WRITINGA LOAN PROPOSAL AND BUSINESS PLAN

 

Table of Contents

INTRODUCTION
Historical Perspective

LOAN PREPARATIONOVERVIEW
The Loan Proposal
Cover Letter

LOAN PROPOSAL
Loan Request
Initial Investment Requirements
Major Equipment and Inventory List
Projections

BUSINESS PLAN

CONCLUSION

EXHIBITS
Required Documents
Sample Loan Package Outline
Sample Cover Letter Outline
Sample Cover Letter Alternate
Sample Loan Request
Sample Initial Investment Requirements
Sample Resume
Sample Business Plan

REFERENCES

RESOURCE LIST

INTRODUCTION

Nearly 92% of all the dentists in thiscountry will eventually own or share in the ownership of their practices. (16)Becoming that owner can be a confusing or frustrating experience for the newpractitioner. Obtaining business loans used to be relatively easy, sincedentists were considered safe risks by lending institutions. Today, however,with substantial educational debt and without a financial track record, the newpractitioner usually has limited clout with the financial community.

The new dentist will present a stronger posture to banks if he or she candemonstrate criteria, such as the following:

• a secondary source of income
• at least two years of work experience after dental school
• indication of financial and managerial skills
• a thorough demographic evaluation of the market to be served by the practice

With this "evidence of solidarity" the dentist can moreself-confidently approach lenders for the capital he or she will probablyrequire to purchase or start a dental practice. Since formal curriculum orguidance on financing a practice is not often available in the professionaldental education, this workbook is designed to help a dentist understand thefirst and subsequent steps to secure such a loan.

Many practice management consultants, banks, practice brokers, CPA firmsfamiliar with dental practices, and dental equipment/supply companies estimatethat costs for a new start-up practice will range from $125,000 to $200,000 inCalifornia. A review of broker ads for dental practice sales suggests thatpurchasing an existing general practice will cost $100,000 and higher. Formulasused to determine the buy-in or purchase price of a practice vary, with muchtime and effort being required to determine a fair price.

From the ADA publication, Successful Valuation of a Dental Practice, comes the following advice on valuation methods:

There is a rule of thumb that can be used to value apractice. Although certain rules of thumbcan be used for a "gross" estimate of a practice's fair market value,these should not normally be used to value a practice. Rules of thumb aretypically simplistic and do not account for unique characteristics of thespecific practice or the community. Parker's Rules of Thumbstates: "A rule of thumb is a homemade recipe for making a guess. It is aneasy-to-remember guide that falls somewhere between a mathematical formula anda shot in the dark."

Rules of thumb commonly cited include, but are not limited to, the following:

1. A practice's fair market value is equal to 100percent of the practice's most recent year's gross revenue;

2. A practice's fair market value is equal to the pricefor which a practice recently sold in the same community or neighborhood;

3. The value of practice's intangible assets is equal to100 percent of the practice's most recent year's income.

After finding and valuating apractice, the new practitioner should explore all funding options, includingcommercial lenders, owner-financing, as well as family and friends. It is thisauthor's opinion that simply because more practices become available forpurchase, it is not correct to always assume that the selling doctor will carryfinancing for that practice.

Since a recent graduate probablywill not have sufficient independent assets and since costs of ownership willprobably increase over time, this author predicts an increased demand tofinance primarily through lending institutions. This workbook will concentrateon the process for commercial funding agencies. To understand the reasons for therequirements currently outlined by the banks, an overview of the recent pastseems indicated.

Historical Perspective

Until the early 1980's, loans,known as "pro-loans," required little more than one's license andsignature as sole "security" to guarantee repayment of that loan.Defaults on practice loans and bankruptcies were rare. The risk of a dentalpractice's failing was thought to be significantly less than that for otherbusinesses in the bank's portfolio of loans. Banks actively solicited professionalsfor loans. The environment to secure start-up funds was very different fromtoday's marketplace.

During the early 1980's, thedefault rate coupled with economic changes significantly impacted the waylending institutions perceived this market. The rise in capitalizationrequirement, competition in the marketplace, and increased governmentalintervention were also factors affecting a dentist's borrowing posture.

Start-up costs in the preceding decades have historically been as follows:

1970 to 1975 - $ 30,000 - $ 50,000
1976 to 1980 - $ 70,000 - $ 80,000
1981 to 1985 - $ 80,000 - $100,000
1986 to 1990 - $100,000 - $120,000

This includes dental equipment,office equipment, furniture, leasehold improvements, supplies and workingcapital. The amount and various categories obviously would change with eachindividual and location.

Because the recession and highinterest rates limited the money supply during the early 1980's, lendingpolicies of many major banks have changed. The lending limits for the localbranch offices were reduced to the $25,000 to $50,000 range. These limitsbecame insufficient to capitalize a practice. Responsibility for reviewingpractice loans was transferred to regional offices which were often remote fromthe intended practice. The subjective factors that allowed local branch officesto approve loans were removed. The approval rate for dental loans decreased.

Federal regulations and lawsgoverning lending policies and auditing of banks by agencies such as theFederal Reserve Bank, the Federal Deposit Insurance Corporation, Small BusinessAdministration, and similar agencies continue to be tightened.1,2,3 The"hand shake" loan rapidly has become obsolete. Increaseddocumentation has been required by the auditors. In light of the current stateof affairs with the savings and loan industry, one might expect continuedgovernmental intervention into the commercial banking industry.

