Approaching Practice
Ownership
Keith Merklin, General Manager
UNC School of Dentistry - 2013
© 2013 Live Oak Banking Company. All rights reserved. Member FDIC
Agenda
• Live Oak Bank History
– Why Lend to Dentists?
• Debunk “Student Debt Myth”
– Brown down typical loan structure
– Explain how we view your student debt
– Student debt’s impact on ownership
• Discuss Practice Ownership
– What will I need as I get closer to owning?
– Practice Purchase or Start Up
– Specific things any bank will ask of you
• Q&A
LOB History & Background
• Understanding Who We Are
– Connotations of the word “bank”
• Live Oak Bank began lending in 2008 in Wilmington, NC
– Right before the financial collapse
• Built to be a Niche Bank – unique concept – “Weird”
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Only lend to 4 Industries
2nd largest originator of small business loans in the U.S.
We will do 100MM in dental loans in 2013
LOB has lent over 1 billion to these industries in last 4 years
• Live Oak Bank Dental Portfolio
– Originated 350MM in loans to dentists since 2010
– We get the awesome opportunity to finance the American Dream
Financing Requests We See Every Day
• Coast to coast we have seen all types of debt, practice
structure, and nuances of the dental industry
4 different types of financing opportunities:
1. Practice Acquisition
2. Start Up
3. Expansion / Relocation
4. Refinance
Why Dentists?
Pick Industries With Low Defaults
7(a) and 504 Combined Loan Performance by NAICS
PORTFOLIO PERFORMANCE DATA BY NAICS CODES is based on Loans Approved from 10-1-00 thru 9-3010
Which have a NAICS Code and which were Disbursed by 9-30-10, Redacted to 10 or More Disbursed
Loans
Disb#
541940--Veterinary Services
Disb$
Failure%
ChrgOff%
4,416
$2,183,122
4.80%
0.59%
10,412
$3,661,038
5.55%
0.83%
621320--Offices of Optometrists
2,259
$480,575
6.60%
0.99%
721110--Hotels (except Casino Hotels) and Motels
9,376
$8,249,338
7.02%
0.61%
812210--Funeral Homes and Funeral Services
1,437
$588,554
7.31%
0.44%
621340--Offices of Physical, Occupational and Speech
Therapists, and Audiologists
621111--Offices of Physicians (except Mental Health Specialists)
2,580
$475,741
7.36%
1.49%
9,343
$2,844,158
7.46%
0.97%
446110--Pharmacies and Drug Stores
1,942
$573,451
8.91%
0.94%
541110--Offices of Lawyers
6,246
$1,058,870
10.13%
1.24%
541330--Engineering Services
4,130
$967,803
10.63%
2.02%
621210--Offices of Dentists
Why else?
• Historic Low Default Rate
• No Customer Concentration
• No Foreign Competition
• Barrier To Entry
• Stable Cash Flow
$250,000 of Student Debt - American Dream?
One of the biggest myths we hear revolves around student
debt:
• “I know you won’t finance me now because I have $250K
in student debt……”
• “How much of my student debt to I have to pay off before
you would finance me the money to buy a clinic.”
• “I know I’ve got to get really aggressive after school to pay
off my student debt so I can own a practice.”
Lets Clarify Student Debt
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How do we view your student?
What kind of effect does it have on practice ownership?
What should be important to you now if you want to own?
Let’s take a look at a couple typical loan requests that we
see every day…
Sample Loan Request – Practice Purchase
•
Male DDS, 29 years old, 3 years of experience as an
associate dentist.
He has $15,000 in cash, $180,000 of student debt, a
negative net worth, and a 740 personal credit score.
He is buying an existing practice for $510,000 – Adding
into loan another 110K for working capital and closing
costs (total project 620K)
The practice generated $700,000 in revenue last year with
$225,000 of pretax cash flow before owner’s
compensation and debt payment.
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Details of this Loan Structure
BANK LOAN
$560,000
10 year SBA 7(a)
Interest Rate of 6%
$6,217 Monthly Payment
$74,605 Yearly Payment
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Details of this Loan Structure
Note To Seller $50,000
10-year Note Subordinated to Live Oak’s Note
Interest Rate of 7.5%
$593 Monthly Payment
$7,122 Yearly Payment
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Details of this Loan Structure
Borrower to inject $10,000
From: personal funds, friends, family etc..
