In my previous post, Steps to Financing a Chiropractic Practice Purchase, I explained the process you need to know if you are looking to buy a chiropractic practice – which is a little different than if you were seeking financing to buy a house or car.
One of the most common questions we’ve been getting in response to that article is simply this:
How do I know what price chiropractic practice I can afford to buy?
It’s a great question and the reason for this post. Obviously, your individual financial situation can cause this answer to vary widely. But here’s a quick and easy way to get in the right ballpark quickly based on what you can afford from the bank’s perspective.
In other words, if you are asking the question “what can I afford,” the assumption is that you don’t have all the money. So really, what you are asking is: “how much will the bank lend in my case.” Again, if you haven’t read the above article, you would do well to understand the Steps to Financing a Chiropractic Purchase. But beyond that, there’s a fairly straightforward formula you could apply to your situation in three simple steps.
Determine the asking price. No bank will get you a blank check to buy any practice, regardless of how good your credit is. So, narrow things down and either discuss the price with the buyer or create a price point for which you can start shopping.
Consider your downpayment. In most cases, a bank will want to see you put some money down towards their loan. Banks may differ in what they require, but the Small Business Administration (SBA) which is the government-based backer for the majority of practice purchase loans wants to see at least 5% down from the buyer. So, find your figure. Do you have $50,000 to put as a downpayment on a purchase? $100,000? Nothing? Your answer will help you determine the ballpark in which you may be shopping.
Reverse Engineer the Math. Now, take the money that you have to invest in buying a chiropractic practice and reverse the math to see how you would meet SBA requirements for a minimum downpayment. To do this, divide the amount of money you have by the percentage of the downpayment and you get the purchase price of the chiropractic practice you are looking to buy. For example:
If you have $10,000 for a downpayment, that would allow you to make…
–> a 5% downpayment on a practice price of $200,000
–> a 10% downpayment on a practice price of $100,000
–> a 20% downpayment on a practice price of $50,000
If you have $50,000 for a downpayment, that would allow you to make…
–> a 5% downpayment on a practice price of $1,000,000
–> a 10% downpayment on a practice price of $500,000
–> a 20% downpayment on a practice price of $20,000
As mentioned above, this is a quick and easy way to get in the ballpark of a purchase price, but it is neither flawless nor complete. Here are a few things this formula leaves out:
Bank policies may be stricter than SBA — the SBA doesn’t actually loan you the money to buy a chiropractic practice, they simply guarantee the bank loan. But in that relationship, the bank retains the right to enforce policies that are more strict than the SBA. For example, just because SBA minimum may be 5%, a particular bank may decide that they are going to require at least 10% down from the buyer. (This is why we help buyers who are working with our clients to find the right bank so that they can increase the chances of successfully obtaining a loan.)
Downpayment “gifting” rules may vary between lenders – many potential buyers of a chiropractic practice will ask if their part or all of their downpayment can come from sources other than their own bank account (ex: their parents, a really nice relative or some other benefactor). Here again, lenders have the ability to insert their own policies and the answer is typically “it depends on the lender.” Some allow this, some don’t and still others place conditions upon the amount or type of gift.
There are other options beyond the SBA – while the SBA may be the most common route to financing a chiropractic practice purchase, there are banks and private lenders who will lend money outside the SBA programs. This means that there is a chance that, even if you don’t meet SBA criteria, you may still qualify for a loan elsewhere.
No money down = limited opportunities — another thought to consider when you are trying to determine the price of the chiropractic practice you can afford to buy is in the case where you have no money down. Here, you need to realize that if you have $0 for a downpayment, you have significantly limited the number of opportunities to realistically purchase a practice. Few, if any banks, will offer zero down loans for a practice acquisition purchase (and none, through the SBA). Additionally, many sellers are understandably hesitant about lending you 100% of the money you need to purchase a practice because all the risk is on them when you have no “skin in the game.” At this point, it’s not impossible to purchase a practice, but you will have many more opportunities if you save up some money to eventually go towards a chiropractic practice to buy.
If you have some money and now better understand the price of the chiropractic practice you can afford to buy, the next step is to find the practice! Here, I would suggest you consider our FREE Practice Match service so we can help you find the best fit for your situation.
And if you are on the other side of the fence needing to save some more money, then realize that your patience will pay off! (Oh, and if your present position isn’t paying you enough to save your downpayment, you probably should consider our FREE Practice Match services as well — so we can help you find a better associateship opportunity — perhaps with a path to ownership built in!