrowers access to a maximum credit line but charges interest only on the amount they use rather than the full loan amount. Lines of credit are more flexible than traditional term loans and offer fast funding. This makes lines of credit a great option for purchasers who want a safeguard against unexpected expenses.

Interest rates for a line of credit are typically higher than those of traditional term loans, but once the balance is paid off, the credit becomes available again. This type of financing is common for cash flow fluctuations and large purchases, like purchasing dental equipment.

Working capital loans can be another great financing option for dentists. These loans are generally used for short-term small business ventures. Working capital loans help borrowers navigate cash flow shortages and cover emergency expenses. They also tend to fund faster than traditional term loans, making them better options for someone trying to jump on the opportunity to buy a dental practice.

Bottom line

Buying a dental practice is an exciting venture. While using personal funds is a great option for those who can afford it, most new business owners will require a loan to purchase a dentist’s office.

Ultimately, the best financing option is the one that will work best for both your individual credit needs and the goals of your new dentist office. Working with a lender who understands dental financing will help make the transaction stress-free.

FAQs

How much does it cost to buy a dentist’s office?

According to the Dental Buyer Advocates, it costs around $500,000 or more to buy a dental practice.

What kind of dental practice purchase financing is available?

The most common types of loans available to anyone looking to buy a new business include term loans, SBA loans, and short-term financing options like business lines of credit or working capital loans.

How do you get a business loan?

Getting a business loan is just like any other type of financing. You must shop lenders to see what interest rates and loan terms are available to you and decide what’s best for your business. Then, get your business plan, credentials, and financial documentation available before applying for the loan.

What’s the difference between traditional and online lenders?

There are several key differences between traditional lenders like banks and credit unions and online lenders. While both offer similar types of loans, traditional lenders tend to have stricter eligibility requirements and longer underwriting periods. Online lenders are better options for new business owners and entrepreneurs with bad credit.

What are the benefits of buying an existing dental practice rather than starting a new one?

Dental offices have significant startup costs. Whether you’re a pediatric dentist or you specialize in something like gum disease, it’s difficult to make a name for yourself in a competitive field like dental health.  It can be easier to purchase an existing practice with a loyal customer base to start your business off on the right foot.

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