You need a loan to buy your first dental practice or expand your group, so you will be talking to the banks. Did you know they will be sizing you up over a Campari? Not a gentlemanly chat over a strong drink — those days are gone — but a sober acronym to check your legs as a debtor. It stands for: character, ability, means, purpose, amount, repayment, insurance. We spoke to Ross Martin, managing partner at Hive Business for more insight. Hive improves the financial performance of dental practices.
“I like Campari because it gives dentists an insight into the bankers’ world. Remember before 2008 when loans became like a commodity and banks fought against each other for the mortgagee? It encouraged the idea among borrowers that you do your own numbers on what you think you can afford, tell the bank and they supply the loan. It set a dangerous benchmark which I see proliferating within dentistry. It’s a booming market and a relatively soft one compared to other markets out there. As a hard-working associate it’s easy to feel like you’ve served your time and now it is right for you to own. But to expect and, dare I say it, feel entitled to a loan to get your dream practice is missing the point a bit.
An associate might call me about a practice they like. It might cost £1m and I will ask them, ‘What’s the return on investment going to be?’ They are usually too vague on that, they might say, ‘It’s a mixed practice, I think I can upsell some private treatments.’ But there’s a lot of vendor power around; vendors hold the cards because there’s a lot of buyers. So the prices push upwards, meanwhile the sales broker usually has an affiliated finance arm, so the process gets smoothed over. But there is a cost, and guess who pays it.
The new owner has to live off £36k a year, subsidising the business through their own wages to pay the bank. For some reason the realisation takes about two years to sink in, at which point they they wake up thinking, ‘I’m working all the hours God sends, paying the debt off, but getting no return.’ They finally get the point that you should always mitigate the risk of borrowing money, but it’s too late.
Imagine if I told you I have an investment opportunity for you: all you have to do is put in £1m, work more hours, and put in an extra £50k a year out of your earnings each year (I’m basing this on more than one real case). If this was a stock or share you would think I was barmy, you would never agree to it, so why agree to it with a loan for a dental practice without a solid expectation of a return? Most practices make between three and five per cent profit, and most simply create a nice place to work as an associate, so be careful about doing your own maths and then agreeing with your own perspective of the world.
Campari is helpful as a way to snap out of that mindset, which is in your own interests to do. Otherwise you’re exposing yourself to financial risk and no one else suffers, apart from perhaps your family. So let’s go through it.
Character. Banks are effectively placing a bet on you, so give them every reason to have confidence in you. Present yourself like a professional, make sure you spell everything correctly, and don’t be late. Come across as a likeable person and show you are a capable business leader with the ability to provide quality services to customers while making a profit. Show attention to detail.
Ability. Bluntly, the bank wants to see how they are getting their money back. Yes, a forecast is important, but it has to be a cogent document, based on reality and substance. Anything more than a modest increase to turnover will not be accepted. Also, don’t forget a tax provision.
Means. You’ve got to have a business plan and a financial plan. An associate buying their first practice usually ends up subsidising their business to make it add up. Sometimes associates have access to family money so they don’t end up personally subsidising the business, but the family money does instead because it’s effectively a pseudo loan — there’s no outflow for that payment, it’s like a fake investment. If there’s no expectation of you having to make a return on the investment, you’re creating a shield from the commercial world. Don’t settle for this, it’s a waste.
Purpose. The reason you’re borrowing money is really important. Banks don’t want to lend for your inability to run a business in a sustainable way, so the money can’t be to cover shortfalls and pay the staff. Can you see the difference in the risk perspective? Show why you need the money and how you’re going to use it to generate a return. You should be really clear on this — you want to be paid well for all the hard work you are about to do.
Amount. Show in detail what the money will be spent on — how did you arrive at the figure? Be precise. Admittedly in many cases this will simply be the asking price, but it may not if, for example, additional amounts are required for investment post-purchase.
Repayment. Show profit margins and cashflow forecasts to demonstrate you’re good for the loan. Don’t exaggerate, because you’re the one who is going to have to pay. You don’t want to live like an indentured labourer.
Insurance. This is about financial maturity. Banks need protection in case something unexpected happens. Let’s be honest, you need protection in case something happens. If you’ve got a mortgage on your home, what happens if you break your arm and can’t work? You can’t pay the mortgage and if you don’t have a back up plan it’s catastrophic. We have ways to make these policies tax deductible for the company, so there are efficient ways to do this.
I’ve also seen Campari extended to Campari and Ice, for: interest, commission and extras. These are also worth checking off.
Interest. If the lender thinks you’re a suitable risk they will issue an offer and stipulate the rate, repayment structure and length. You’ll need to digest these details to grasp the implications of taking on the loan.
Commission. Lenders usually charge a fee which is based on a percentage of the loan amount (often from 0.5% to 3%). If it’s possible to add the fee to the loan just remember this will cost you more in the long run with interest on top.
Extras. Meaning all the other policies you and the lender need for protection should anything go wrong. For instance, I’m a key person at Hive and if I died the effect on the company would be substantial in the short term, so we have effectively insured the business against the financial adversity of losing individuals of particular value.”
