This is the fourth article of a multi-part series on the process of healthcare transitions prepared by Samuel N. Klewans and Michael Skerritt. This article focuses on selecting professional advisors, and financing healthcare practices.
Selection of Banks and Professional Advisors
Once a purchaser decides to purchase a healthcare practice, it is important to select a bank, an attorney, and an accountant to assist the purchaser in the transaction. Likewise, the seller should also retain an attorney and a CPA.
Financing Healthcare Practices
Up until about 20 years ago, the seller normally financed the purchaser’s acquisition of the professional practice. The seller, in effect, acted as a lender to the purchaser. Within the last 20 years, several banks have created special divisions for financing the acquisition and re-financing of professional healthcare practices.
These banks use different criteria for financing healthcare practices than they do for other types of business loans due to the fact that they are financing cash flow (recall in Part One of this series that we advised sellers to work very hard for two or three years prior to the anticipated sale in order to create or maintain high levels of cash flow or gross receipts).
If you are a third-party purchaser it is possible, in today’s environment with fairly inexpensive interest rates, to finance the entire amount needed to purchase a professional practice and also obtain a line of credit in the process.
If you are an associate in the practice, in most instances you will be able to borrow whatever money you need to acquire your percentage of interest in the professional practice. A potential drawback to this is that most banks will want all of the practice assets as collateral, even for a loan purchasing a fraction of the practice, such as 50% for example. This may or may not become a stumbling block for the seller. In our experience it usually is not an issue, but it could be.
Selecting the Appropriate Bank
The selection of an appropriate bank when financing healthcare practices is very important because the bank will likely require the practice’s accounts to be placed with that bank. Thus, the character of the bank and the people you will conduct business with at that bank are important ingredients to consider.
You should not select a bank based upon interest rate alone, as it may be a bad business decision. Many purchasers, whether third-party purchasers or associates in the practice, will submit applications to two or three banks not only to determine who will lend them money, and at what rate, but also to evaluate the potential relationships with the bank personnel.
The practice broker, your attorney, and/or your CPA can also provide referrals; they are familiar with banks that have special divisions for healthcare practice acquisitions and refinancing.
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