As a result of the Energy Crisis and Double Digit Inflation, clients are often trying to identify the merits of fixed rate and variable loan products. There is a good deal more interest from purchasers now in fixed rate options. On the face of it this is considered a good option when it comes to planning repayments over an extended period when interest rates are increasing.
To meet this demand, it is clear that lenders are putting a lot more emphasis on fixed rate options when they quote for deals. When interest rates are rising it is usually very difficult to get ahead of the curve. This is because the debt market is already anticipating where interest rates are likely to go and then adding a little insurance of their own. Therefore, fixed rates currently being quoted by the main clearing banks are around 2.5 per cent to three per cent or higher than the current base rate.
So, whilst a variable rate will protect you if rates go higher than your fixed rate. Until (if ever) the base rate catches up with the fixed rate then the borrower will be paying more than they would if they had a variable rate.
Market rates can come down as well as go up. We cannot rule out a scenario where inflation is back under control and the Bank of England sees fit to cut rates to stimulate an economic recovery. Borrowers must therefore research likely early repayment penalties on fixed rate loans. Particularly if you anticipate re financing or future projects.
Existing debt review
When reviewing existing borrowing one should look at the debt maturity profile of a business across all financial arrangements. Any BBLs and CBILs taken out during the pandemic will be re-payable in the next four to five years.
Many practices have invested during the lockdown in new surgeries, new equipment and general renovations.
In large part these are financed by HP, Leasing Agreements or unsecured business loans. Most of which will need repaying in five to seven years.
In some cases, short term repayments will be putting pressure on cash flow at a time when overheads are creeping up.
Lenders tend to be reluctant to re finance short term debt over a longer period. But there are some exceptions where a new debt proposal includes significant new investment such as a practice purchase, freehold purchase or extension. In those kinds of cases short term debt can be wrapped up in a medium-term loan which should then offer a lower rate of interest and lower monthly repayments.
Advice for practice owners
The best tip for all business owners is to know their numbers. You must have a financial dashboard. You need to know that activity is not outstripping the financial, human and material resources of the business. At the same time, monitor costs and work to widen the gap between fee income and all costs.
You also need to know how much liquidity you have in the business. In terms of cash and the headroom in revolving credit lines. Consider how your liquidity compares to the monthly fixed costs of the business. Review the direction of key costs over the last two years and then lay down a rolling forward monthly budget for the next 12 months against which to compare actual costs.
It is important to have a framework to review the budget. It can help to run different scenarios to test the impact on the business of cost inflation on larger overhead categories.
Finally, if your team are under pressure review your processes first before recruiting. Look for ways to make people more productive. If you need to hire then consider how you can hire fractionally by employing contractors rather than full time employees.
Advice for those considering selling
Of course, the market can change due to environmental factors such as availability and cost of borrowing. We are seeing good demand from existing operators, corporates, groups and PE houses. Fist time buyers are being more cautious during this time of relative instability.
We have had low-cost borrowing for a long time and that is what business people have become used to. Many of the practices we are selling now were purchased when inflation was around nine per cent. Our job as dental brokers is to get you the very best outcome from the market we are reaching for our clients. We are working diligently with buyers to make sure they know what they are signing up to, have the funding in place and the right risk appetite for a transaction now. Everyone knows that instability in the economy can make some people more cautious and we need to identify those people early in their purchase journey.
Do as many of these things as you can:
- Focus on business performance, growth and Profit typically dictates the value of a business and also helps the buyers with their funding as funding is determined by the amount of profit the business generates to service the debt.
- Review the condition of the property, length and terms of the lease, the value of the freehold relative to the All these things will support the valuation.
- Get an annual practice This is a great benchmark.
- Make sure your practice is shown to the entire market and not a niche part of the market.
- Private approaches are made in order to prevent you from going to the They will not deliver you the full market value for your business.
- Get to know your broker before you hire You are going to be spending a good deal of time working closely with them so it is important you are confident they are the right people for you.
Of course many dentists will be doing some or all of the things described. The more you can do, the better you will mitigate the impact of the Energy Crisis and Double Digit Inflation.
This article was written by Abi Greenhough, the Managing Director of Lily Head Dental Practice Sales and Martin How, the MD of Lily Head Finance. It was first published in January 2023 edition of The Dentist Magazine.
If you would like to talk about anything to do with buying, selling or financing a dental practice anywhere in the UK then Contact Us today.
