Getting a loan can be intimidating, especially if you’re not familiar with the loan process. The following will help demystify the process and give you everything you need to know about the type of loan you may be seeking. These guidelines should provide some direction and some questions during the process, regardless of the loan type.
1. How will student debt affect any loan I may want to secure?
Typically, most lenders experienced in the industry will recognize that a young veterinarian will have a significant amount of student debt. This will factor into that lender’s analysis of the amount of cash flow that a buying veterinarian will need to generate from the practice being acquired. Enough is needed to not only pay the payments for the practice acquisition debt, but also for any personal debt, including the student loan. Again, for most lenders experienced in the industry, this is a routine situation.
2. If I am buying a practice, how should I approach the option of buying the real estate?
This decision comes down to a classic “rent vs. buy” decision. A starting point would be to compare the total monthly payment under a rental agreement vs. monthly debt service. Be sure to include all costs in this analysis, rent, insurance, property taxes etc. under each scenario. Assuming that some of the costs under each are similar, try to look at the purchase price vs. the appraised value. Are you getting a deal? Is the building located in a rapidly growing area with value likely to increase? Is the property well located and able to handle a growing customer base as your practice grows? If the answer is yes to all of these questions, it is probably a good long-term investment for you. As you pay principal on the loan, your net worth grows. Be sure to get a building inspection done by a licensed, independent inspector to identify any major problems with the property.
3. How much equity will I need to buy a practice?
Many times, a practice acquisition can be acquired with no, or very little, equity down. Experienced industry lenders are comfortable with the veterinarian industry, and will stretch to minimize the equity put in upfront, recognizing that this can be a barrier for a doctor just out of school. If there is a small equity requirement, often the selling doctor will take a seller note back for a small percentage (10%) of the purchase price to facilitate the sale. A lack of a lot of money to put into a practice should not be a deterrent to a highly skilled doctor buying a good practice. Many industry lenders will view the tremendous investment in education you made as being the necessary down payment.
4. How long should I wait to buy a practice if I just graduated?
Usually, spending two to three years to acquire the business skill side of practice management would be preferred. However, if a veterinarian is surrounded by great advisers (accountants, practice management consultants, experienced lenders, etc), they may buy a practice even sooner. Some continuity in the practice’s management personnel is also helpful here if they are excellent employees.
5. What are my financing options for practice acquisition, start up, or expansion?
Financing options for a practice acquisition or expansion are more available. This is due to the fact that an existing practice has a historical cash flow that can be analyzed, and a customer base already established. A start-up will experience a period of negative cash flow before becoming established, and is thus harder for most lenders to finance. If you are doing a start-up, it is critical to find a lender who will help provide the working capital (cash) necessary through the first few months of operation.
6. What information will I need to provide a financial institution?
Most lenders will want to see three years of financial statements (usually tax returns) on the practice being acquired, three years of personal tax returns, a personal financial statement showing assets and liabilities, a resume and a description of how the loan proceeds will be used (cost breakdown if construction project). Copies of any leases for the property, or current business debt outstanding will also be asked for. In addition, a business plan is typically required for a start-up. For an acquisition, a copy of the purchase contract will be needed.
7. How long does it typically take to close a loan?
A loan can usually be closed in 30 days if all information is available.
8. What is an acceptable credit score to secure a practice acquisition, start up or expansion loan?
A credit score above 700 makes each loan easier. A score below 700 will probably require some explanation if there are negative marks on a credit bureau. Some lenders have minimum scores that are acceptable, while other like Live Oak Bank, will look beyond a low score to the explanation of how it got that way.
9. What does a lender look for in a practice being acquired to decide whether it’s something they wish to finance?
A practice that is growing revenues, with a cash flow margin above 25% before an owner’s salary is usually viewed favorably. If a practice’s revenue has been declining, or if the margins have been poor, it requires a more in-depth analysis. Has the existing doctor been cutting hours of the practice leading to lost revenue? Is the practice not generating good margins due to the owner being out ill while paying relief veterinarians to staff? What expense items can be added back that will not re-occur in the future? What is the experience level of the acquiring doctor? Has he or she been practicing in this market before? (a real positive) All lenders’ analysis revolve around determining whether the practice can support the debt service and cash requirements of the owner going forward.
10. What is looked for in a successful start-up?
In a start-up, four primary factors are considered:
- The attractiveness of the market (measured in terms of population growth and median income levels)
- Strength of competitors
- Location of the proposed practice (hopefully right in the area of the most residential growth with a convenient building)
- The experience and energy level of the doctor
