In this episode of The Art of Dental Finance and Management podcast, Art meets with Justin Klingshirn, Vice President of Dental Sales for Bank of America Practice Solutions. Art and Justin discuss the current economic conditions affecting interest rates and strategies for obtaining financing for dental practice startups, remodels, or acquisitions.
Reach out to Art if you have any questions regarding dental finance and management for your dental practice. More information about the Eide Bailly dental team can be found at www.eidebailly.com/dentist.
Being more strategic in all aspects of your dental practice will lead to increased profitability.
Show Notes and Resources:
- Eide Bailly’s Dental Practice
- Eide Bailly’s Tax Services
- Decisions in Dentistry magazine
- Academy of Dental CPAs
- Year-End Tax Planning
- What Business Areas to Focus on in Your Dental Practice
Art Wiederman, CPA: Hello everyone and welcome to another edition of The Art of Dental Finance and Management with Art Wiederman. I am your host. I'm very happy to be here. My name is Art Wiederman. I am a dental division director at the CPA firm of Eide Bailly. I've been a dental specific CPA for 38 years. I've been a dental practice broker for about 17 years. And today we have a very relevant topic that we're going to talk about, and we're recording here first week in November, and this one will probably air sometime in late November, early December.
So not a whole lot is going to change. But you might have noticed, folks, that your interest rates have gone up. Interest rates have gone up on car loans and home loans. I mean, when did you ever think you were going to see a 7% home mortgage interest? I mean, it was normal. Home mortgages were 3%. There were three and a half, three and a quarter. Now they're over seven. Credit card interest rates are averaging. I just heard this on the Today show this morning, over 20%, almost 20%. Car loans are more expensive. Everything's a little more expensive.
So my guest today is my good friend, Justin Klingshirn, who is vice president dental sales for Bank of America Practice Solutions, which is the largest dental practice lender in the country. Justin works out of Southern California and there is nobody better to talk to you about financing. Do you want to buy a practice? Are you going to expand? Are you going to do a new dental office? Are you going to well, do you want to refinance your loans? Yeah, I don't know about refinancing it, but maybe. Yeah, who knows? Maybe you got an interest high interest rate loan years ago and it might make sense. We'll see. So we're going to get to Justin in a minute.
I want to let you know that we're getting to year-end tax planning time, folks. And if you haven't been sitting down with your CPA, the best time to do it is November, December. We at Eide Bailly, we represent the firm, represents almost a thousand dentists. Our office in Tustin represents close to 300 and we are now launching into almost every day. We're getting on either a Teams call or a live meeting with clients and going through year-end tax planning. So we will do a podcast before the end of the year on year-end tax planning with my friend Mel Schwarz from Eide Bailly. I just got to nail him down for a date. And we are also going to be doing our Business of Dentistry webinar series. The last one it was going to be on December 2nd, but now it is going to be rescheduled. We will get back to you on what the dates are going to be.
But if this podcast airs after our webinar, you can email me at awiederman@EideBailly.com or call me at 657.279.3243. And we have all of these recorded and ready for you to watch. But if you do need some, year-end tax planning and your CPA has not reached out to you, please give me a call and we will take very good care of you.
I also want to thank our wonderful marketing partners, Decisions in Dentistry magazine www.DecisionsinDentistry.com. Incredible clinical content and over 140 fantastic continuing education courses that you can listen to at your leisure for a very, very reasonable price. Go to www.DecisionsinDentistry.com.
One more thing I want to tell everybody about again, and I'm seeing this more and more. If you are being called receiving phone calls from a company that is telling you that you qualify for the Employee Retention Tax Credit for every quarter of 2020 and all the three quarters of 2021. I've been talking about this. If you are one of our thousands of listeners on the podcast, I've been talking about this for now, a year and a half, and this topic for the last couple of months. There are a lot of bad players out there who are telling you that if your hair is green and blue, you qualify for the employee retention tax credit. If you had supply chain issues or if you had social distancing and things like that, most of you have done better in 2021, did better in 2021 than you did in 2020. And I would be uber careful about having someone come to you. I had another one $146,000 credit. And I just said. You know, I'm just not feeling the love for this. Just be very, very careful, because we know that some of these shops are not going to be in business in five years when the statute of limitations runs out. And then you get audited and you go back and they're not there and you don't know where they are and you have to write a big check back to the government. Just be very, very careful. All right.
Well, I'm going to get to my guest right now, who is my good friend Justin Klingshirn from Bank of America. But I should pronounce my guest's names, right? Justin Klingshirn from Bank of America Practice Solutions. I've known Justin for many years. And like I say, Justin is a vice president. And at the moment, he specializes in helping doctors who are buying practices to do practice acquisition financing. But we're going to talk about that when talking about interest rates. We're talking about startups. And we're going to start up talking about expansions and remodels and what's going on in the economy.
So Justin Klingshirn. Justin, welcome to the Art of Dental Finance and Management.
Justin Klingshirn: Yeah, you got it.
Art Wiederman, CPA: I do numbers much better than I do letters. So I mispronounced one of my good friends is Mike Unthank. He's a dental architect in Omaha. And I spelled his name wrong. I said, I don't do letters, I do numbers. So. But you're a numbers guy, right?
Justin Klingshirn: Yeah, yeah, yeah. So thank you for having me on the podcast.
Art Wiederman, CPA: Well, I appreciate it, too. So, how's life in San Diego? You're in San Diego, right? How's life for you? You were in Texas, and now you came to San Diego's, weather a little better.
Justin Klingshirn: Yeah, yeah. It's a little cooler in the summer. Yeah, yeah, yeah. I'd been on the podcast before pre-COVID, but my history with the bank and with dental finance for that matter, is I started in Ohio working as an account manager, moved to Texas, ran a six state territory at one point down to four, then one stayed there for about six years. I did all sorts of dental financing from acquisitions to start ups to project real estate, moved down to Southern California. I lived in San Diego, primarily focus on the SoCal market, although I do work nationwide. So I do have quite a bit of experience both in product and then just logistically across the country.
