Working Capital Strategies When Buying a Practice

When a dentist purchases a dental practice, one of their initial concerns after closing is the short-term & immediate cash flow needs. Generally, most dental practice transaction lenders who dwell in this arena of financing dental practice acquisitions will provide working capital to the buyer in addition to financing 100% of the purchase price. They usually do this either by lending an additional amount on top of the acquisition loan amount or by providing a line of credit (LOC) to the buyer to satisfy any immediate and short-term working capital needs. 

However, this is not always the case with dental-specific lenders. Sometimes the purchase price of the practice is too high, and the lender has tapped out on the amount they can lend. This approach may mean the buyer has to come up with cash at closing or the seller has to finance the rest of the purchase price. This decision could place an unusual burden on the buyer for any short-term immediate cash flow needs.

Also, many times buyers might use local lenders with little dental practice transaction experience, and they may not be able to provide the additional working capital funds or, as noted above, they may not even be able to provide 100% financing of the actual purchase price of the practice.

If you cannot get the additional working capital from your lender, what are the other options a buyer has for the potential short-term and immediate capital need? Here are some ideas in no particular order and the pros and cons of each.

  1. The buyer may have a lot of liquidity personally, which they can use for short-term working capital needs. The benefit is they can access these funds quickly and easily if it is genuinely liquid, and they can save themselves the interest expense on a higher loan amount or a LOC. The downside is their using their personal funds for business purposes, potentially exposing them to unnecessary business risks and keeping those funds from potentially earning more in another form of investment, like the stock market or real estate.

  2. If you have decided to purchase the A/R and your lender has funded the entire purchase price, the “need” for working capital may be minimal. The benefit of buying the A/R is that you can generally get it at a fair discount, and you will have immediate cash flow right out of the gate. The downside is A. if you do not do your homework and overpay for the A/R, you could lose money or B. if you wind up needing additional capital and need to replace something larger quickly, the A/R may not be sufficient to cover the need.

  3. If you decide not to purchase the A/R or the seller will not sell them (which is more than half of the time), you can always ask the seller if you can use them for ninety days and agree to repay the seller on their A/R after ninety days. The benefit of this is you should have immediate cash flow right from the gate while you are collecting sellers A/R. The downside might be if the seller requires too much return for their short-term loan. You would collect them for ninety days then repay the seller over the following nine months.

  4. You could ask the seller to give you a short-term loan from the proceeds of the sale of their practice. Consider enough to provide you with the necessary working capital needs and repayment of at least twelve months, if not twenty, for thirty-six months. The benefit again is having a cushion right out of the gate with fair lending terms. The downside is you continue to have strings with the seller, especially if you want them out of the picture quickly and do not prefer the lines.

  5. Lastly, maybe you have other avenues of borrowing like advances on a credit card, equity on a home, or a personal line of credit. These are options of the VERY last resort, in my opinion, and should ONLY be considered if you have no other options and have an extreme need to borrow from these sources.

While most dental lenders will easily provide working capital for fairly priced practice transactions, it’s not always the case, so you need to be prepared for other options.

 

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