Bill Klaproth (Host): This is an AAOMS On the Go podcast. I'm Bill Klaproth. And with me is Jonathan Burns, Senior Vice President, Southeast Region Executive for Bank of America Practice Solutions. And today we're going to be talking about securing financing to purchase or start an OMS practice. Jonathan, welcome.

Jonathan Burns (Guest): Oh, thank you Bill.

Host: Yeah. Thanks for being here. I appreciate it.

Jonathan Burns (Guest): Feels good to feel welcomed.

Host: Yeah, well, it's always good to feel welcomed. You're always welcomed on our podcast here, are you kidding me? So let me ask you this to start off, when it comes to purchasing or starting an OMS practice, what do personal financials need to look like before you start to apply for financing?

Jonathan Burns (Guest): Yeah, that's a great question. I think that one of the things that we find is many, many of the surgeons we talk to think that they need to look a lot better than what they maybe the bank's expectations are. So we really look at three things. The first is we would like you to have 10 percent of what you're looking to borrow in some type of savings. That can be cash in the bank, that can be stocks, bonds. So call it a typical oral surgeon starting up a practice, it may cost seven or eight hundred thousand dollars. We'd want you to have seventy or eighty thousand dollars in the bank. So that's number one.

Number two student loans are okay. We're okay with the student loans. Even some surgeons who come out of school may have five-, six-, maybe 700,000 in student loans, depending, you know, if they went and borrowed for everything. And that's all right. Really what we're looking for there is the monthly payment. And so we're going to factor that monthly payment into our cash flow projection. So that's number two.

And then the third thing we're really we would like you to have minimal credit card debt. And so that's debt that you're holding onto. You haven't necessarily paid off on a monthly basis. If you're charging your card and you're paying it off every month, we're okay with that. And so typically we would like the credit card debt to be at around $25,000 or under total debt. So.

Host: Well, those are very actionable things that someone would need to do. So, pretty straightforward. Like you said, the bar isn't so high that someone can't achieve it.

Jonathan Burns (Guest): Yeah. Oh, and by the way, we need you to have an active license to practice surgery as well.

Host: Okay, well that would be helpful.

Jonathan Burns (Guest): You know, seem yeah.

Host: That would be a good thing. That would be a good thing. So then, what options would someone have when it comes to regarding buying an existing practice or starting one up from scratch? What are the options there?

Jonathan Burns (Guest): Yeah, great question. So maybe we'll start with if you're looking to start one from scratch. And, so banks typically will be able to give you 100 percent financing. So you should, you should expect that you receive 100 percent financing to start that practice. Everything soup to nuts. So from the build out costs to the equipment costs, and then we're also going to give you working capital on top of that. And it really the same thing for if you're acquiring a practice, the bank should be able to give you 100 percent financing to purchase that practice. And then also working capital on top of that and the working capital is really to ensure that you have a smooth start to the operation of the practice after the purchase.

Host: Because you want it to be successful. You don't want to loan this person all this money and then have it collapse in a year and a half.

Jonathan Burns (Guest): That's exactly right. And that's also one of the reasons we want to give you 100 percent financing. I think, it's contrary to say buying a hard asset. It's important for us for you to be able to conserve your money. We'll give you all the money you need to start up. We want you to keep your own money, to make sure that you can continue to meet your monthly needs from a cash flow perspective.

Host: Yeah. So if you're buying an existing practice, same thing, you're, you will finance a hundred percent of that buying that business? Well, it's the same thing. Same thing applies. Either way.

Jonathan Burns (Guest): Either way.

Host: Okay, and the same things apply a hundred percent financing, working capital. If they need to make upgrades, if say they're buying an existing business and they need new office chairs or equipment, you'll…

Jonathan Burns (Guest): We can do that as well. Yeah, it depends on how much they need to upgrade. But in most cases, we can give them the money to purchase the practice, and we can give them the money to upgrade the office. In most cases, what you'll find is that most of the practices have for the most part been upgraded before you purchase it otherwise the value is going to be reflective of the condition of the office.

Host: Kind of like selling a house. You're going to paint and you're going to make sure the carpets are clean. You're going to fix this and maybe get a new fridge, right.

Jonathan Burns (Guest): That's right. So the ones that need those improvements are probably going to sell for less, which gives us the ability to give you that additional money to make the improvements.

Host: Okay. So what if an OMS has an existing practice and they're like, “Hey, I want to expand,” or “there's a great location at the other side of town.” Can, how do you help with that situation?

Jonathan Burns (Guest): Yeah, so if a surgeon owns an existing practice and they want to say purchase or expand to an additional location, we can do that as well. And same thing applies. Typically, we're able to give a hundred percent financing in almost all cases to do that.

The one thing I would say is that we would like you to be in business for at least three years prior to doing that additional location.

Host: Okay, so you can't start a business and then eight months later, “Hey, I want to open locate.” You want to make sure that that location is established for a period years, go through the ups and the downs, adversity, whatever, and make sure at that point, the odds are they're going to be successful if they last three years and they've got a good strong client base.

Jonathan Burns (Guest): That's right. And we're going to ask basic questions like, do you have the capacity to work there yourself? Are you going to bring an associate on?

We're really going to want to understand what the plan is to go from operating one practice to that second location.

Host: Yeah. So how do you value a current practice? How do you kind of like how do you say, “Well, your practice is worth this much, so I'm going to give you this much.” Do you value practice? How do you do this?

Jonathan Burns (Guest): What's funny is that we get that question a lot. Because I think everybody thinks that…

Host: Hey, my practice is worth this.

Jonathan Burns (Guest): Yeah.

Host: Now what does the bank say?