Art Wiederman, CPA: Well, we are going to tap on that experience today, my friend, because things have changed in the last 12 months. So let's start the conversation. So yesterday now again, this is not yesterday when this podcast is going to air their days. I wish it would air live, but it doesn't. Yesterday, the Federal Reserve first week in November raised the federal funds rate for the fourth time this year was the third or fourth. It was the fourth, right?
Justin Klingshirn: I think that's right. Yeah.
Art Wiederman, CPA: By 75 basis points. And again, folks, for those of you that don't know, a basis point is 1/100 of a percent. So 75%. So, Justin, you are the banker on the call. Would you explain to our audience who maybe don't understand, you know, they know the Fed raised the rates, but what is the rate they raised? What does it mean? And how does it tie to dental loans? I mean, we understand that home mortgage interest rates, if you went to get a home mortgage, a home mortgage, right now it is over 7%. And if you want to buy a car, it's probably five, 6% or more. Who knows? But how does it affect that? Also talk about all that stuff.
Justin Klingshirn: Yeah, yeah, it's a good question. So the Fed raised rates again, right, at 75 basis points which three quarter point in order to tame demand which it is a by product, the crazy demand of the inflation that we're seeing. So having said that, this is just a tool in the toolbox the Fed has. That is the rate at which banks borrow from the Fed, and then banks can earn interest by storing money in the Federal Reserve. So there are benchmarks, there's an upper bound and a lower bound. There's an effective federal funds rate. And, you know, right now, I believe the target after this raise was around four. Now, having said that, there is an indirect but pretty clear correlation between the rates and this just general cost of borrowing.
So when doctors asked me about the Fed raising rates and what it means for their interest rate, there's not always a 1 to 1 relationship, nor does it always impact in the moments after the Fed raises rates. There's an indirect secondary market happening with the most closely. The Fed tracks with a three month T-bill. We normally look at and for doctors listening the ten year Treasury note. So your interest rate is likely going to be more related to that than it is anything else, as is in the case of mortgages. So mortgages have historically tracked with this note the ten year Treasury, and that's basically just a bond, right, that pays a fixed coupon, you know, every month. That's money that you're lending to the government. But needless to say, if you're trying to look at any sort of economic indicator for rates. Right. Look at that ten year t note.
Art Wiederman, CPA: I know everybody was flipping out when they saw that it was going over 4% because that does not bode well for a lot of the economic indicators. Right.
Justin Klingshirn: Yeah. Yeah. I mean, they're you know, they're looking at tame inflation. Right. Right. So that's why you see the inverted yield curve and that people are expecting rates to be lower in the future because in the short term, you know, there might be some turbulence up ahead.
Art Wiederman, CPA: So and I know the Fed is talking about another rate increase in the month of December. And again, this podcast, we haven't decided which day it's going to be in. Probably in December. They're going to meet again, the market committee is going to meet and they are talking about maybe this time a 50 basis point increase, but they really haven't given a huge indication of where this is going. I mean, it's. Yeah. So how does it affect dental loans? In other words, I know being a broker and being someone who works with the dentist, I know that interest rates. Or dental loans are not anywhere near what they are for home mortgages. So how where are we? And again, I know that there's a lot goes into rates and different people get different rates based on their credit and the deal and so. So where are we now as far as if someone wants to buy a practice? What are we looking at, approximately?
Justin Klingshirn: Yeah, no, good question. Obviously, all deals are risk graded. Right. So the lower the risk, the lower the rate. Generally speaking, again, I'd reference that ten year from a correlation between what that secondary market is doing and how banks are pricing. Oftentimes, banks borrow directly from the Fed. They lend it out into the market. But I guess make it simple. Rates right now are going to be in the 4s somewhere in the 4s.
Art Wiederman, CPA: That's still pretty darn good, Justin. I mean, that's not expensive money. I mean, if I could get a four year loan for ten years, I mean, that's really good. So in the fours depending you say, so what are the factors that the bank looks at as to whether it's 4.1, 4.9 or what are you looking at?
Justin Klingshirn: Yeah. Yeah. I mean, there's a number of different factors there. But when we speak to risk rating, we speak of just the kind of risk that we're taking on. So, for instance, a doctor that does 3 million in collections, they're only looking to borrow $500,000. The practice is pretty much debt free. That doctor is likely less of a risk so than a doctor looking to do a startup for the first time. Right. Who has no patients, no revenue, and they're borrowing $700,000 to do a startup.
Art Wiederman, CPA: Right. Okay. So let's get into we're going to cover two main areas here. We're going to start with the startups, remodels, expansions, and then we're going to get deep into the weeds about acquisitions. So let's talk about startups. So you just made the comment that if someone starting up a practice, there's more risk because they've never been a business owner, they don't have any patients, they don't have any revenue. So what does what advice can you give to two young dentists? And we have a lot of young dentists who listen to this podcast who are thinking about somewhere in the country starting up their first practice. They come to you and they say, okay, Justin, I want to do this. Yeah. What is your average startup looking like cost wise and what are we telling them and what are rates and stuff like that? So talk a little bit about startups.
Justin Klingshirn: Yeah, yeah. Now it's a good question. We do get a lot of startups. Costs are going to vary across the country. Construction costs vary just as home prices vary, equipment varies a little bit, but mostly it's construction. That's where the big variance comes into play. A doctor normally will get will apply for. Let's just say a start up for 600 to $700,000. Your specialist, it does, in fact, go up, get you up to 750 oftentimes. But the main thing that I would say is that you're looking for buying potential. You're ideally going into a market that's growing. Perhaps there's a neighborhood where they're building out communities near you.
