When purchasing a dental practice, most dentists finance the purchase with a bank loan. Although a bank loan seems like a simple enough concept, there are some things to consider. Here are 10 things you need to know about applying for bank loans for a dental practice purchase:
Assignment of Lease/Proof of Purchase
Like most lenders, the bank doesn’t like risk and will try to mitigate as much risk as possible. The first way they look to do this is to confirm the proposed location of your new practice. If the bank is lending you money to buy a dental practice, but you have nowhere to operate, how can you repay the loan?
- When the practice premises are leased, your lending bank will want to be provided with a copy of the signed lease assignment, coupled with the landlord’s consent, to prove your right to use the space for the dental practice.
- When the practice premises are being purchased, the bank will want to see the purchase documents to prove your property ownership.
10 Year Lease Term Without a Demolition Clause
Almost all lending banks will ask for the lease term to be at least 10 years long. This can be either a single 10-year term or the aggregate of the current term plus the renewal terms. Why? Because the bank will want to amortize the loan over the life of the lease so you can afford the monthly payments.
However, when it comes to leases, a demolition clause can add a tricky situation to this request. Even with a 10-year term, banks will almost never tolerate a demolition clause, or at least not one that could be exercised during the first 10 years of the lease. This is because a demolition clause, if properly exercised, allows a landlord to evict the tenant. This leaves you with no location from which to practice and thus earn income to repay the bank loan. For more information on demolition clauses, you can read this post.
General Liability Insurance
Insurance is another common way for a lender to mitigate future risks on repayment. One form of insurance required by the bank is general liability insurance. This tells the bank that, in the event of a lawsuit against the dental practice, you or your dentistry professional corporation (DPC), the insurance will be able to cover the costs of defending or paying the lawsuit so that you may continue to pay your monthly bank loan obligations to the bank.
If there’s a fire, the banks want to be covered for the amount of the loan. For this reason, you will also have to obtain fire insurance and assign it to the bank or at least make the bank a loss payee. The amount of fire insurance you need should depend on the value of the contents. But banks often want it to be for an amount no less than the loan they are giving.
It usually doesn’t take long to obtain fire insurance, and often it is included in your property insurance policy. It can be arranged in advance of the transaction closing date with the closing date as the policy start date.
Adequate Life and Disability Insurance
If you die or become unable to continue to work, your lending bank will want to be paid back any amount owing on the loan they provided to you to buy the dental practice. For the bank to assure they are repaid in these unfortunate circumstances, they will require you to obtain and pay the ongoing premiums for a life insurance policy and a disability insurance policy. The amount of these policies will depend on the loan amount, but the general rule of thumb is
- the life insurance policy will be equal to the loan amount the bank is providing
- the disability policy will be for an amount that will cover the monthly bank loan repayments.
As with the Fire insurance, the bank will ask you to assign the insurance policies’ payouts. Something to keep in mind and talk to your insurance advisor about is getting additional insurance at the same time. This will help ensure you have enough to not only repay the loan but also provide for your loved ones.
You will need to provide the bank with proof of malpractice insurance. Since all dentists in Ontario are automatically insured through the Royal College of Dental Surgeons of Ontario (the “RCDSO”), this only requires you to write to the RCDSO. You can ask for a letter confirming that you have malpractice insurance in the amount of $2,000,000 (which is usually the base amount of coverage all dentists get).
Suppose your DPC borrows the funds to purchase the dental practice, rather than you as an individual. In that case, the bank will want to see certain Minute Book documents. One required document is a directors’ resolution authorizing the corporation to sign the loan documents. Another is a Certificate of Status, which is a document from Service Ontario. The Certificate states that the DPC is a valid corporation that is still in existence.
If you are borrowing funds in the name of a DPC, some lending banks will ask that you sign a guarantee stating that you will be personally responsible for your corporation’s debts and obligations. This is to ensure that you do not hide behind the corporation.
General Security Agreement
Another way the bank will seek to protect its loans is by having you sign a General Security Agreement (“GSA“). The GSA gives the bank interest in and recourse to all of the equipment, inventory, instruments, books & records, tangibles/intangibles, etc., at your office if you and/or your corporation defaults on the loan. The bank calls these items collateral.
Once you agree to the bank’s lending terms, then the bank’s lawyer (or your lawyer acting on behalf of the bank for this limited purpose) will register the GSA in Ontario’s Personal Property Security Act (the “PPSA“) register. The PPSA register is a place where creditors can register their interest against a person or company. This registration typically stays in place until it is renewed or until you pay off your debt and the registration is discharged.
Now you’re ready to start the loan process for your own dental practice purchase. If you have questions or want help with any of these areas, please give us a call. We not only have expertise in selling dental practices, but we also represent dentists in buying a dental practice and are happy to help you apply for financing, review lease agreements, appraisals and more. The DMC team is dedicated to helping dentists succeed and improve both their business and their lives by saving them time and money. Send us an email any time.