Additionally, in the 1960's theHealth Professions Assistance Legislation increased dental school enrollments,which led to a dramatic flow of graduates into the marketplace. In the 1960's,there were 3,290 graduates per year nationally; in the 1970's, 3,775 per year;and by the 1980's, there were 5,550 per year.6 While all graduates are not ableto begin practice as an owner, it is estimated that 60% of the graduates (52.3%in California) will own a practice as a sole proprietor, partner, orshareholder in a corporation within two years of graduation.7 These statisticstranslate into an abundance of practitioners in the marketplace. An apparentoversupply of practitioners for a specific pool results in diminished financialexpectations for practices. Competition for developing a patient base in acommunity is intensified.

By the early 1980's, many banksdissolved their "Professional Loan Departments." Each practice thatdefaulted represented a $125,000 to $200,000 loss in the bank's portfolio.Acknowledging this increased risk factor, medical and dental practices nolonger enjoyed a favored status. Both banks and prospective proprietors ofpractices are now subject to the same scrutiny in the loan process as any otherbusiness.

While securing a loan without afinancial track record is difficult today, the new practitioner will find itbeneficial to have a second income, business experience, financial andmanagerial expertise, collateral and possibly a co-signer. Preparing a loanproposal is a significant first step for showcasing these attributes. Thequality of the dentist's application materials is critical to the lender'sperception of the presentation of the product.

LOAN PREPARATION OVERVIEW

The following will give a step-wise guide on writing a formal loan proposal andbusiness plan. The loan proposal presents the need and justifications for aloan to a committee in the bank. The bank requires extensive information toevaluate the risk of offering the loan and to assure a safe return on itsinvestment. The business plan offers a blueprint of how the dentist expects toachieve his/her objectives and goals for the proposed business.

The quality of the proposal presentation along with the bank interview offersinsight into the doctor's organizational skills and business acumen. To thebank, the new practitioner is an untested or narrowly tested commodity withouta documentable business track record. The bank requires some substance on whichto justify the decision to grant a loan. Presenting this proposal in anindexed, tabulated report offers a clear, easily-referenced outline to thelender. The material should be self-explanatory and self-contained.Presentation and "packaging" count.

One may seek professional assistance in preparing the business plan,(e.g., from dental supply companies, dental practice brokers, practicemanagement consultants or professional loan brokers) but there will be a price.However, these individuals may save time and energy by knowing whichinstitutions to go to and who has expertise in specific areas. The doctor mustevaluate his options wisely before committing to one source of information.Preparing this document is not mysterious, though it does require patience inthe information gathering phase. No matter who prepares this proposal, it isthe dentist who will be questioned on any detail of the plan. A business planmust address nearly every conceivable contingency in starting and operating apractice.

The Loan Proposal

There are many variations of formattingthe loan proposal and business plan.9,10,11,12 The loan proposal should bewritten in outline form which has a succinct, concise style and economy ofdialogue. Each major heading should be given a tabulated divider for easyreference. Within the major headings, each subsection may be identified withdifferent colored paper or additional tabulated dividers. Pages need to be numbered.

The principles of presenting a loan proposal and business plan equally applyfor a dental practice as well as any other business. The following offers thesignificant highlights often requested in a Small Business Administrationproposal.

Cover Letter

Write the cover letter either in outlineform or in standard business letter format. (See sample page 1.)

Begin with the doctor's name and current address as an introduction. Clearlyidentify the nature of the business, i.e., the practice of dentistry. Statewhether the loan is for the purchase of an existing practice or for a start-up.List the size of the business as a measure of a year's gross receipts. Brieflydescribe the location of the proposed building and the facility you are tooccupy. Give a concrete mental image of the proposed business to the lender.Photographs help.

Include personal information such as your current business address, yourspouse's or business partner's employment address. Indicate if there is asecondary source of repayment in the event the practice cannot support the debtservice.

Present a current curriculum vitae, work history, and previous businessexperience. This brief narrative is an introduction or profile to the bank.With it, you "sell" the bank with your qualifications for thebusiness, and identify your personality with the loan proposal. (Be reminded ofthe adage: "Never lend money to a stranger.") Finally, include a copyof a credit application by the Small Business Administration or the bank forcompleteness. Even if you duplicate some information, the more clearly andsuccinctly you present the proposal, the easier it is for the bank to referencethe material.

In the practice information section, detail and describe the business you areproposing to start. Identify the business as a new practice start-up, apractice acquisition, or partnership buy-in. If this venture is to be anacquisition or buy-in, then you should describe the business history includingthe seller's name and reason for sale. Include:

• a brief narrative on your personal management expertise
• a summary of the profit/loss statements, cash flow statements, and the trends for the business for the last three years (this shows the viability of the venture)
• graphic illustrations
• a twelve month pro forma, which is a cash flow analysis of the practice, a projection of your first year's income and expenses

Present similar information in loanproposals for expansion of existing businesses. To justify the loans, includecost estimates of equipment and leasehold improvement bids from contractors.Conclude the discussion with a brief description on how the use of the fundswill expand the practice.