The one thing that I always say to anybody looking to do a start up is do you have the fortitude to stick with it for two, three years? And then secondly, have you done an appropriate demographics and competition analysis? So I like it for the demographics. That's dentographics.com just for demographic reports, competition assessment, but make sure that you do that right. Make sure that you are organized and that you at least have somewhat, if not a business plan, a sense of the type of people you're going to treat and how you're going to attack them. Okay.
Art Wiederman, CPA: So for someone that's starting up a practice, they need to be out of school, what, a year or two years? They don't have any business experience. Do they need to write up a business plan?
Justin Klingshirn: Yeah. Yeah, that's a good question. Again, so the same, we look at the same things for anybody looking to do a startup as we do for anybody looking to do an acquisition. Now the Tollgates are going to differ to a degree because in the case of an acquisition, they may be looking to borrow 1.5 million as opposed to a startup or perhaps a third of that right. So we look at credit production liquidity and then their monthly debts. Credit. That's a 700 go or no go. If you do have it, great, you're onto the next condition. If you don't have it, work on it. Come back when you're ready.
Production. If you are going to do a startup, we like to see that you can produce at least $40,000 for the dentistry per month. Now, this isn't the case for specialists. Oftentimes they can get money right out of school, right out of residency will give them money. Liquidity. This is a little bit newer and it adjusts. But this isn't money that we need for the doctor to put down on the project or in the case of an acquisition on the practice. This is money that the bank likes to see that that doctor has saved. Typically, this is 5 to 10% of the loan amount. So you're borrowing $1,000,000 to do an acquisition, try to have at least $50,000 between cash, marketable securities, that type of thing. Okay.
Art Wiederman, CPA: All right. Let's talk about somebody who wants because I got so much I want to talk to you about. How do you guys look at people who they own a practice, they own two, they own three. And they want to start up another one or they want to buy another one. And I know I'm getting into acquisitions, but so what do banks look at as far as what goes into whether they're going to make a loan, a practice number two three or start up location number two, three, what have you?
Justin Klingshirn: Yeah. Yeah. So it's important to differentiate between lending to a first time practice owner and an owner working on their second, third or fourth location. If you're looking to give a doctor a loan for a second, third or fourth location, whether it's an acquisition or a startup, there's a deep assessment of their current situation. So how are they running their practice? Are they increasing revenue collections every year? Are they increasing margins? Can that practice pay for it? Is that doctors personal and professional, so it's bank debt. And then also are they ready from a timing standpoint? So what we look at is, you know, oftentimes their first practice, right? Again, things that I mentioned. And we pull equity in the case of a second location from that first practice in order to do a startup second location, right.
Now in the case of an acquisition, we don't necessarily need to pull equity out of their current practice. So needless to say, it's very different based on what you're looking to do. But a good rule of thumb, if you're looking to build a second location, you take your first location and take the amount of debt that you owe and you compare it to your collection. So let's say you have $1,000,000 practice and you have $500,000 by the bank. So long as that your cash flows, meaning the net income of that practice can pay for that next project. Can give you up to $500,000 for the next practice. Okay. Now, in the case of an acquisition. You have $1,000,000 practice and you owe $500,000. There's not really a limit in that sense of how much you can borrow. Because it's more a matter of how you can manage that next practice, because we're going to be leaning into the equity of the practice that you're buying as it already is at Hard Asset.
Art Wiederman, CPA: So what you're saying is, is that, number one, if you want to be a multiple practice owner and you want to go to a bank, any bank, your bank, any bank, they're going to want to say, listen, can you do the job on practice one, two and three. Why should I lend you money on number four? Credits still got to be good. We're going to talk about credit a little bit. But you know, we just got to look at the, we can use the existing practices if they're successful, if you've grown them to leverage to start or buy other practices, is what you're telling me, right?
Justin Klingshirn: Yeah. Yeah. It's very nuanced once you get you know, post-practice one. But ultimately, if you have the ability to manage the next acquisition or startup and you've shown that you can do it with one and you have a plan to do it, then there shouldn't be too much of an issue for you getting money for that second or third office.
Art Wiederman, CPA: Okay. So now so we're going to start up, we're doing a start up or a second location, let's just say a startup. When do we call you? Because here's my biggest nightmare. This happened to me once before. It was frightening. So a doctor comes to me and says, So, Art, I'm doing a startup. I've signed a lease. Oh, great. Well, who are you doing your financing? Well, I don't know yet. Okay, so you've signed a lease. You've committed yourself to the lease for ten years or whatever, and you don't get a loan. And then it turned out that this doctor had a short sale. And nobody would lend money to him.
So when do they need to come to you in this process? They're going to start up an office. I mean, I'm thinking you're probably the first person I get to come to you before I go talk to a contractor or an architect or a landlord, right?
Justin Klingshirn: Mm hmm. Yeah. Yeah. So in the case of a startup, that's another difference between if you're looking to do a project as opposed to an acquisition, you can get approved for that project before making any kind of commitment, right, before even really selecting a space. You want to do that as soon as you have an idea that that's something you want to do this to your point, you may be well into a lead and then find that you're unable to secure financing. And I'm sure you've dealt with doctors that are in that position. It is not fun. No, it is not easy to back out of a lease. So to answer your question, as soon as you're able to apply for financing, you apply for financing.
Art Wiederman, CPA: And do not sign a lease or a contract to buy anything until you make sure you've got the money. It's pretty much that simple.
Justin Klingshirn: That's right.
Art Wiederman, CPA: Yeah. So let's say that we have doctors. We want to buy equipment. Now, I have heard in the industry that because of all of the supply chain and chip issues, that doctors who and this is an interesting point I think I might have made on another podcast is if you're going to build out an office, I mean, I'm hearing six, nine month delays in getting equipment. Is that still going on? Do you hear that?
Justin Klingshirn: Yeah, they're backed up. I think some of the manufacturers have caught up, but we're still seeing, you know, equipment pushed out. And again, I don't operate as much in this world as some of my counterparts. Right. But every Becker's release and everything that we're seeing is it's still pushing out right now. And it, you know, April, May and which is unprecedented, you know.
