Often times the sale of a practice boils down to financing. The good news is that, in my experience, for a practice with good cash flow and that is priced correctly, there are banks willing to finance 100% of the purchase.
Unlike Loaning Money For A Car Or A House, There’s No Real Collateral
Sometimes, though, bank financing can be difficult, especially for a young buyer who is just starting out. They typically don’t have much credit history or net worth. The value of an optometry practice is mostly “blue sky”, ie, the goodwill and intangible assets. Unlike loaning money for a car or a house, there’s no real collateral. The bank is not interested in taking over an optometry practice from a new owner who has defaulted on his or her loan.
Six Reasons Why Owner Financing Can Help
While most practice owners are ready to “walk away”, and aren’t particularly interested in owner financing, sometimes you don’t have a choice. Often times the bank will require the seller has at least some “skin in the game”. SBA loans, for example, almost always require some owner financing. When I sold my practice, that amount was 10%. According to Jim Stauder of “How to Plan and Sell a Business” here are six reasons why owner financing can help you sell your practice:
- It may be the difference between selling or not selling the business!
- It instills confidence in the buyer when he knows the seller believes in the viability of the business.
- The business will sell much more quickly than otherwise.
- You may get a higher price. Studies show that owners who provide some seller financing achieve a higher multiple than those who demand all cash at closing.
- The interest rate you charge will most likely be higher than that of a bank, and you may achieve a higher rate of return on the financing you provide vs. investing the funds elsewhere.
- Because income deferral occurs as a result of providing seller financing, there may be some tax savings. Ask your tax advisor.
Depending On The Business, You Can Ask For
Obviously, if you are going to help buyers with partial seller financing, you want to feel good about the prospects of the buyers’ success. You can request resumes, references, personal financial statements and check credit scores. Depending on the business, you can ask for updated monthly, quarterly or annual financial statements for the length of your note. You also should require security agreements and/or personal guarantees. Realize, though, that if an outside vendor (bank) is involved, your security will likely be subordinate to the lender’s security. And by all means, get your attorney involved in the financing documents.
I don’t think I’m going out on a limb here: the last thing you want is to get back the practice you just sold!