Finally, present a brief summary of your business plan, the marketplace, yourexpertise and background for that business, and the target market you areseeking. You will follow with the more detailed analysis in a later section.

LOAN PROPOSAL

Loan Request

The proposal will contain more detailedinformation regarding the loan than was stated in the brief summary portion ofthe cover letter. For the loan request, each of the following should beitemized on a separate line: the amount, terms, interest rate, collateral andsecurities, debt/equity ratio, other conditions of the loan, purpose, repaymentplans, and contingency plans. (See sample page 2).

The borrower should ask for an amount that can be justified to the lender. Careshould be taken to not ask for too much or too little, since an experiencedlender will be knowledgeable about realistic costs and expenses. However, onemust be sure to ask for enough money the first time because it will bedifficult to go back requesting additional funds.

The term specifies how long it will take to repay the loan. Usually, the termfor a practice loan is five to ten years measured in monthly payments. It isvery important to negotiate and clearly state in writing if there areprepayment penalties, origination or maintenance fees.

With the possibility of a time delay in cash flow for the new practice, thedoctor may want to negotiate for an interest-only payment schedule during thetime leasehold improvements are being performed followed by six months. Thiswill gain enough time to build the practice sufficiently to meet immediateoverhead expenses as well as monthly principal on the loan.

When defining the credit terms, the dentist needs to consider structuring it asa credit line rather than a lump sum loan. He or she will then be responsiblesolely for the incremental amounts that are needed as the construction continuesor new equipment id ordered, thereby minimizing total accumulated interestpayments.

Interest rates should be clearly defined. Few lenders are willing to offer afixed rate during the term of the loan, since most offer a floating rate basedon the prime interest rate. The doctor should clarify if the interest rate isaccumulated as a simple or compound rate. Compound rates might continually addto the principal amount owed on the loan. The rate determined by the lenderdepends on a litany of risks, total amounts of the loans, competition for theseloans in the market. It is important to define what reference (such as the WallStreet Journal or a specific bank such as Chase Manhattan or Bank ofAmerica) is used to determine the prime interest. One needs to ask thefrequency of change in rate and notification.

Few institutions offer loans without some form of tangible assets or collateralin the doctor's portfolio. Should he/she default on the loan, banks sell thesetangible assets to recover the unpaid balance of the loan. Assets includepersonal bank accounts, equipment, and occasionally a deed of trust if a homeis owned. Intangibles such as expected future assets and accounts receivable donot count. Leasehold improvements are not readily sold and therefore often fallinto this category.

The debt/equity ratio illustrates an overview of what the loan is to be usedfor and how much money will be used to start the project. It is unreasonable toexpect an institution to leverage the entire project without a substantialstake on the practitioner's part. For example, should the project cost$100,000, a bank might expect the doctor to contribute 10% - 25% of the loan,or $10,000 - $25,000 towards the start-up expenses.

Other conditions of the loan might include assignment of life insurance anddisability insurance. In the event of death or disability of the dentist, thebank will have first right of assignment to these funds to retire the debt.

The lender may also request periodic financial statements or progress reportson cash flow and profit/loss statements as a condition of the loan. However,stating these conditions up front offers a measure of good faith.

It is wise to summarize other encumbrances that the lender should consider -home, car, other businesses, other loans or debts, alimony. A credit reportwill reflect much of this information which, if discovered by the lender, couldresult in denial of the loan.

The period of financing is often tied to the term of the lease. Inherently, thedoctor will be tied to the lease long enough to retire the loan. By offering ananalysis on the projected income (cash source) and expenses (overhead, taxes,loan principal), one can demonstrate the capacity of the business to meet themonthly installments of the debt. In a reasonable time, projections should showthat the business will be reasonably profitable for living expenses in thefirst years.

Banks favor situations where theowner's draw is subordinate to the debt service; where a secondary source ofrepayment (i.e. income outside of the practice) exists to meet the debtservice; where there is collateral, occasionally one's house; where there isco-signing guarantor for the loan. (The co-signer becomes subject to the samefinancial scrutiny as the dentist. Should he/she default on the loan, the bankwill pursue the assets of the co-signer or guarantor with expected vigor.)

Lenders expect the practitioner to have sufficient income for personal livingexpenses. A budget analysis should include a monthly "draw" which isusually taken form the working capital. Alternately, one may indicate if theincome from the practice is taken strictly from the "profit" (thedifference of the practice income minus all the expenses). If there is asecondary source of income to supplement living expenses while the practice isgetting started, it must be indicated. Discretion must be exercised indetermining needs for living expenses. The doctor must be realistic in theminimal amounts, but careful not to overextend his/her lifestyle on borrowedmoney.

Being aware that banks do not want to see the business fail, the doctor mayconsider alternate repayment schedules. Some banks may be impressed when thedentist outlines contingency plans should he/she be unable to meet the debtservice due to unforeseen circumstances. Banks do not consider this discussiona negative factor in the decision making.

If a doctor is considering negotiating with more than one bank, it might bebeneficial to know that lenders generally do not like shoppers. Whilenegotiation is important, it is important to avoid the possibility of apotential adversarial position with a lessor. Banks also compete in themarketplace for investments that will make money for the bank. Since most banksare similar, it is wise to find out rates first. The proposal may then havejust the right combination of elements that is consistent with a bank'sportfolio of loans.