Art Wiederman, CPA: Yeah, it is. And so doctors what that means is that so say you sign a lease today. Okay. You sign you sign a lease today and that lease starts. You know, maybe your office is going to be built out by February. But if you're not going to get your equipment and your computers until June or July, you know, you've got to reconsider. You've got to talk to that landlord and say, listen, you know, here's my problem and I don't want to be paying rent for three months when I'm not open. So these are things that you have to consider. But now when people borrow buy equipment, do they go through Schein, Patterson, Benko, or are they coming to you? Who's doing equipment loans? Is that something you guys do?
Justin Klingshirn: Yeah, typically, if it's associated with a project, so in the event of a start up or a second location or they're buying a practice, they want to refresh the equipment. We'll often do that financing. But as you know, Schein, Patterson, they have separate financing arms. So they'll finance one off pieces of equipment, typically under $100,000. We like to come in at anything over that number.
Art Wiederman, CPA: And we had talked about earlier that the rates for acquisitions are in the fours. You said startups are a little more risky. Are those a little higher than the fives? Where are they?
Justin Klingshirn: You know, that's again, tough. They do change quite often. I mean, you. I think that you can still get him in the fours, right? Yeah. To be frank, I haven't. Price to start up in some time. But I would still think I mean, from a competitive standpoint, you're going to be right there, right around where acquisitions are.
Art Wiederman, CPA: Okay. All right. So take a second and tell us a little bit about what you guys do at Bank of America. And folks, again, I bring folks on this podcast who I've known, who I trust, who take good care of customers. Like I told you, I don't get anything for any of this other than the satisfaction that I can help you with your financial decisions. And, you know, Justin and I have worked together and he's just great to work with, as is the bank. So talk about what are you guys financing, how does it work? And if someone wants to get a hold of you, how do they get a hold of you?
Justin Klingshirn: Yeah, of course. So we finance a lot, but within practices.
Art Wiederman, CPA: I knew that. But what do you finance?
Justin Klingshirn: All right. Yeah, within Practice Solutions and our division, we help dentists specifically and other healthcare professionals finance their equipment, their expansion, their acquisitions, their real estate, their start up right. Any kind of healthcare financing that you'll find that you need with the exception of working capital loans. So in the event you just need some money to pay the bills, it's typically not in our wheelhouse. But for any project or acquisition or real estate, that is what we specialize in.
Art Wiederman, CPA: Well, how does if somebody has a question, they're thinking about doing a project, they're having a problem with their bank or whatever. Give out your email address and your phone number and we'll have that in the show notes. Also, how can someone get a hold of you?
Justin Klingshirn: Yeah, for sure. So as you mentioned, you'll put it in the show notes, but my number is 512.590.2923. My email address is just my first name dot last name at bofa dot com. email@example.com. And wherever you are, I'm more than happy to connect you with somebody in your market that specializes in what you're looking to do, whether it's a project or an acquisition. So we have about 50 people in the field that are dedicated to meeting with doctors locally and helping them out there.
Art Wiederman, CPA: Okay. All right. Let's continue the conversation I want to talk about I mean, you live in the world of acquisitions and I live in the world of acquisitions. And so what are you seeing with interest rates going up? Are you seeing dental practice values going? I mean, theoretically, you know, when house prices, when house interest rates go up to buy a house, it's more expensive and there's less demand or supply and the prices come down. What are you seeing with dental practices? That's an interesting conversation. Yeah.
Justin Klingshirn: Yeah, I don't I have not seen it in effect yet. That doesn't mean that I will not see an effect throughout this whole time post COVID, I've seen the disparity between the haves and the have nots grow. So I've seen more practices that have been struggling right to sell doctors that have really just sort of given up. And then I've seen the guys that, you know, really have been crushing it, continue to crush it. You've seen a lot of obviously, you know, DSO growth in certain states and I'm sure you can speak to that probably quite a bit. Yeah. So with that said, the interest rates, look, they are meant to curb demand, curb spending. At the end of the day, our rates haven't gone up all that much. When you consider all of the expenses of the dental practice, the loan is a small one. Right. Right. Your lease rates are going to be more your wages are certainly going to be more. It's oftentimes in line with what you spend on marketing. So in the grand scheme of things, two, interest rates really affect demand for practice prices. They have to. Right. But are we seeing much of an effect as to bring prices down? Not yet.
Art Wiederman, CPA: And I would agree with you, I am not I'm not seeing it. And again, we're doing a Business of Dentistry Webinar Series through Eide Bailly and we're also doing a transition series now. The transition series, we've already done one. I'm going to be doing the next one a week from Friday, November 11th, which is after this podcast airs. But guys, if you want a copy of that recording, just shoot me an email at awiederman@EideBailly.com and we'll get you connected. It's on our YouTube page, but I'm not seeing a change in values. And the bottom line is, if it's a good practice with a good 35 to 40% net profit, if it's fee for service, if it's in a good area, I mean, they're still going for, you know, top dollar in the area. But and again, like you made a really good point, Justin, is that, you know, in a dental practice grossing 100,000 a month and the interest rate goes from 3% to four and a half percent, I mean, what are we talking? We're talking in the hundreds of dollars per month difference rate.
Justin Klingshirn: Yeah.
Art Wiederman, CPA: I mean, not much.
Justin Klingshirn: I mean, it's not like the interest rate, the principle is going to remain fixed.
Art Wiederman, CPA: Right.
Justin Klingshirn: So you're talking about interest. And then at that point, my suggestion was, would be to any doctor that that's burdened by that. While not a perfect one. Look, if you were going to take a ten year, consider a 15 or a 20 year in order for the ten year and its payment to match the 20 year rate would effectively have to quadruple. Right. That's not going to happen. It hasn't even come close to happening. So at the end of the day, this is just a very small expense relative to all other expenses within a dental practice.
