Most dental practice acquisitions don’t fail because the seller backed out or the broker misrepresented the practice.
They fail at financing.
The deal looks clean, the LOI is signed, and then something in the underwriting process unravels it. We see this constantly, and the frustrating part is that most of these problems are fixable if you spot them early enough.
Let’s walk through the dental practice financing red flags that most often sink dental acquisition deals, and what you can do about each one before the lender ever sees your file.
Lender Underwriting for Dental Practices Works Differently Than Standard Small Business Loans
Dental-specific lenders, including Bank of America, TD Bank, and a handful of SBA-preferred lenders with dental books, underwrite based on clinical earning capacity rather than personal income history alone.
That distinction matters because a dental associate with $180K in W-2 income buying a $1.4M practice looks overleveraged on paper, but looks creditworthy to a lender who understands that production capacity is the real collateral.
A conventional SBA 7(a) loan maxes out at $5M for acquisitions and typically requires the borrower to inject at least 10% equity.
For many dental practice purchases in the $800K to $2M range, 100% financing is available through dental-specific lenders, which means the deal structure looks very different from a conventional small business buy. Working with a lender who does not understand dental is the first place deals fall apart.
What debt-to-income ratio do dental lenders actually require?
Most dental-specialty lenders underwrite to a debt service coverage ratio (DSCR) of 1.25 or higher, meaning the practice’s adjusted net cash flow must cover annual debt service by at least 125%.
For a practice generating $280K in adjusted practice cash flow (often referred to as adjusted EBITDA or seller discretionary earnings, depending on the lender’s methodology), that supports roughly $224K in annual debt service, which at a 7.5% rate over 10 years supports approximately $1.5M in loan principal.
Personal debt-to-income matters too, but it’s evaluated in context of the practice cash flow, not in isolation. The common mistake is letting a student loan balance become the story.
We’ve helped buyers reframe the file so the lender sees clinical production capacity first. That reframing alone has saved multiple acquisitions that would have died in a generic underwriting queue.
Depressed practice tax returns are the most common deal-stopper at underwriting
Let’s look at an example.
We worked with a buyer on a $1.6M acquisition where the practice’s tax returns showed three straight years of $90K to $120K in net profit on $1.1M in collections. The lender’s first read was that the practice couldn’t service the debt.
What the returns actually showed was a seller who had run $180K to $220K per year in personal expenses through the business: vehicle leases, family health insurance, travel, and a salary to a spouse with no documented duties.
The fix is a recast profit and loss that backs out the owner’s personal expenses and shows what a buyer-operator would actually net. Lenders who work in dental know how to read recast financials. Lenders who don’t will price the risk into the rate or decline entirely.
Per IRS guidance, these add-backs must be documented and justifiable. You can’t recast phantom income, but a legitimately run dental practice almost always has real add-backs that belong on the recast.
You want a dental CPA who has done this before building your recast. A generic P&L cleanup from someone who doesn’t understand how dental practices expense owner benefits will either miss legitimate add-backs or include ones that won’t hold up to scrutiny.
How do dental lenders evaluate practice cash flow?
Lenders typically use a 3-year average of adjusted EBITDA, then stress-test it against the proposed debt service.
For practices with declining collections in year 3, that trailing average gets weighted, which compresses the underwritable number.
A practice that was collecting $1.2M two years ago but is at $980K now will be underwritten closer to the lower number regardless of the reason for the decline.
We see buyers underestimate this regularly. If the seller lost a key hygienist or had an extended health absence, collections may have dipped but the underlying practice is sound. Document the reason. Lenders who do dental will give weight to a clear explanation with evidence. Lenders who don’t will just see the downward trend.
Lease Issues Can Kill Financing Even After the Lender Approves The Loan
A lease with less than 5 to 7 years remaining (including renewal options) is a financing problem, not just a business problem.
Most dental lenders require the remaining lease term to extend at least through the loan repayment period. If the loan is 10 years and the lease only has 4 years left with no signed renewal, the lender may condition approval on a lease extension before funding.
We see this stall or kill deals regularly. The seller has a landlord who is slow to respond, or the landlord wants to renegotiate rent as a condition of signing the assignment.
Getting the landlord engaged early in the process, before the financing application, is worth the awkwardness. A lease assignment that takes 8 weeks to execute after financing approval is its own problem because rate locks expire.
What Does the SBA 7(a) Program Require for a Dental Acquisition?
SBA 7(a) loans used for dental acquisitions require the borrower to meet standard SBA eligibility criteria: the business must be for-profit, operate in the US, and the borrower must have invested equity and exhausted other financing options.
For dental specifically, the SBA also looks at practice goodwill allocation, because goodwill-heavy deals (where intangible assets like patient charts and reputation make up 70%+ of the purchase price) present a different collateral profile than equipment-heavy deals.
The goodwill vs. equipment allocation in the asset purchase agreement directly affects both the SBA’s collateral position and the buyer’s tax treatment.
A higher equipment allocation gives the lender better collateral and gives the buyer faster depreciation. The negotiation of that allocation is a tax and financing conversation simultaneously.
We work through it on every acquisition we’re involved in, because getting it wrong on either dimension is expensive.
Timing the Financing Process Wrong Is Its Own Red Flag
Most buyers start the financing conversation after the LOI is signed.
The better move is to start it before. Pre-qualification with a dental-specific lender before you’re in active negotiations tells you your real purchasing power, flags any issues in your personal financial profile before they become deal-breakers, and gives you leverage at the negotiation table because you know what structures you can actually close.
SBA documentation alone takes 4 to 8 weeks to assemble and submit. Add lender underwriting time of 3 to 6 weeks, and you’re at 7 to 14 weeks from application to funding.
Most purchase agreements allow 60 to 90 days to close. Starting the financing process the week the LOI is signed leaves almost no margin for the complications that reliably appear in dental acquisitions.
A Dental-Specific Lender and CPA Dramatically Improve Deal Close Rates
The two professional relationships that have the most impact on whether a dental acquisition closes on time and at the agreed price are the lender and the dental CPA.
Both need to understand how dental practices are structured, how collections and production relate to cash flow, how goodwill allocation works, and how to build a recast P&L that holds up under scrutiny.
A generalist bank and a generalist CPA are not wrong exactly, but they’re not calibrated for this. They slow down the process, miss the recast opportunities, and sometimes misread the risk in ways that either kill the deal or price it higher than it needs to be.
We have worked acquisitions where switching to a dental-specific lender midstream saved the deal. We’d rather that conversation happen before the LOI.
If you’re looking at a dental practice acquisition this year and want to run the financing picture before anything else, book a call with the Virjee Consulting team.
We’ll map out what your file looks like to a lender before you’re in the room negotiating.
If you liked this, you might also like: How Much Debt Is Normal When Buying a Dental Practice?
About the Author
Omar Virjee, CPA is the founder of Virjee Consulting, a CPA firm specializing in year-round tax planning and monthly bookkeeping for solo and small-group dental practice owners across the United States. Omar focuses on helping dentists maximize owner take-home pay through proactive tax strategy, S-Corp optimization, dental real estate planning, and clear monthly financials.
Meet Omar · Schedule a Consultation
Getting owner pay right is half tax question and half payroll mechanics, and our dental payroll services cover the mechanics side.