As an added note, the doctor may want to consider simultaneously negotiatingmore than one office space to lease. The leverage might be: if the doctor signsthe lease, then the lease becomes a defined income stream for the landlord.Then the question to the potential landlord would be: "What are you givingme as an incentive to sign this lease?" If the doctor does not engage thelease, the space will remain empty and not generate income for that landlord.Choice and contingency options should be explored whenever possible.)

Initial Investment Requirements

This section reviews an overall use ofspecial funds needed for the practice. The areas to be financed areprofessional equipment, office equipment and furnishings, leaseholdimprovements, consumable inventory, deposits and other fees, and workingcapital. There should be columns presented here for: the category, loan amount,your equity, and their totals.

Negotiate with the landlord to define cabinetry as a trade fixture rather thana leasehold improvement. Then, upon termination of the lease, you may elect totake the cabinets with you.

Include in your leaseholdimprovement amounts only the immediate funds needed to pay the contractors foryour portion of responsibility to renovate the suite. If your improvements areamortized into the rent, do not include this amount. Your leaseholdimprovements include plumbing (water, waste lines, gases, compressed air, andvacuum), electrical, phone installation, construction, flooring, paint, wallcoverings, air conditioning and heating. Know that often a landlord willincrease rent to recover "front end" costs or renovation. Negotiatewith the landlord to contribute as much as is cost effective for you in thelong run.

Since deposits for leases often include the first and last month's rent, andpossibly a security deposit, consider asking the landlord to place the fundsinto an escrow account to gain a reasonable interest, less a management fee forthis account.

Working capital is the amount of funds you might need to call on to pay forsalaries, unforeseen expenditures, and other costs of doing business untilthere is sufficient cash flow to pay for these expenses. Some methods estimateworking capital to be 7% to 10% of the total loan package plus two to threemonth's expenses. A preferred method is to present an actual total estimate ofemployee salaries, taxes, draw for living expenses, contingency funds for theworking capital. Working capital need not rely on your savings. It might beborrowed but must be justifiable to the bank.

Remember your other incidental significant expenses, which include professionalfees for accountants and attorneys, initial licenses, permits, insurances(particularly malpractice and equipment, life, disability and worker'scompensation insurance). Be sure to list them as part of the initial investmentrequirement.

Major Equipment and Inventory List

This is an itemized list of allprofessional and office equipment, including the model, quantity and price.Start-up practices should include inventory (consumables) necessary for atleast the first six months of operation. Sources of prices include the dentalsupply houses as well as catalog sales. For a practice purchaser, the borrowershould include a detailed inventory of all assets being purchased.

Projections

This is one of the most difficult areas tosecure accurate up-to-date information, especially in a start-up practice.4Sources of data include the lending institution itself, if in fact it carriesother similar loans in its portfolio; other contemporaries in a similargeographic range; CPA firms specializing in medical/dental practices;publications such as Dental Economics, and dental supply houses.The ADA Committee on the New Dentist, ADA Bureau of Economic Surveys, or ADASELECT Committee can also direct applicants to appropriate sources.

One should include the following tables of information: profit and lossprojections (monthly for one year) with explanations; cash flow projections(monthly for one year) with explanations; projected balance sheet (one yearafter loan) with explanations.

 The projections used shouldreflect the actual costs in the geographic area and the doctor's personalvisions of the needs of the practice.

 These projections include onlymonthly operating costs. Some costs may be incurred only on a bi-monthly orquarterly basis. Due to changing tax laws, one should consult a knowledgeableaccountant on depreciation and how it factors into your presentation. Thelarger costs such as malpractice, office or equipment insurance premiums,initial inventory, etc., are often due as a lump sum and are more appropriatelydesignated in the initial investment requirements. Replenishment costs ofoffice and dental supplies should be included. Life and disability insurancesfor a non-incorporated proprietor are generally not incurred as business costs.

Some institutions may require longer projections (pro formas) for the proposedbusiness. According to a recent survey of commercial banks, monthly projectionsfor the fist year are generally required for new start-up practices.2, 3, 4, 5,6 There appears to be a consensus that this projection helps to illustrate atrend of profitability for the business as well as to define an orderly agendafor that business to pursue. For the purchase of an existing practice or anextremely large project, banks may require pro formas from one to two years.

BUSINESS PLAN

Summary Sections: These parts of thebusiness plan describe the conditions of the marketplace which lead the dentistto believe that a practice would be viable in the selected location. Keycomponents are:

• Introduction: dentist's name, business address and phone number (if known)
• Location and Facility: attributes of the proposed business site
• Market and Competition: historical perspective of the specific market, analysis of the current market and competition, description of the target market and how the dentist plans to serve those patients
• Technical Expertise: chronicle of the dentist's background, education, degrees, technical knowledge and expertise relevant to the market
• Market Plan: short-term itemized/realistic business objectives that the dentist wishes to attain for successful market penetration, including peer networking, advertising, community visibility
• Market Potential: specific projections showing that the market will support the dentist's practice and subsequent terms for increasing the monthly production by a specific dollar amount, a new patient census, a percentage of increase in gross for the year (with sufficient reference for the expectations); a discussion of demographics of the area would answer questions as:
  
  - Are there a certain number of new families in the geographic area, with a baseline per capita income to sustain a new practice?
  
