How Dentists Actually Finance a Practice Purchase

Key takeaways

• A lender underwrites the practice's collections and cash flow first, and you second. That is exactly why an acquisition is often easier to finance than a much cheaper startup.
• The debt-to-collections ratio, not the sticker price, is what determines how much room you have to borrow, and how fast you can borrow again.
• Government-backed and conventional practice lenders both exist for a reason; which one fits your deal is a conversation with your own lender, not a rule from an article.
• The cash rule I wish I had followed: working capital sits outside the deal, not inside it. Don't finance the purchase down to the last dollar and call the rest a surprise.

I have financed more than twenty practice purchases at this point, through local banks, dedicated practice lenders, government-backed programs, and a few sellers who carried part of the note themselves. The mechanics are less mysterious than they feel the first time. Here is how it actually works.

What a lender is really underwriting#

A lender is not primarily betting on you. They are betting on the practice's collections and cash flow, with you as the person who has to keep it running.

This is the whole reason an acquisition is often easier to finance than a much smaller startup, even though the acquisition's price tag looks scarier. I talk through the math on one of my channels: a decent four-to-six operatory startup can run $500,000 to $600,000 for buildout and equipment, plus another $150,000 or so in working capital just to keep the lights on before a single patient walks in. Call it $750,000, and every dollar of it is speculative. Compare that to a practice already collecting a million dollars a year, priced around $850,000 plus $50,000 in working capital. The total is higher, call it $900,000, but a lender is looking at collateralized, proven cash flow instead of a bet on your ability to market and fill a schedule from zero.

Illustrative numbers from Ryan's own comparison. The startup's number is mostly a bet on future patients; the acquisition's is mostly a price on cash flow that already exists.

Banks know this. It's why they will often chase you to finance an acquisition and make you work harder to finance a startup of the same size, even though the startup usually needs less total money.

The debt-to-collections ceiling#

The single number that matters most to how much you can borrow, and how fast you can borrow again, is your debt-to-collections ratio: total practice debt as a percentage of annual collections.

I've written through the full mechanics of this in how to build a dental empire, because it's the exact math that determines whether you can buy a second practice with almost no cash of your own. The short version: many lenders hold a ceiling somewhere near 65% of collections. Buy a practice collecting $500,000 a year for $400,000 and you start at 80%: maxed out, and no bank is lending you more on that practice alone. Grow collections and pay the loan down and that ratio falls fast. That is the lever. It is not about saving up more cash; it's about making the ratio move.

This matters just as much on your very first purchase. A lender evaluating your deal is running roughly this same math before you ever ask about a second location, so understand what the practice's collections support before you fall in love with the asking price. The practice valuation calculator is a useful gut check here. If the price you're financing sits well outside the range both valuation methods produce, expect your lender's underwriting to ask the same question you should already be asking.

Conventional practice lenders vs. government-backed programs#

Broadly, you'll be looking at two categories of financing, and the right one depends on your deal and your lender relationship, not on anything I can tell you generically.

Conventional practice lenders are banks and specialty lenders who focus specifically on healthcare and dental practice acquisitions. They understand the asset class (that a dental practice's real collateral is goodwill and cash flow, not equipment that depreciates fast), and they can move quickly once they know what they're looking at.

Government-backed loan programs, most commonly through the SBA, work by having the government guarantee a portion of a loan a private lender makes. That guarantee is generically why lenders are willing to finance things like a change in practice ownership, equipment, and working capital with less collateral than they might otherwise demand, since the government is absorbing part of the risk if the loan goes bad. The SBA's own description of the 7(a) program covers what it can generically be used for, including acquiring a business and working capital: worth reading before you talk to a lender, not instead of talking to one.

What I will not do here is tell you a specific rate, term, down payment percentage, or eligibility rule, because those change, they vary by lender, and stating one as fact would be irresponsible. This is where you shop more than one lender and let them compete for your deal.

Seller financing, and when it makes sense#

Sometimes the bank won't cover the full price, or you don't want it to. That's where seller financing comes in: the seller carries a note for part of the purchase price, paid back over time out of the practice's earnings.

I like seller financing for two reasons beyond the obvious one of closing a funding gap. First, a seller willing to carry a note is telling you something real: they believe the practice will keep performing after they leave, because their own money is riding on it. A seller who wants 100% cash at closing and nothing on the table afterward is a data point worth noticing, especially next to what I've written about the mistakes I see dentists make when selling: plenty of sellers are chasing a headline number over a healthy transition. Second, it can align incentives during the transition period: a seller getting paid out over a few years has a reason to make sure your first year goes well, not just a reason to disappear.

The mechanics (interest rate, subordination to your bank loan, what happens on default) are entirely a matter for your attorney and CPA to structure. Seller financing interacts with your primary lender's terms in ways that are not universal, so do not assume a structure that worked for someone else's deal will work for yours.

Working capital at closing#

Do not finance the purchase price down to the last dollar and treat working capital as an afterthought. You need a reserve sitting on top of the loan and your down payment, separate from the number you borrowed to buy the practice.

I use the same logic here that I use for ongoing practice cash flow: know your buffer number and keep it real. In my guide to practice cash flow I recommend a reserve equal to one full month of operating expenses at all times, found by looking at the point in the month your account balance is naturally lowest. Apply the same discipline on day one of ownership. If the practice's monthly overhead is $75,000, I want $75,000 sitting separately from your loan proceeds before you ever see your first patient as the new owner, not something you hope collections will produce in week three.

This reserve is what absorbs the inevitable bumps: a slower-than-expected first month, an equipment repair the seller didn't disclose, payroll timing that doesn't line up with your first deposit. Without it, a completely normal rough patch feels like a crisis.

The cash rule I wish I had followed#

If I could go back and tell myself one thing before my first acquisition, it's this: the cash buffer is not optional, and it does not come out of the deal's financing.

I've written about the version of this rule I apply across a group of practices, not adding a new location until every current one has a full month of revenue sitting in reserve. On your first purchase, the same principle applies at a smaller scale. Do not structure a deal where every available dollar, borrowed or your own, goes into the purchase price and the working capital line is whatever's left over. Decide the reserve first, then figure out what you can actually afford to pay for the practice.

The bank is not lending you money because they believe in you. They are lending against the practice's cash flow. Respect that logic on your own balance sheet, too: the practice's cash flow needs a cushion before it needs to fund your withdrawals.

Before you talk to a lender#

• Know the practice's trailing twelve-month collections and, separately, its adjusted EBITDA: a lender will ask for both, and so should you.
• Run the price against both valuation methods before you get attached to it.
• Understand your own debt-to-collections ratio on day one, and what it would take to bring it down.
• Get quotes from more than one lender, including at least one dedicated dental or healthcare practice lender.
• Ask directly whether seller financing is on the table, and why or why not.
• Set your working capital reserve as a separate number before you finalize how much you're borrowing to buy the practice.
• Read the letter of intent guidance before you sign anything that starts a financing or diligence clock you can't meet.

Get this part right and the rest of the purchase gets a lot less stressful. For the full sequence from finding a practice to running it, start at the topic hub on buying, building, and partnering.