One Loan, Twice the Benefit
Finance equipment and operations acquisitions together
Bruce Bryen, CPA, CVA
A dental laboratory owner may wonder why they should consider financing equipment and operations purchases together; they seem so different. Lenders want to give to creditworthy businesses that have available funds. An equipment acquisition is generally looked upon as a secure loan, making it an easy decision for the lender, provided that the laboratory owner has reasonably good credit and a good enough cash flow to pay back the loan. Sometimes an owner can provide proof to the lender that a new piece of equipment, with its better technology and speed, will allow the laboratory to provide better service to its clients. This can help assure the lender of payback for the equipment loan since the laboratory expects additional profits. With the use of the new equipment, getting new clients and offering better service to current clients help the laboratory owner to gain additional credibility in the professional dental community at large.
One of the objects of acquiring a laboratory is to get its state-of-the-art equipment. When the laboratory is presented to the lender for the acquisition, the amount of equipment and its current market value are a big consideration for the lender in making the decision to lend. A material reason for this is that the type of loan is considered secured to the lender. Also, the labor force and the customer base will usually add to the purchaser's bottom line. Those items are primarily considered to be goodwill, which is much more difficult to finance than what is known as a physical asset, such as equipment. Thinking from a lender's standpoint, which is normally a worst-case scenario, if the purchase of a new dental laboratory should fail, the equipment could be sold to repay part of the loan. All the goodwill—including the labor force and the customer base—will be gone and not help the lender recoup its losses.
The acquiring laboratory owner already has his or her own accounting, legal, and other administrative people in place at his or her business. Many times, the ancillary personnel of the acquired business are asked to leave the employment. Eliminating these costs will automatically reduce overhead. Rental space can be vacated upon the prompt termination of leases. Reducing the fixed and variable site costs of the acquisition or eventually doing away with them altogether really enhances the profit potential as well.
Having the people and tools available to make the lender's job as easy as possible can aid in the loan being granted. Of course, the borrower must have reasonable credit and cash flow, as previously mentioned. The term for the acquisition should also be advantageous to the buyer. The usual shorter term financing for the equipment can be combined with a longer term for the acquisition of another operating business to give a blended term and rate; this will make the payment schedule easier for the buyer to maintain. That will enable the purchase to occur and with it access a higher projected revenue stream and a lower percentage of fixed cost to gross revenue once the businesses are merged. This will culminate with a lower variable cost for the acquiring laboratory owner, as well.
Besides being easier for a lender to finance, the combined acquisition of an existing operating dental laboratory increases the potential for substantial tax considerations from that purchase. The buyer and the seller in the transaction must report the allocation of the purchase price on their tax returns in the same manner. The agreement for the sale and tax allocation of the items being acquired are of paramount importance to the parties involved. The tax benefits actually increase to the buyer's cash flow, since many advisors suggest using the lender's funds for as much of the acquisition price as possible. Aside from the customer list, which would be considered as goodwill, the equipment with a valid appraised format could present the buyer with a very attractive scenario for lowering the net, after-tax cost. If financed properly with a long enough term and the probable merged interest rate, the actual borrowing cost would end up being considerably lower on the sold business as well for the buyer. Since the agreements are so important to the transaction's net cash effect on the buyer and seller, a competent CPA and attorney are definitely needed for guidance when the documents are being prepared and reviewed for finalization.
When an acquisition looks like it makes sense for the synergy, overhead decrease, and revenue increase of the existing laboratory, merging a business purchase along with equipment purchase makes it easier on the lender. Since dental laboratories are so heavily invested in technology and the state-of-the-art equipment that goes with it, all of the pluses can be brought together and many of the negatives set aside.
About the Author
Bruce Bryen, CPA, CVA, is the principal in the firm of RKG Tax and Business Services, LLC, in Fort Washington, Pennsylvania.