  - Is there a lower dentist/population ratio for the locality?
  
  - Is there a big new employer in town who can help the dentist get a lock on the market?
  
  With a minimal track record, the strength of the practitioner's proposal may come from this analysis.
• Managerial Capacity: shows that the background of the prospective owner demonstrates knowledge and expertise to effectively utilize the market
• Goal-Setting Plan: long-term itemized agenda of how the doctor expects to achieve his/her objectives; the heart of the business plan
• Expense Management: description of specific actions planned to show that each dollar is spent effectively when the practice can best afford it
• Earning Potential: discussion showing lender what is in it for the bank; to include projections, an estimated return on investment over the life of the loan, an analysis of the break-even point of the business and a time-frame within which the practice can be expected to be profitable. This projection shows the bank when it can expect a return, i.e., in six or twelve months, and that the business is goal-oriented.

Banks exist to make money. Thedentist might negotiate with the banks to consider maintenance of otheraccounts such as savings, checking, credit card and longer term certificates ofdeposit or money market accounts to improve one's negotiating position. Thedoctor is cautioned to be sure that the return on his/her funds makes economicsense.

Other Hints

Since the market analysis portion is such a major part of the business plan, athorough review of pertinent literature should include Economic Profilesfrom the local chamber of commerce and baseline data of the perspective patientbase from the county.

Industry trends need to be examined to describe how the market place ischanging in the geographic sphere the dentist is approaching. Historicalchanges should also be noted.

Target market. This discussion is the heart of the business plan. Intoday's market, the business owner must go out to the public and bring inpatients. Unless you're the only game in town, it's wise to allocate yourresources and focus your efforts to a specific segment of the population justto get started. Include the following subjects:

• Define the market. Is it the unions, the bigger employers, a geographic range, social strata, social groups, ethnic groups, community groups, age segments? Be prepared to answer the fundamental question: "Who are you trying to bring into the practice?
• What part of the market has the competition not appealed, neglected or assumed it has but has not made the effort to develop? Find a niche.

Use sources such as the local community banks and newspapers for statisticaldata on the demographics in your community. Your greatest resource however, isto do your homework in that area you are about to set up. Interact with yourcommunity, listen and observe what it needs.

Identify the Competition. Competition is a fact of today's market. Howwill the new doctor most effectively compete in that market? A discussion ofstatistical data relevant to the geographic area to be served is imperative. Anexcellent source to use is the Distribution of Dentists in the United States(14) by the ADA; one should relate thestatistics to the locale to be served. The telephone book and local dentalsociety can offer information on the most current number of dentists in thetarget market.

The astute dentist must:

• identify the practice most likely to compete for the same patients
• outline his/her strengths and how those strengths will be used to capitalize on the market
• note possible weaknesses in competitors and how those will be turned into opportunities for the proposed practice
• describe special idiosyncrasies of the local market and how one will capitalize on there nuances; that is, how the new doctor will position him/herself and what strategies will be employed to pursue this market

Describe the pricing policy. Will the earnings base of the practice befee-for-service, welfare, capitation, discount, external credit agencies,direct reimbursement or alternate delivery systems?

What will be the method of delivering the marketing? A monthlybudget for that expense must be made, along with a detailed accounting of themethods planned for penetration of the market, i.e., expanded hours, specificage/social/community/ religious/ethnic/socioeconomic groups, advertisingvehicles, promotional techniques, target services that may not be well known inthe geographic sphere, joining local dental society, business or communitygroups. Note should be made of special contacts and skills. Rough of finaldrafts of marketing materials should be shown to the lender.

It is important to realize that perceived competition may also be appealing tothe same market. Note the differences. What makes the approach or segmentationof the market for this practice unique? It is easier to get more patients beforethey are of record with another dentist than to lure them away from establishedpractices. Other variables to point out are the strengths of the location andfacility, uniqueness of the interiors, desirability in the marketplace andmanagement consultant reports.

The summation offers those idiosyncrasies that characterize the practice, thevehicles planned for use to gain name recognition for the practice in thetargeted geographic sphere, and reiteration of the business objectives.

There is increasing emphasis to balance the business as well as theprofessional aspects of the practice. Personal interactions outside of theoffice broaden the potential numbers of people that will have heard of the newdentist. There is a considerable degree of competition in the marketplace.Cloistering in one's office minimizes the exposure for the business. Developinga "presentation" in the public arena is as fundamental a skill as anydental technical skill that is needed to survive in the real world.

Demographics of the target area to be discussed are:

• Are there a certain number of new families in the geographic area with a baseline per capita income to sustain a new practice?
• Is there a lower number of dentist/population ratio for the area?
• Is there a new big employer in town to help the dentist get a lock on the market?

With a minimal financial track record, the strength of the practitioner'sproposal may come in this analysis.

CONCLUSION

Dental offices are small businesses. The initial outlay to get started in a newor existing practice is rapidly increasing. The funds necessary to capitalize astart-up or purchase of a practice may not be easily available to the newprofessional. This booklet has detailed the procedure in making these fundsmore available.

In the current marketplace, all the canons of standard business practicesapply. The dentist's livelihood is dependent on his/her performance. There areno special exclusions for potential, new dental practice owners who comeunprepared to these proceedings. Your naivete in the business world can becostly.