Jonathan Burns (Guest): Yeah, banks will not value your practice. I'll just say it out there, no bank is going to value your practice. There are professionals in the industry that will value your practice if you want them to, but not the bank. What the bank's duty and what we will do is determine the lendability of your practice. And so, what I mean by that is we're going to determine how much we would feel comfortable lending against your practice. And there are a whole slew of factors that go into that, but the most important factor is going to be the cash flow of the practice, the ability for the practice to be able to service the debt that we're going to give you.

And also, we look at a metric called loan-to-gross revenues. So, almost every bank, including ourselves, is going to want to be lending either 100 percent or less of what your one year's gross revenues are. So if you're producing a million dollars, most banks will cap out at, you know, a million or less. Some banks will be less than that, but that's kind of the second metric that we look at.

Host: Okay, that's interesting. So from your point of view, Jonathan, what are the benefits of purchasing an existing practice or starting one from scratch? If someone is thinking, “Well, what's better for me? Do I look for somebody that's maybe older and getting out, time to retire? Or is it better for me to try to start a whole new, find a location and start a whole new practice?” What's your thoughts on that?

Jonathan Burns (Guest): I think it depends. You know, it depends on what the situation that's right for that particular surgeon. But the advantages of starting up, for example, is you get to put it anywhere you want it, which is a big advantage.

The other is that you get to design the practice for today's dentistry. In most cases, when you're buying an existing practice, chances are it was built 30 years ago and it was designed for dentistry 30 years ago. Uh, you get brand new equipment, you get to hire new staff, all of those are advantages of starting your own practice.

When you acquire a practice, there are some advantages there, too. The big advantages that, you have a staff and you have a doctor that already know what they're doing, that it's theoretically a well-oiled machine. All you have to do is step in. That doctor, when you're buying a surgery practice, it's very different than, say, a general dental transition. That surgeon, it's important that surgeon stays on, transitions the referral sources and ensure that the people that are referring them the dentistry, are also going to refer you the dentistry.

And so again, can be a lot of pluses there because you're not having to build it from scratch as opposed, but it just really depends on what you want to do. And surprisingly we don't see a difference in success rate between an acquisition versus startup. They both tend to perform and have a similar success rate.

Host: Oh, that's interesting. I was just about to ask you, is one riskier than the other? Is one preferred than the other? You might be like, I'm going to buy the existing practice because they've got a client base. They've got a well-established thing. People know where the location is and I'll transition. Like you said, the person I'm buying, maybe he stays on or she stays on six months a year before they go into retirement or whatever it is, and then I'm, I'm established, everybody knows me, so, or do I do my own thing where I have that new facility that's built for today and all those types of things.

Jonathan Burns (Guest): Yeah, the only thing I would say. I mean theoretically I think everybody thinks startups are riskier than buying an existing business.

Host: That’s what I was thinking in my mind.

Jonathan Burns (Guest): What I would tell you is the truth there is I don't think from a risk perspective is probably similar but is it going to be easier to maybe to grow the revenues in an existing practice a little bit quicker. Sure. The startup is going to take, is going to take a little bit more time. So that would be the only, I guess, comment I would make there is that most startups, if you have an existing practice that has a million dollars in revenue currently, to take it to 1.5 or 2, you probably accomplish that a little bit quicker than taking a startup to two.

Host: Right. That makes sense. So, when somebody wants to start a new practice, do they come to you? Do you look at geography and say, okay, well, they're, oh, this person wants to build a new practice in this area. There isn't an OMS for 15 miles around. He's going to be able to service this big area. That's a good investment. Do you take a look at things a look at that?

Jonathan Burns (Guest): We encourage that the doctor does.

Host: Right.

Jonathan Burns (Guest): So we will give them the resources to figure that out, but surprisingly as a bank, we actually do not factor in the location when we're deciding to lend. So if that doctor qualifies for the loan and they want to go in this location, we will give them the loan.

And that really goes back to redlining rules where we can't determine where somebody wants to open a practice versus not open a practice. Because if we did, that would also put us kind of in a point of liability there.

Host: Right. Yes, right.

Jonathan Burns (Guest): Um, so, but we highly encourage that they look at the area and we will give them, there are companies out there that specialize in helping doctors and dentists with location data.

And so, highly suggest that.

Host: And they can figure those things out. And you would hope that, that person would do the homework before coming for the loan. That's really, really what you're looking for. Well, this has really been fascinating. When we do a lot of these podcasts, we're talking about the health aspect of it and the actual procedures. The wonderful things that OMSs do.

But this is great to talk about, hey, if you're out of college, you've been in a practice working for somebody for 3, 4, 5, 6 years, time to, you want to start your own, here's how you do it. So that's why this is a really informative podcast.

Jonathan Burns (Guest): That's right. And I will tell you, I mean, if you're a surgeon coming out of your residency and you want to start up or buy a practice right off the bat, we'll do that for you too.

Host: Mmhmm, and that happens as well. So there's many different pathways to owning your own practice. Well, Jonathan, this has really been informative. Before we wrap up, is there anything else you want to add?

Jonathan Burns (Guest): No, this has been great, Bill. I appreciate the opportunity to come on and, that's it.

Host: Yeah. Well, Jonathan, thank you so much. This has really been informative. Once again, that is Jonathan Burns, Senior Vice President, Southeast Region Executive for Bank of America Practice Solutions.

Bank of America Practice Solutions is the AAOMS Advantage Approved Partner for AAOMS members practice financing needs. For more information, just visit aaomsadvantage.org, aaomsadvantage.org. Or you can email aaomsadvantage at aaoms.org. Take advantage of those resources.

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