If you are considering purchasing a chiropractic practice, first of all congratulations! You’re making a smart move in buying an existing business with momentum, patients waiting to see you and built-in cash flow.
But, if you don’t have a spare few hundred thousand dollars sitting in your bank account or an extremely generous relative ready to bankroll your dreams, one of your big concerns is probably financing a chiropractic practice purchase.
Here are a few thoughts to help you understand how chiropractic practice financing works and to help you succeed in this next exciting step of your chiropractic career:
1) Find the Chiropractic Practice First
When buying a house, many buyers get “pre-qualified” to figure out how big of a bank loan they would qualify for, then they go home shopping. When you are ready to buy a business, the steps to financing a chiropractic practice purchase are generally reversed. In other words, FIRST find the practice that you want THEN figure out the financing. Here’s why:
When funding the purchase of an existing business, the majority of the lending decision is based on the performance of the chiropractic practice — not you!
Certainly, you will factor into a bank’s decision to lend. In fact, if you have poor credit, no money down, no work history or other “negative” factors you will potentially reduce the limits that the bank may lend.
But the bulk of the decision still rests on the practice.
For example, if a lender deems the practice is worth $500,000 – then it matters less that you have great credit, a large downpayment or other positive factors. The bank is not going to lend more than the practice is worth.
On the other hand, if the practice is worth $500,000 and your personal profile is less than excellent, the bank may only decide to lend $400,000 and/or they may require the owner to lend you $100,000 (plus the bank’s $400k loan) to make the deal work.
So, as you can, see the process starts with the practice.
2) Negotiate the Terms
Once you’ve found a practice that’s a good fit, negotiate the terms of the potential purchase with the Seller. Again, this may sound like you are getting ahead of yourself, because you don’t know if a bank will lend you the money.
But here’s another reality of practice acquisition funding — one of the first items on a loan application is the purchase price of the practice. In other words, the bank expects you to come to a basic agreement on the price and terms BEFORE getting them involved.
Certainly, some smaller negotiations can continue and the deal is not yet set in stone (because you don’t have the financing piece in place). But banks are not looking to be a part of a thirty-seven stage negotiation process. And they definitely don’t want to do all the work of processing your loan application for $400,000 only to find out that the seller wanted $650,000 and that the seller won’t do the deal at the lower price.
Now — don’t worry. All price and terms negotiations are always subject to financing. So, even if you do agree to pay $xxx, if the bank doesn’t approve a loan for that amount, you and the seller will have the opportunity to modify terms.
And, in most cases, banks are not going to require a finalized contract before starting the loan process. But they do expect a basic level of acceptance between you and the seller. In many cases, this can be accomplished in a simple one-page agreement known as a Letter of Intent – which essentially states that you intend to purchase the practice at $x price subject to financing approval.
3) Let the Buyer Lead You to the Bank
Once you’ve agreed on the price and terms, NOW is the time to find financing. But here’s another area where buyer’s make mistakes.
Most buyers looking to purchase a practice go to their bank or (worse yet) to their buddy or friend who works for a local bank to inquire about financing. Here’s why this is BIG mistake:
a) Not all banks love chiropractors.
It’s rare to find it on a website or in a brochure, but the fact remains that chiropractors are not always treated fairly by banks. In some cases, they view us as a poor risk because we have large student loans and smaller revenues than corporate giants. Unfortunately, if banks don’t willingly publicize their bias against chiropractors, the only way you will find out is through the “school of hard knocks.” Translation = the hard way. After they reject you and 100 of your DC friends, you would eventually figure out that XYZ bank doesn’t like DC’s.
b) Not all banks are experienced with chiropractic practice acquisitions.
Just because a bank is not biased against DC’s doesn’t necessarily mean they are good at practice acquisitions lending. This type of financing is a niche and the average banker has little to no experience in it. Therefore, when they run the numbers, they will default to extremely conservative projections to cover their tale (because they don’t know what they are doing). This almost always goes against you because they will require a larger downpayment or lower debt load (as in zero student loans) compared to more experienced banks. The effect of an inexperienced bank is simple: you have a lot smaller chance at getting a loan and a larger chance at wasting a lot of time in the process.
INSTEAD, here’s what you should do to increase your chances of getting that loan:
- Work with Proven Lenders That Fit Your Profile
Here at The Strategic Chiropractor, when we help our clients transition their practice, we profile the buyers and then match the buyer to banks that fit their needs based on similar situations and the bank’s desired type of deals and clientele. An easy way to look at this scenario is that every bank may have different lending requirements (even if they are participating in SBA lending programs) that affect their willingness to get you a loan. In this respect, a buyer who doesn’t match the bank’s desired profile will be rejected.
Fortunately, having worked exclusively with chiropractors on their transitions for over a decade now, we have enough history with different lenders that we can help guide you to the right bank. After all, if you are a “C” student you wouldn’t apply to Harvard (and expect to get in). In the same way, you need to apply to banks that willingly work with your criteria.
When you do work with proven lenders that fit your profile, your chances for funding go way up. (In fact, last year our financing approval rate was 86%).
- Work with Your Seller’s Bank.
If you are not able to work with a proven bank, the next best relationship is with the SELLER’s bank. Think about it. Your bank knows about you (a little) but they know nothing about the Seller. It would be better to go to the Seller’s bank who knows the track record they have — and ask them about lending based on historical performance of the business.
Hopefully this helps you understand how chiropractic practice acquisition financing works.
If you are considering a practice purchase with one of our clients, here’s good news: we assist all of our clients in working with proven lenders that fit your profile so that you can increase the chances of your funding success!
On the other hand, if you are still looking for a practice purchase or an associate opportunity you should consider our FREE Practice Match Service – where we will help you find a chiropractor who is looking to sell or transition their practice that will fit your needs and profile!