You should not feel overwhelmed by the extent of the detail necessary for thebusiness plan. Consider it part of the learning curve needed to clarify, defineand articulate your own goals to target and focus your practice. By preparingyour loan proposal and business plan, you are gaining an entry levelcertificate to the business world. Securing funding for a practice is possiblewith a little homework.

EXHIBITS

This section of the proposal contains the documents that are referenced inother parts of the report. The documents usually required by banks are:

I. Curriculum vitae including copies of diplomas, certificates, licenses,professional documents, etc.

II. Personal Financial Data

A. Personal Financial Statement(not more than 60 days old). This form is usually available from your bank. Ititemizes your total assets (bank accounts, retirement funds, stocks and bonds,real estate, autos, accounts receivables, personal property); liabilities(loans to banks, credit unions, other loans, mortgage, unpaid taxes, otherliabilities); and net worth (asset minus liabilities.)

B. Federal Income Tax (1040) Reports for the past three years (complete copies)

C. First Deed of Trust on your residence (applicable if you have one)

D. Contracts of sale, leasehold improvements, equipment leases, major equipmentpurchase contracts

E. Office lease agreement

F. Life Insurance, disability, property insurance

G. Blueprints of proposed office or remodeling (Including photos of proposedoffice site)

III. Other Information

A. Credit Reference(s) (list ofbank accounts and loans). Personal credit references are companies with whichyou conduct considerable regular financial transactions such as savingsaccounts, checking accounts, credit unions, mortgage companies, credit cards,or other items listed in the financial statement which can be verified by thebank. They do verify your account amounts and "credit profile." Thisinformation will help the bank to characterize your credit risk.

B. Credit Report (TRW) (Optional as bank will generally automatically run acredit check for initial screening before going forward with the package.)

C. Local Economic Profiles of Target Areas. Economic profiles obtained from thelocal chamber of commerce or newspaper contain detailed demographicinformation. Population statistics, distribution, ethnic composition, economicgrowth and trends, major industry and employment statistics, characteristics ofthe labor force, income levels, and other pertinent data need to be specificallyaddressed with relevancy to your target market. The information will vary witheach community.

The Small Business Administration is a governmental agency which guaranteespayment of a loan to a bank. Its mission is to assist in the initiation and developmentof small businesses. Many of the criteria SBA uses to evaluate a loan proposalare similar to many of the banks. However, SBA can see a broader perspective inlending a greater weight to the proposal if there is a shortage in a particularniche to be served. (4) When a market is densely saturated, the economic senseof business is in question.

SAMPLE LOAN PACKAGE OUTLINE

The following example illustrates the format of presenting a loan proposal andbusiness plan. It should contain all the information presented in the textabove. The brevity of the example is for illustration purposes only.

TABLEOF CONTENTS

I. COVER LETTER

A. Statement from Proprietor
B. Summary of Loan Request
C. Personal Information
D. Proposed Practice Information

II. LOAN PROPOSAL

A. Loan Request

1. Amount
2.Terms
3. Collateral and Securities
4. Repayment Plans

B. Initial Investment Requirements

1. Equipment Lists
2. Furnishings List
3. Inventory Lists

C.Projections

1. Cash Flow ( Pro Forms)
2. Profit/Loss Projections
3. Balance Sheet (Pro Forms)

III. BUSINESS PLAN

IV. EXHIBITS

A. Financial Statement
B. Federal Tax Return
C. Curriculum Vitae
D. First Deed of Trust on Residence
E. Proposed Equipment Sales Contract
F. Contractors' Bid for Leasehold Improvements
G. Office Lease Agreements
H. Blueprints of Proposed Office
I. Life Insurance Policy
J. Disability Insurance Policy
K. Credit Report
L. Credit References
M. Economic Profiles

 

Sample 1 - Cover Letter (detailed) Outline

I. SUMMARY

A. Nature of business (Purchase ofexisting practice or start-up)
B. Size of business (Estimate of a year's gross receipts)
C. Location of proposed business
D. Amount and purpose of loan
E. Repayment terms
F. Equity share of borrower (debt/equity ration): How much of your money areyou contributing to the business?
G. Security or collateral

II. PERSONAL INFORMATION

A. Applicant name and address
B. Current business and address (can be where one is associating)
C. Curriculum vitae, work history, business experience
D. Credit references (bank accounts, loans)
E. Income tax statements (CPA prepared for the last three years)
F Financial Statement (Personal asset/liability/net worth statement)
G. Personal Budget
H. Detail on Student loans

III. PRACTICE INFORMATION (whichever applicable below)

A. New practice

1. Business plan (see below)
2. Life and disability coverage (what company and how much)
3. Lease agreement
4. Contractor's bid for leasehold improvements
5. Personal credit rating (TRW report)
6. Office design blueprint, architect plans
7. Estimated cost of equipment to be purchased
8. Pro forms

B. Practice acquisition

1. Information on acquisition

a. Business history (seller'sname, reason for sale)
b. Current balance sheet (not over 60 days old)
c. Current profit/loss statement (last 2-3 months)
d. Business federal income tax returns (last 3-5 years)
e. Copy of sales agreement with breakdown of inventory. (Equipment, leasehold,goodwill, accounts receivables)
f. Lease agreements
g. List of equipment
h. Practice appraisal
i. Aging of accounts receivable
j. Pro forms