Art Wiederman, CPA: And again, if it's a good dental practice, if it costs you an extra 200, 250 or $300, that's one composite restoration a month. Think of it that way. So. Right. Yeah. So let's talk about how we evaluate the purchase of a dental practice. So I know that they have what's called a coverage rate and it's 1.2 or 1.25. I mean, you live in that world. That's what you do. And, you know, and I want to make one point before we get into this discussion, Justin, is that if Bank of America, if a practice is listed for $1,000,000 and Bank of America says we will loan 800,000, that now that doesn't mean that the practice is worth 800,000, right?
Justin Klingshirn: That's right.
Art Wiederman, CPA: It means that under the underwrite I want to be very clear, sellers and buyers understand this is if you're a buyer and your practice is listed at a million and the bank loans 800, that is because of the underwriting rules of that bank. They will own it. That doesn't mean it's not worth $1,000,000. It's just because under their rules. So talk a little bit, Justin, about. How it works. You know you get you get a practice is doing a million bucks it's grossing a million bucks. It's listed for 850. Okay. And here in Southern California, the multiples are higher. And so how do you determine how much the bank is going to lend a buyer walk through?
Justin Klingshirn: Yeah, it's a good question. And we get this a lot. So a lot of doctors will say, hey, can you do a valuation for us? What does the bank think? It's really the bank's job to say yes or no, right. The market price is at which point a seller is willing to sell and a buyer is willing to pay and buy that practice. So having said that, most banks, including us, can really lend up to 100% of that last year's collections on a practice. Meaning if a practice collected $1,000,000 in 2021, it was trending to do about the same. We could lend up to $1 million for that practice. Now, what often gets missed here is what's included in that number is the working capital.
Now, let's assume for $1,000,000 practice that doctor wants $100,000 in working capital. So the absolute most really in practical terms that a bank could lend on that practice close to $900,000. Are there exceptions? Of course. Right. But it's the bank's job to say yes or no at that price. Secondly, and you brought this up before, we need to make sure that it cash flows. So if that million dollar practice is throwing off of the net income, the seller's discretionary earnings are about $360,000. Right. We then take that number, we back out taxes and we find out whether or not you as a buyer can pay that, you know, for all of your debts, your home debt, your student loan debt, you have cars that debt plus the debt of the bank loans. We're going to give you money and you have to pay us on $360,000 a year, less taxes. So there's a few things that we do as a bank. It's not our job necessarily to put a value on a practice. It's our job really to say yes or no. And it's also important to understand, based on that second thing I talked about, that we may say yes to some doctors, but no to other doctors for the exact same practice.
Art Wiederman, CPA: No, it's not. And again, doctors, the valuation has nothing to do with what the bank is going to loan. So let's now walk into the next conversation, which is maybe some advice that you might have for some young dentists who are starting their journey to buy a practice. Now we're going to talk hold off on the discussion about credit, because I want to get deep into credit here in a minute. But, you know, what are some of the mistakes you see doctors making in buying practices? I mean, I could spend a day on that, unfortunately. But what do you see and what advice are young dentists? You know, they maybe been working in a practice. They're not going to buy it. It's a large practice. It's a group practice. And they want to own their own practice. And doctors, I want to encourage you, even though DSOs are out there and they're knocking on the doors of lots of doctors out there, they will not take over dentistry the way they've taken over medicine for a lot of reasons, which I'm going to talk about in my November 11th webinar. But they're just not.
So if you want to buy a practice, you will be able to buy a practice and you'll be able to buy a good one. And I always tell doctors, just in 75% of any major decision that you make in your life, I tell this to my two kids. Whether it be, you know, marry someone, buy a practice, buy a business, buy a house is in your gut. And if your gut says this is the right thing for me. And even if you have to pay a little more for it than maybe you think it's worth it. But if your gut says this is the right thing, then you should do it. So what is your advice to young doctors? I'm sure you get lots of them who come to you and at your seminars and your webinars and at the conventions. And they say, you know what? What do I do here? I want to buy a practice.
Justin Klingshirn: Yeah, yeah. Really good question. I would say a number of things. One is they're looking for the wrong practice. So oftentimes doctors that really want to like just toe into ownership will only look at smaller practices. Now, smaller practices are typically that way for a reason. They're a bit broken. It takes somebody who is really, really almost willing to otherwise start up. Quite a bit of fortitude and entrepreneurial spirit to buy that practice and turn it around. And oftentimes it's the most risk averse people. But look at those smaller opportunities, oftentimes for them. A larger practice is what they're really more. That's really what they should buy right now.
Now, having said that, I would also say that as a buyer, try not to be too picky. I have seen buyers remain on the sidelines for years. Right. Looking for the absolute most perfect practice. And when it finally comes along, they get outbid by a current practice owner who's able to go above and beyond. Their bank is able to give getting more than you can get from your bank. Right. And oftentimes, they get wedged out of deals. That just happened about a week ago. I met with the doctor, his dream practice. What do you know? The doctor across the street was just willing to pay more and it ended up selling to that doctor.
So having said that, I think looking for the wrong type of practice based on the doctor, that you are also just being too picky in the kind of practice that you want. There is no perfect practice that exists, right? There is hair on every single deal and oftentimes those that are so picky will never end up owning a practice period. And then on the practical side, a piece of that advice again, as it relates to qualifying for a loan. Banks want to see your production, they want to be able to gauge it. I know that it's awkward to get your report sometimes, but if you can get ahead of that and grab your production reports from your banner months, right, where you could really showcase what kind of work you could do as a clinician. Try to get those to save them just one quarter. Right. Let's just say it was January, February, March 2020 of production reports. Right? So save your production reports and try to do that as quickly as you can without really drawing attention to yourself.