**Little skin in the game
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Details of this Loan Structure
Educational Debt $180,000
25-year Repayment Term
Interest Rate of 6.8%
$1,249 Monthly Payment
$14,991 Yearly Payment
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Synopsis of this Loan – Practice Purchase
700,000.00
Seller Revenues/Collections
225,000.00
Cash Flow after Salary
WHAT do I owe my Creditors?
(74,605)
Debt Service: SBA Loan
(7,122)
Debt Service: Seller Note
(14,991)
Debt Service: Student Debt
(96,718)
Total Debt Service
$225K-97K
128K
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What is my Cushion?
Sample Loan Request – Start Up
•
Female DDS, 31 years old, 5 years of experience as an
associate dentist.
She has $19,000 in cash, $220,000 of student debt, a
negative net worth, and a 723 personal credit score.
She is starting a practice in a lease space
She will need $150,000 Construction, $150,000
Equipment, and $75,000 Working Capital
She will continue to associate 2-3 days per week as she
starts up earning $500 per day ($1,500 per week)
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Details of this Loan Structure
BANK LOAN
$375,000
10 year SBA 7(a)
Interest Rate of 6%
$4,163 Monthly Payment
$49,900 Yearly Payment
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Details of this Loan Structure
Educational Debt $220,000
25-year Repayment Term
Interest Rate of 6.8%
$1,541 Monthly Payment
$18,490 Yearly Payment
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Synopsis of this Loan – Start UP
$275,000
First Year Revenues/Collections
$60,000
Practice Cash Flow
$78,000
Associate Income
$138,000
Cash Available
WHAT do I owe my Creditors?
(49,900)
Debt Service: SBA Loan
(18,490)
Debt Service: Student Debt
(68,390)
Total Debt Service
$138K-68K
70K
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What is my Cushion?
Not Complex - Cash Flow Lenders
Boils down to 2 crucial factors:
1. Can you pay yourself a comfortable salary?
2. Can you pay your loan payments?
-If so, and there’s a cushion left over. We will do that deal all day long!
What specific things will we need from you to
evaluate a loan request?
• Remember the 4 types of loan requests we receive
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Practice Acquisition
Start up
Expansion
Refinance
• Depending on what type of request, will determine what
we would ask for
• Lets just use the example we used earlier of a practice
acquisition. What would we need and why?
What the bank needs and WHY…
 Three years personal tax returns
 Review Historical Income
 Personal Financial Statement
 Evaluate personal
assets/liabilities
 Resume
 Three years business tax returns
 Interim P/L and Balance sheet
on business
 Understand
experience/leadership
 Historical repayment ability
 Current operations of practice
You feel good about the numbers
But what about…..
• The Transition? You see positive things, you like the
location, but now its time to take a deeper look
• Demographics
– What is happening in the neighborhood?
– Competitors, who, how close, how aggressive?
• Existing Staff
• Operating Margins - Typically well managed practices run about
35% General Dentist - In other words – Efficiency of the practice.
Existing Problems or benefits will become YOURS.
Healthy Operating Margins for Specialties
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General Dentists – 35%
Endodontists – 54%
Pediatric Dentists – 44%
Periodontists – 42%
Oral Surgeons – 60 %
Orthodontists – 43%
Be prepared to walk away
• You are buying, or starting your future and building an
asset. You need to justify the price with numbers and be
willing to walk away if it is too high.
• We see emotions – practices that dentists grew up in, but
the selling dentist is asking too much. They buy the
practice and fail because they have too much debt and not
enough revenue no matter HOW hard they work.
• Location is great, but Lease terms are too expensive
• BE PATIENT. Sometimes the best deal is the one you
didn’t do.
What will benefited the business from this point on…
• High visibility, physical and online.
• Positive energy, be a leader.
• Maximize the areas of revenue that generate the most
profit. Understand your P/L and B/S. Find a financial
coach.
• Don’t suggest, sell, if you believe in it!
• Locate in the best demographic areas: high income, low
unemployment, rapid growth, and few competitors.
What should matter to you right now?
• Credit Score
– Make your payments, that means more than the AMOUNT you
owe
• Business Acumen
– Educate yourself on the side, mentors, build management skills
• Build your people skills
– You are in the people business
• OPTIMISM!!! YOU CAN OWN A BUSINESS!
Q&A
29
© 2013 Live Oak Banking Company. All rights reserved. Member FDIC