2. Business plan

3. Life and disability insurance policies

C. Existing Business Expansion

1. Information on existing business

a. Business history
b.Current balance sheet (not more than 60 days old)
c. Current profit/loss statement (not more than 60 days old)
d. Cash flow statements for the past year
e. Life and disability insurance
f. Accounts receivable
g. Current value of the practice

2. Business plan

3. Credit report

4. Costs estimate: Leasehold improvements, major equipment

 

Sample Page 1a (Outline format cover letter)

I. Applicant	Alex Smith, D.D.S. 1990 Quest Avenue Golden City, California (415) 55-SMILE
II. Nature of business:	Start-up office for the practice of dentistry
III. Size of business:	Anticipated annual gross receipts - $100,000
IV. Location of proposed business:	2001 Sparkle Lane, Suite Happy, a four storied professional building next to Ivory Towers Hospital in Golden City.
V. Amount and purpose of loan:	Dr. Smith is seeking a business loan of $100,000 together with his cash savings of $25,000 to start a dental practice. Funds are to be applied towards leasehold improvements in the suite, dental equipment and inventory.
VI. Ownership:	Sole Proprietor
VII. Availability of funds from outside of new business:	Dr. Smith is currently employed as an associate in Silvertown and has an annual income of $50,000. There are sufficient funds for living expenses and to subsidize debt service in the proposed practice.
	Savings accounts amounting to $25,000 will be used to augment business loan funds $60,000 in home equity can be assigned for collateral.

 

Sample Page 1b (Alternate cover letter format)

Loan Committee Members:

My name is Alex Smith, D.D.S., a resident of Golden City. I am seeking a loanfrom your bank to start a new dental practice in Golden City.

I believe that there is an unexplored, yet lucrative, niche in the dentalmarketplace in our community. There is an opportunity to start a practice inthis niche before another practice discovers this opening.

Projections anticipate that the annual gross receipts of this business will beat least $100,000. The location of the proposed business is 2001 Sparkle Lane,Suite Happy, which is a four storied building next to Ivory Towers Hospital.The ownership of the business will be the sole proprietorship.

The amount I am seeking for the loan is $100,000. I am contributing $25,000 ofmy savings to the project. These funds will be used for tenant improvement forrenovations, dental equipment and inventory.

Currently, I am an associate working for another dental practice in Silvertown.My annual taxable income is $50,000, which is sufficient for living expenses,taxes, and to subsidize the debt service anticipated for this project. $25,000from my personal savings will augment the early capitalization costs of theproject. In addition, $60,000 in equity of my house will be assigned ascollateral toward the loan.

Sincerely,


Alex Smith, D.D.S.

 

Loan Request
I. Amount:	$100,000
II. Terms:	Seven year term with no prepayment penalty. No origination or maintenance fee. Interest only payments for the period of leasehold improvements + 6 months. Principal repayment schedule based on 78 months. Loan to be established as a credit line.
III. Interest:	Simple interest based on Prime Interest (Wall Street Journal index) + 2 points. Floor and ceiling to be defined.
IV. Collateral:	Dental equipment, trade fixtures, inventory, personal guarantee of Dr. Rookie, second deed of trust on his home.
V. Debt/Equity Ratio:	$100,000/$25,000 4/1
VI. Other Conditions:	Assignment of life insurance in the amount of the loan in force during the term of the loan. Disability insurance assignment sufficient to service the debt during the term of the loan. Access to financial statements as requested by lender.
VII. Purpose of Loan:	The loan, together with the applicant's equity, will enable Dr. Smith to start a practice by renovating an office suite, buying dental equipment and supplies, and providing working capital.

 

Sample Page 3 - (The numberspresented are fictitious and only present the mechanics of how to construct theloan proposal.)

Initial Investment Requirements

	Loan	Equity	Total
1. Professional Equipment	$ 50,000	$ 0	$50,000
2. Office equip/furnish	15,000	0	15,000
3. Leasehold improvements	35,000	0	35,000
4. Lease deposits	0	3,000	3,000
5. Working Capital @ 15%	0	12,000	12,000
6. Inventory	100,000	25,000	125,000

The loan will be repaid from the receipts generated by the practice. Theprojection of practice income, expenses and practice growth indicate there issufficient earning power to service the monthly debt and prove profitable.

Living expenses, debt service, and additional practice capitalization will besubsidized by Dr. Smith's secondary source of income and accumulated savings.The owner's draw from the business will be subordinate to debt service.

Sample Page 4

Personal Information
NAME:	Alex Smith, D.D.S.
BIRTHDATE:	1/26/51
BIRTHPLACE:	Sierra Madre, CA
MARITAL STATUS:	Married: two sons 7, 10
PRESENT ADDRESS:	1990 Quest Avenue Golden City, California (415) 55-SMILE
PRESENT POSITION:	Private Practice
Educational Experience
Martin Luther King Jr. - L.A. County Hospital Residency: Pediatric Dentistry	Los Angeles, CA	1979-1981
Martin Luther King Jr. - L.A. County Hospital Residency: Hospital (General Practice) Dentistry	Los Angeles, CA	1978-1979
Georgetown University School of Dentistry Degree: Doctor of Dental Surgery	Washington, D.C.	1974-1978
University of California, Los Angeles Degree: Bachelor of Arts (Zoology)	Los Angeles, CA	1969-1973
Work Experience
Private Practice (Newark, CA)	Sole Proprietor Pediatric Dentistry	1983-present
Private Practice (Oakland, CA)	Independent Contractor Pediatric Dentistry	1981-983
Martin Luther King Jr. Hospital	Chief Resident	1979-1981

 

Sample Page 5 (Business Plan Summary)

(This entire passage is fiction as well asabbreviated. It serves to illustrate the reasoning and key points to present tothe lender on your plan.)