Art Wiederman, CPA: And that's really, really good advice doctors and you know the don't be too picky it's not like houses there's not a million houses out there to buy. There's a limited number of dental practices. I will tell you the other thing I'm seeing just Justin, I maybe come into this with.
We'll call it economic downturn, with inflation, with interest rates going up, with the stock market getting hammered 20 to 25% so far this year, depending on which of the indexes you look at. I am seeing I talked to two doctors in the last week who said, you know, Art, I was going to put my practice on the market and, you know, I'm down X dollars in my retirement and I'm a little wary and I think I'm going to work for a couple more years. Are you seeing some of that?
Justin Klingshirn: Yeah. Yeah, I we just had that seminar for Sellers a couple of weeks ago and we had a number of people in that room that had been wanting to sell this year that won't be able to sell based on their retirement portfolio. So I do think you're going to see people hanging on for a bit longer. Right. And obviously, that has impacts on the market to a degree. But I am definitely seeing that.
Art Wiederman, CPA: Yeah, I'm seeing I think you're going to see it more. And especially if we take a you know, if we have an economic downturn next year, if we have a, you know, use the recession word, technically, I think we may be already in a recession because the textbook definition of recession is two consecutive quarters of negative GDP growth and growth. And we had that this year. So. But let's talk about credit. I mean, credit is huge in your world. And we're not talking about debits and credits as a CPA. We're talking about your credit. Now, I know you can go on to free credit score dot com and get your credit and you can get on the Internet. And so but I mean, that's not where you pull people's credit. So talk about who are you, who are banks loaning to? How is credit figured out and how do dentists mess up their credit? Because if they want to buy a practice and their credit score is 600, it may not happen. So talk about credit in your world and how it affects dentists buying or starting practices.
Justin Klingshirn: Yeah. Yeah. So again, credit is sort of a benchmark to where if you have an above the 700 720 credit score, you're good, right? You do that by paying your bills on time, not carrying a lot of credit card debt, just not waiting on any sort of medical bill that goes unnoticed and unpaid. Needless to say, you can check actually your credit once every 12 months. There's a joint venture between the three agencies. It's annualcreditreport.com. There. You can basically get a free credit report once a year. That is legitimate. I would be very wary about it. You credit some of the credit monitoring sites we get, you know, oftentimes will pull doctors credit. It might be 670. Right. But they have something from Credit Karma showing their credit score is actually 710. So oftentimes those apps can be wrong. AnnualCreditReport.com should be right around the number two where, you know, we're billing it directly from the bureaus.
So and again. As long as you pass, as long as your credit score is above 720, it has very little impact on your rate or your approve ability. Right. It's more of a go or no go type metric.
Art Wiederman, CPA: Now, a couple of things I know from learning from you and everybody else in the world late on a home mortgage payment is the kiss of death, right?
Justin Klingshirn: Yeah. That's going to affect your credit score quite a bit. Yeah. Yeah. And again, every scenario is a little bit different. We can grab a letter of explanation detailing what happened. Right. There may have been a traumatic event. Something may have happened that went wonky with your bank and maybe contesting it. So most of those things, if they only happened once, we can explain. But when we see a pattern of behavior, you know, it shows up in your credit report. That's tougher to get around. And oftentimes that's where you'll see credit scores in the five and 600 range.
Art Wiederman, CPA: And that is where, folks, it might not be a bad idea for your home mortgage to go to your home mortgage lender and put that payment on an automatic debit. So it comes out the first of the month or the you know, whenever the mortgage payment comes out, you don't have to worry about it. You went on vacation, you forgot to write the check. You usually have a grace period. Talk about credit card debt. Just I am just absolutely. I mean, I've told my listeners before, I mean, I have my wife and I each have one credit card. It's got a reasonable limit. So we could do you know, what we need to do. I don't have to worry about it, but it automatically is debited from my bank account on the 20th of the month because I refuse I repeat, I refuse folks to have credit card debt. It is the devil you know. Kathy Bates talks about the devil in the Waterboy movie, one of my favorite movies ever. And it's the devil. It's horrible. So how does the bank look at credit card debt?
Justin Klingshirn: Yeah. Not favorably.
Art Wiederman, CPA: I'm shocked.
Justin Klingshirn: Yeah. Yeah. I mean, credit card debt is an indication that you're living outside your means. So the income that you're making after you pay your debts and you're living expenses just isn't enough. And you'll have to accrue credit card debt to basically live again. Are there ways to explain credit card debt in the event you have a 0% introductory rate and you might have 20 grand in credit card debt and a 100 grand in the bank, of course. But typically, especially today with where rates are, you're not going to see that. And it's more of an indication that you're just living outside your means. Banks across the board do not like it. It is probably the easiest way to disqualify yourself from being able to buy or start up a practice. Okay.
Art Wiederman, CPA: So I've had doctors come to me and say, well, I'm using a loan broker to find me the best loan. Now, this is a loaded question. I know that. Does a dentist need a loan broker to get a loan to buy or start up a practice?
Justin Klingshirn: No, I think the only doctor that needs a loan broker is one that cannot get approved from a conventional lender. And this market is organized enough such that. The banks are known right there at the trade shows. You can find them yourselves. Loan brokers are more of a thing of the past. Again, for some doctors that have shaky credit. Are they necessary to find some of those lenders that they otherwise couldn't find because they're more hard money lenders? I'm sure. I do believe they serve a purpose, but not for most dentists. I believe they serve a purpose for the dentists that's been it's fallen upon some financial hardship that might not be able to get approved from, you know, your Bank of Americas of the world.
Art Wiederman, CPA: Okay. So I know that SBA makes loans. Do you need it? I mean, does it make any sense to go to SBA to buy a practice?
Justin Klingshirn: You know. Not often.
Art Wiederman, CPA: That's what I find, too.
