At this point in the process, you’ve got your locations selected and your projections are done. The obvious question looms: how am I going to pay for all of this? This is usually the limiting factor in your growth. If you had $10 million of cash or available credit and 8 locations you wanted to add, you would certainly be able to add them all at once. Since most of us are not in such a position, other options need to be examined.
As you learned from our new office development podcast, costs for a new office are probably going to run $300,000 - $600,000 per facility so keep that in mind.
Let’s take a look at the various options out there for you:
Here, you find a bank or specialty lender who goes through the standard process of evaluating your business plan, projections, collateral, personal financial statement, etc. As I am sure you will recall, 5 years ago, lenders of all kinds seized up and funding for new facilities, especially for doctors early in their careers, just did not exist. The situation has certainly improved somewhat over the years, although it is not perfect by any stretch. Still, 5 years ago, you wouldn’t have someone like this person from BBVA Compass actively seeking dentists and orthodontists interested in building new facilities.
Other specialized entities like Group Financial Services continued to lend money for practice development even through the teeth of the financial meltdown. They know what they are looking for in a practice and usually have a strong understanding of the financial markets. Since some of these entities are not as well capitalized or diverse as their larger banking brethren so interest rates may be higher which reflects that additional risk. However, this may not always be the case.
In general, local banks have lent a bit stronger to entities like dental and orthodontic practices than their national brethren, but your experience in your market may differ. Still, in sum after the disaster we went through a few years ago, options do exist.
One thing I do hear regularly is that doctors will say that, for one reason or another, their credit is absolutely wrecked. In that case, consider going through a credit repair process with a reputable agency to put yourself into a better position to get financed down the line.
Utilize a service
As mentioned in the aforementioned podcast, our friends over at American Business Consulting have been having good success in finding financing for their clients. In a number of cases, these firms have built relationships with lenders and are able to standardize your business plan so that when the banks look at your business plan, it looks familiar to them and the lender can effectively compare it against other projects. Not only does a service allow you to get your project in front of multiple lenders at once, but the standardization enables banks to spend less time trying to understand your process and move it through their channels faster.
In particular, group practices make things easier on the bank because it gives the bank some diversity in product, a larger potential cash flow and a more substantial client who can provide repeat business or provide other services. Typically, a consulting firm will not charge for their services in this area. With that type of no risk arrangement, the only thing you risk losing is time. If a deal cannot get done, you will have lost the time allowing that firm to search and the time to go through the process again. But that might have happened even if you had handled it yourself.
Build from your own cash flow
This may be the slowest of the processes, but it also gives you the most control over funding and eliminates the need to report to a lender or be pitched for additional services from a consultant. Let’s say that you peg your cost for a new facility and startup losses at $300,000. Let’s also say that you decide to put $25,000 per quarter aside for that office (instead of keeping that as personal income for yourself). That means that you will have accumulated the $300,000 over a period of 3 years. That’s a long wait for a new office. Probably too long. So, with one office, this may not be the most efficient way to go.
But, let’s say you have 3 offices and you put away $25,000 per office per quarter. Now, you’ve saved enough to build a new office every year and that’s not bad at all. No matter which way you go, new offices take work on your part and taking your time with adding them, especially early ,is a prudent course of action.
When you build offices from your own cash flow, you are beholden to no one except yourself and that isn’t a bad feeling at all.
Use alternative means of financing
Startup costs for a new office can generally be broken down into 3 categories: leasehold improvements, office furniture and equipment and startup losses. If you negotiate some tenant improvement allowances (TI money) into your lease arrangement, you have effectively found a form of financing. TI money is usually amortized into the cost of the lease as a method of repayment. For the equipment piece, large suppliers like Henry Schein on down offer some sort of financing for the equipment you purchase for them. There may be some additional things you’ll need to do to get that financing, but it allows you to get funds to get your office up and running.
Startup costs are generally the smallest piece (at least, we all hope they are) and are generally incurred over time –not a short burst like construction and equipment costs-- so this can be financed via your current pay, friends and family loans, etc.
I’ll let others expert in the field discuss things like crowdfunding, peer-to-peer lending and the like.
Join a management company
The whole focus of this series is to teach you how to become your own group practice, but I’d be remiss if I didn’t mention this option. The publicly traded entities have access to significant amounts of capital including equity sales and institutional lending that aren’t open to many private companies or startup groups. On the other hand, the fees get large – 40% of profit, 10-17% of revenue, etc.—and there is some loss of control (take it from someone who has spent his career deeply involved in this field). Imagine having a $5 million gross and a fee of 12% of revenue to pay. That’s an annual fee of $600,000. Is that charge worth it? You’ll have to decide, but you may want to take your time and get things done on your own terms.
Questions, suggestions, disagreements. Please don’t hesitate to contact us.
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