Business Plan Summary
Name and Address of Business:
Alex Smith, D.D.S. 2001 Sparkle Lane Golden City, California (415) 55-SMILE
Location and Facility:
The location of the proposed business is on Sparkle Lane, the main thoroughfare in Golden City. This multi-storied building is next to Ivory Tower Hospital. Eighty percent of the dentists and physicians in Golden City are located less than a mile radius from that hospital. The building is well known in professional circles in the community.
Market and Competition:
Golden City is a growing community of 160,000 with the neighboring communities of Silvertown (40,000) and Bronzeville (50,000). Affordable housing, the electronic/computer industry, proximity to metropolitan centers in the bay area are attracting new median income families, resulting in the fastest growing community in the bay area. The target market is the patient who requires completion of his/her dental care under sedation. This area is severely under-served.
Technical Expertise:
Qualifications for this type of delivery of care is unique for this area. Dr. Smith has completed post graduate training in hospital dentistry and pediatric dentistry. he has worked in hospitals for three years and is on the medical staff at Ivory Tower Hospital. The market presents an opportunity to pursue. The uniqueness is the advanced training beyond the majority of dentists who begin practice straight out of dental school.
Market Plan:
1. Involvement with hospital staff by concentrating on developing relations with physicians. 2. Involvement with local dental society to market unique skills with other dentists. 3. Open an office with state of the art equipment specific for sedation purposes. 4. Advertising directly to the public with newspaper announcements, telephone book ads and direct mailers. 5. Public speaking to community groups, parent groups and other adult education forums. 6. Marketing to nursing homes and staff.
Market Potential:
Economic surveys indicate that Golden City is one of the fastest growing communities in the bay area. The socio-economic level of the clientele that could afford this level of dental care is consistent with the per capita income of the area. There is no one similarly trained, or presenting himself for this niche in the marketplace. While some practitioners may conduct sedation in their offices, ours would appeal to an elevated standard of care.
Managerial Capacity:
Dr. Smith has sufficient managerial experience to operate this business successfully. During his residency, he was appointed Chief Resident in charge of his section. He is an instructor at Children's Hospital. Prior to this venture, he associated with two very successful dentists for two years. He is well qualified and experienced.
Goal-Setting Plan:
1. Open a two-chair office. 2. Develop a clientele base. 3. Expand the facility in five years. 4. Hire an associate. 5. Buy a building. 6. Assert dominance in my field of dental experience in Golden City.
Expense Management:
1. Employees will be salaried. 2. Computer programs will bill insurance companies, track inventories and expenditures.
Earning Potential:
Based on expenditures of an average number of ten new cases per month requiring these skills, with each case averaging $1,500 in treatment costs, there is sufficient potential to exceed the anticipated first year's gross receipts of $100,000

 

Sample - Loan Package for Practice Purchase (as prepared by a consultant for a client.)

TABLE OF CONTENTS

I. Loan Summary

A. Statement of Proprietor
B. Summary of Loan Application
C. Loan Request, Sources and Uses of Funds, Equipment List, Furniture List,Supplies List
D. Loan Repayment

II. SBA Forms

A. Application for BusinessLoan-SBA 4
B. Lender's Application for Guaranty or Participation-SBA 4
C. State of Personal History-SBA 912 (2)
D. Personal Financial Statement-SBA 413 (1)
E. Compensation Agreement for Services-SBA 159
F. Request for Counseling-SBA 641
G. Statement Required by Laws & Executive Orders-SBA 1261
H. Policy and Regulations concerning Representative & their Fees-SBA 394
I. Standby Agreement-SBA 155

III. The Business

A. Statement of Purpose
B. Business and Product Description
C. Market
D. Competition
E. Advertising and Promotion Patient Newsletter
F. Pricing
G. Location
H. Management and Personnel
I. Summary

IV. Financial Data

A. Historical Financial Reports

1. Notes to Historical Analysis
2. Historical Financial Statement Spreads
3. _____________________, D.D.S., Inc., 1/31/95 Interim Financial Statement
4. Accounts Receivable Aging
5. _____________________, D.D.S., Inc., FYE 1992, 1993, 1994 FinancialStatements
6. _____________________, D.D.S., Inc., 1992, 1993, 1994 Federal Tax Returns

B. Analysis of Current Financial Condition

1. Pro Forma Balance Sheet
2. Ratio Analysis

C. Projections

1. Cash Flow Projections (bymonth)
2. Notes to Projections

V. Exhibits

A. _______________, D.D.S. - Resume
B. 1989, 1988, 1987 Federal Tax Returns
C. First Deed of Trust on Residence of __________________, D.D.S.
D. Contract of Sale
E. Promissory Note
F. Bil