Justin Klingshirn: Yeah. Yeah. The SBA typically does require either an injection or carry back at 10%. You also have to pay a guarantee fee of 3%. Obviously, it's quite cumbersome given the SBA. The only advantage is that the SBA has access to longer terms for practice loans. So oftentimes you can find the SBA issue in a 25 or 30 year note. Typically, though, the SBA is going to be a player in the real estate financing game or for the doctors that just simply can't get approved from your conventional lenders.
Art Wiederman, CPA: So let's talk about real estate, because I'm going through a couple of real estate loans right now with some clients. So I know there's two ways to finance real estate. Talk about SBA loans. Talk about conventional. So what are the differences, advantages, disadvantages?
Justin Klingshirn: Mm hmm. Yeah. Yeah. So. The SBA loan is essentially federally backed. So the government is guaranteeing that loan and for that assurance you pay a 3% guarantee fee back to the SBA. Now, having said that, again, super cumbersome. It's good for a business owner that isn't a doctor that might be more high risk. So and the SBA, for that matter, was created to really spur economic activity for small business owners to start up small businesses. Now, as more and more businesses have started and really banks and lenders can assess the risk rating to each business. Some of those businesses shouldn't, you know, need to deal with the SBA and are better as a conventional risk and one of those businesses or dental practices. So because of their performance and the success and because of really dentistry being able to make it through COVID largely untouched. Most banks are going to lend conventionally, meaning, you know, just without involving the SBA to these practices and oftentimes with lower fees, with lower rates, with a better use of process.
Art Wiederman, CPA: So let's say I have a building and let's say about so I'm buying a practice and there's real estate. And what I'm finding is a lot of doctors want to buy the real estate with the practice. Now, in Southern California, where I live and where you live, that's harder because of this stupid increase of real estate values. But in, you know, most and in northern California, the Bay Area is the same. New York City is the same. But a lot of other areas, it is very realistic to buy the real estate now. So, you know, with that said, number one, so if I have a practice that's got a good net and maybe the valuation is in, it's in the Midwest and it's maybe it's 70%, so maybe it's $1,000,000 practice and it's going at 700,000. Can I actually pull some of the money I've heard from the dental practice to make the down payment because I know I've heard in some cases I they still do it that you can almost do 100% financing on the real estate and the practice together if all the planets align. Do they still do that?
Justin Klingshirn: Yeah. Yeah. No, actually, your timing is great here. We did roll out that product for first time practice owners again a couple of days ago. So even as a first time practice owner, you have the ability to do that. Now, of course you do have to have equity in the practice that you're buying. But to answer your question, yeah, I mean, and especially if you own your own practice today, you don't have a lot of debt on it. Again, let's use that 100% marker. So if you have a practice collecting $1,000,000 and you owe $700,000 on it, technically you can borrow up to, you know, really $300,000 to take a million, -700. You're left with 300. That's what I would consider your practice equity. You want to buy a piece of real estate and let's say it's $4 million, the bank can give you a loan for 80% of that million. That's 800. And then you attach some of that $300,000. That is your practice equity out of the real estate. So at the end of the day, that's a long way to say we can do 100% financing for an established practice owner and for a first time practice owner, so long as there's enough practice equity.
Art Wiederman, CPA: So I guess the best advice that I can give to our listeners and that you can give, Justin, because by law, you and I are required to agree on everything, right? Yes. Say yes. Say yes. The answer is yes. I'll coach you through the answers here. So it is before you start the journey, doctors, before you go in and find the practice. I mean, and I know you guys do this and a lot of the banks do this is go to Justin, go to these guys and say, listen, this is my vision. I want to build a six operatory three startup practice in Carlsbad, California. I talked to contractors. It's going to run me $700,000. And, you know, what do I need to do so that this loan is not an issue or I want to buy a practice in, you know, San Mateo, California, or, you know, Omaha, Nebraska. And I think I want it to be doing a million. It's going to be worth about 700,000, from what I hear. What do I need to do in that? I mean, you will talk to young dentists all day long, right? As far as saying, okay, let me I mean, can you even pull their credit and say this is where you're at or this is what you need to fix? Do you do that a lot?
Justin Klingshirn: We don't do that a whole lot. Normally they know we're there. Okay. If they're asking questions about their credit, there are likely issues with their credit. And again, that annualcreditreport.com is a pretty good resource for them to get a credit report.
Art Wiederman, CPA: Okay. So but if a dentist doesn't know, you can certainly answer questions and you'll give your number out one more time when we're done here. So now I want to talk to sellers of dental practices. Okay, Sellers, I'm talking to you. Maybe you ran stuff through the practice. Maybe there's stuff that shouldn't have gone through the practice. That was. I used to have a client. I know I've said this on the podcast before. Just I used to have a client. They got audited one year and they told me that they have a businal account. And I said, What the heck is a businal account? And they said, Well, it's a combination of business and personal. It's businal Art. Don't you know what that is? I go, Well, now I do.
So we have doctors when you put stuff to underwriting just in that have business accounts, I'm sure that you and I could spend another hour just talking about the strange stuff you've seen go through dental practices. But so when you look at the 2021 tax return, okay, and you look at the profit of the practice and it's like 200,000. And the seller says, well, wait, wait, wait a minute, no, no, it's really 300 because I get all this stuff. How does the bank look at that? And then I'll make another comment when you're done with that.
Justin Klingshirn: Yeah, yeah. Good question. Comes up all the time. So. That's why we have an add back sheet, right? Often times expenses are inflated or placed incorrectly or in the case that your spouse let's just use air quotes works in the practice. Right. That may very well be an add back. Right. That basically is an expense that you had that the new owner won't have. So we can add that back into the cash flow. Now, we can't push the limit here, so it's not as if we get an add back. She went down every single expense category and you identified 100,000 potential add backs. We may only give you a credit for 60,000, so you won't be able to basically add back everything that you've been writing off. But of course, there are some of those classic add backs and some of the standard ones to just like your car. Right. That's an expense. Practice was likely paying for it. The new owner won't have that expense because they already have a car payment and we're factoring that into the debt service model.
