Mistakes to Avoid When Buying a Practice
by Crystal Misenheimer
Financing a clinic is one of the biggest hurdles to clear before receiving the keys to your new practice. While obtaining lending can be difficult, it should not deter you from considering a purchase. It’s well within reach for most qualified buyers who take the right steps.
This article will lay out the challenges of securing a loan, available lending options, qualifications buyers need, and exact steps required to realize your dreams of practice ownership or expansion.
Why Is It Hard to Get a Loan?
Unfortunately, chiropractic practices aren’t always the most appealing investment for banks. Lenders are hesitant because the primary value of a clinic lies in the doctor and their ability to charge for expert services. The majority of clinics don’t have significant physical assets that could be liquidated. So, if the new owner defaults on the loan, the lender is left with very few options to recapture their investment.
That’s not to say lending is unattainable, but a lender needs to be convinced. With the right approach, a buyer can make a strong case and secure a generous loan.
What Types of Loans Are Available?
Clinic financing broadly falls into three categories: SBA loans, conventional loans, and owner financing.
SBA loans are backed by the Small Business Administration and are aimed at entrepreneurs and business owners. SBA loans typically have longer terms and lower payments. Historically, they have offered better terms for borrowers than conventional loans.
The downside of SBA lending is the bureaucracy. There is no real access to decision-makers, which makes it very difficult to navigate the complicated system on your own.
Conventional loans can offer a shortcut alternative to the SBA lending process if a buyer can qualify. Approval times are generally faster, and buyers can deal directly with the bank or organization from which they’re borrowing.
However, with convenience comes cost. Payment terms will be shorter, meaning higher monthly loan payments. Since banks shoulder 100% of the risk with a conventional loan, they’ll usually require a larger down payment and have more stringent qualifications. Buyers without substantial experience and assets typically cannot attain a conventional loan.
Some sellers are open to owner financing. This option also circumvents the bureaucracy of SBA lending, but it comes with complications.
Owner financing means that the seller accepts some of the risk created by decisions the buyer makes with the business. The financial payoff must be worth the risk to the seller, meaning that owner financing is often an expensive option for buyers. The seller often stays involved in the business after the sale, which can complicate the transition and relationships. Additionally, litigation and collapse are not uncommon when the agreement is not well structured.
Despite the bureaucratic obstacles, SBA lending remains the best option for most buyers. Securing an SBA loan is challenging but not impossible. To give yourself the best odds of success, here are some rules to follow during the process of applying for a loan:
What Not to Do:
1. Don’t Quit Your Job
Lenders will examine your work experience and qualifications, and unemployment won’t help your chances. While you may want to focus all your energy on the purchase, don’t quit your job until it’s time to transition.
2. Don’t Take on New Debt
Taking on new debt while applying for an SBA loan is unwise because a high credit score is generally required to secure lending. Anything that hurts your credit or debt-to-income ratio will hurt your case.
3. Don’t Take Advice from the Wrong Expert
Just because your cousin’s friend’s dad got a loan for their plumbing business doesn’t mean that they have the necessary expertise to help you navigate a clinic purchase. The nature of clinic ownership, financials, and lending are all highly specific to the chiropractic industry. Make sure that any advice you follow comes from someone who understands it.
4. Don’t Burn Bridges
Securing a loan is stressful for everyone involved. Do your best not to let that stress affect other parties involved in your transactions. Working with an experienced third party is one of the best ways to mediate competing desires while keeping options and communication open.
What to Do Beforehand:
1. Save for the Down Payment
For a typical SBA loan, the down payment will be 10%. To cover costs and allow some financial wiggle room, you’ll likely want around 12%. These funds may be gifted. Keep in mind that the SBA likes to see that these funds have been seasoned, which means that they have been in the same account for at least three months. Therefore, avoid moving funds for the down payment until the last minute, whether saved or gifted.
2. Understand the Requirements
In addition to a down payment, banks will look for a solid credit score and at least two years of work experience. A qualified guarantor on your loan may also counteract shortcomings in any of these categories.
3. Think About the Practice You Want to Buy
Don’t buy something too big or too small. You don’t want to overextend your resources for a large, demanding clinic. However, make sure that the clinic can cover your financial needs. Buying a practice that generates professional income from day one makes a significant difference in a doctor’s career trajectory.
What to Do During the Process:
1. Put in the Work
Getting a business loan is nothing like getting a mortgage or buying a house. Don’t underestimate the amount of work it will take. When our team helps a doctor secure a loan, it typically takes about 100 hours of work, and that’s with expert input and years of experience.
2. Choose Your Words Carefully
Do your homework before you speak to the bank. Lenders will judge your expertise, competence, intelligence, and judgment. They will assess how much you know about the lending process and the reality of owning a business. Put your best foot forward because this is your opportunity to convince them that you are worth the financial risk.
3. Work with a Qualified Broker
If possible, seek help from a qualified broker to see you through the loan process. A good broker can help you negotiate the best terms and walk you through the process of securing funding. When banks look at loans, they will evaluate the potential of all entities — buyer, seller, and clinic. The broker’s job is to create the ideal match between those parties, which increases the upside for lenders. A broker who specializes in chiropractic clinics will have an established network of trustworthy lenders who understand the potential of the chiropractic industry, which goes a long way toward smoothing any bumps in the road.
The loan you receive lays the groundwork for the career you create. Although purchasing a practice requires taking on debt, stepping into a professional income allows you to start making payments immediately, and it ends up being the best way to pay down student loans. With long terms and low rates on SBA loans, the numbers work out in the buyer’s favor. To maximize your career earnings and set yourself up for the lifestyle you want, start by securing the right loan for you.
Crystal Misenheimer, founder of Progressive Practice Sales (PPS), leads the industry’s fastest-growing chiropractic brokerage. Crystal is the only chiropractic broker certified as a Business Intermediary (CBI) by IBBA and is recognized as an Industry Expert by the Business Brokerage Press. Crystal’s proven track record, experience in clinic management, sharp negotiating skills, and deep industry knowledge make her the go-to expert for practice sales nationwide. Contact PPS at 888-508-9197.