The last thing I'll say is that I just got off the phone last week with the doctor and they told me it's a two doctor practice and they're collecting about $650,000 and looking to buy a second location. And we had problems with the cash flow rate. So it just wouldn't work. Their current situation it was, you know, the cash flow of the practice was showing largely that they were losing money, they're unable to pay their own bills. And the doctor called me late the night I talked to him about this and he said, we're just and I got something to tell you. I you know, that that really isn't the number, right? There's a lot of cash there in the practice that's going unreported. Unfortunately, the bank will never give you credit for that. Right. So in the event you are taking cash payments and you're not claiming it is income, the bank will never be able to count that income period. So just my thoughts on that.
Art Wiederman, CPA: Yeah. And doctors, here's my thoughts. If you have won the war for 30, 35 years against the IRS and you have minimized your tax liability and we'll use the term right, wrong or otherwise, my recommendation to you and I've heard other bankers say the same thing, and I think Justin will probably echo this. So you've won the one the war for 35 years. The bank is going to look at the last couple of years of your tax returns in evaluating what they're going to lend to a buyer, maybe one or two years before the time that you're going to sell. You might dial it back a bit, maybe don't run all the trips to Costco through or the vacations or the, you know, whatever else it is. Because, number one, it's going to make your practice bottom line look bigger. It's going to make your practice more attractive. It's going to give you more potential suitors to your practice. Whereas if your bottom line is zero and yeah, you're not paying any taxes, but then you don't have any profit. So I mean, is that a good analogy?
Justin Klingshirn: Justin Yeah, I like that a lot and I use it.
Art Wiederman, CPA: So last thing I want to touch on because we're running out of time here, is talk to me about the difference between using a specialty dental. And this has not only to do with dental lenders but with all I mean, dental CPA, dental attorney, dental contractor, people that have worked in this space before. What's the difference between a doctor just walking into their local bank? And getting along. I'll give you an example. I just talked to a doctor yesterday who they are actually financing a buying of a partner. And it's a bank they've done business with for 30 years. And they're in the community, they're entrenched. And that partner is paying a 7.4% interest rate. That's crazy. But they don't want to do business because anybody else because it's going to make them mad and stuff like that. So what is the difference between working with a specialty lender and just walking into your local bank in Muskegon, Indiana? I think Muskegon I think that's a city and I think that's in Indiana. I just made that up off the top of my head. What's the what's the difference between a specialty lender, a dental specialty lender and just walking in your local bank?
Justin Klingshirn: Yeah, it's a good question. And the market's become a little more organized that we're getting this less and less. But generally speaking, dental practices can be really complex. Right. And you might be very complex in your clinical performance.
Art Wiederman, CPA: You have no idea how complex I am, Justin.
Justin Klingshirn: So, yeah, you need to be speaking to a CPA specialty lender. So having an underwriter, I mean a business development guy, having an account manager that can understand the vernacular around dentistry is critically important. And you know, what it means to is that those banks have a good understanding of the actual risk associated with the money lent to that business. And it's very low. So oftentimes, especially today, the specialty lenders will be lending at lower rates than the local banks. Yeah, local banks, again, they can have their time in place just as the SBA can. And again, I feel like I was ragging on the SBA there a little bit. The SBA look, it's an incredible resource if you're looking to mortgage a building on 30 years or if you can't get approved from a conventional lender. Right. And by the way, specialty lenders have access to the SBA products as well, just as they do. But ultimately look when it comes to working with a specialty lender or a local bank, you know, don't let me be the guy that tells you to go apply, right? At least apply with a specialty lender like Bank of America. And let us show you how we're different.
Art Wiederman, CPA: Well, Justin, again, you and I could talk for days. And when you and I get together, we normally do spend a couple of hours solving the problem of the world. But your information, as usual, is spot on, and I really appreciate it. One more time. Give out your email and your contact information, your phone number, doctors. If you're thinking about any type of financing for your dental practice and you're not really sure you know where to go, what to do, what you need, are you going to get the loan? Give Justin a call and how they get a hold of you.
Justin Klingshirn: Yeah, yeah. So my direct line again, my name is Justin Klingshirn. My number, my cell phone number is 512.590.2923. My email address is just first name dot last name. firstname.lastname@example.org. And whether or not you want to talk to me or have me put you in touch with somebody locally, I'm more than happy to do that. You can call me day, night, weekend. I'm always available, but thanks, Art. Appreciate you having me and everything.
Art Wiederman, CPA: Justin, just hang with me till I take the podcast out. And folks, thank you again for the honor and privilege of your time. Again, we get calls and emails all the time about the podcast. I think we're doing the right thing. My gosh, a month from now we will hit four years on the air. Four years that we've been doing this, it is a labor of love. Love. It's joy to me to help you get to your goals. This is my legacy. I've told you this over and over again. That's the God's honest truth. Again, I know we're near the end of the year. Yeah. If you want access to our webinar series both on transitions, which we talk about, you know, things like this, Justin will actually be on my webinar November 11th talking a little bit about loans and some of the stuff you heard today. And we're also doing the Business of Dentistry Webinar Series. Email me at awiederman@EideBailly.com or call me at 657.279.3243.
Do remember again, folks, go on to our wonderful partners, Decisions in Dentistry magazine 140 continuing education courses at a very, very reasonable rate. Best clinicians in the world are in this magazine talking about state of the art, dental procedures and topics. Dental CPA by my group, the Academy Dental CPAs. We just had our meeting in Miami. It was wonderful. www.ADCPA.org.And with that again, I'm gonna bid you adieu for today. We have several really, really great topics coming up on the podcast. I'm excited about what we're gonna be doing into 2023, and we look forward to hearing from you on email. Give us a call. For the Art of Dental Finance and Management with Art Wiederman, CPA this is Art Wiederman CPA signing off. See you next time.