From selecting the right practice to securing financing, acquiring a vet practice requires planning and patience, but becoming an owner is one of the best ways to maximize your degree and build net worth. Here are a few tips from our team to prepare for and secure vet practice financing.Buying a Practice? 3 Ways to Prepare for Vet Practice Financing #ReadHere Click To Tweet
Understand Your Financial Position
Obtaining a loan to purchase a business is fundamentally different than many of the loans veterinarians have previously received. For most consumer loans the income to make the payments on the loan is coming from a separate source. However, for a veterinarian purchasing a practice, the loan is being obtained to buy an asset that is generating the income that will pay back the loan. Thus, the practice needs to generate enough earnings each year to make the monthly loan payments, cover a reasonable salary for you and some cushion for savings.
This is where your personal financial situation comes into play. Your yearly personal obligations determine the salary amount you will need to take from the business. During the loan pre-qualification stage, your credit report will be pulled. Part of the analysis will include looking at the payments you owe to other creditors, including your mortgage payment, any car payments, student loan payments, etc. We want to make sure the business can pay you a reasonable salary that is at least a 50% Debt to Income Ratio. Thus, your personal obligations influence the size of practice you buy.
For instance, if your total payments in a year for your personal vehicles, house, and student loans total more than $50,000, we would calculate your owner’s compensation at a minimum of $100,000. The Net Operating Income of the practice needs to support both the debt associated with the purchase price and owner’s compensation.
Your personal debt obligations can affect which business you can buy. Interestingly, this means that you may qualify to purchase a higher priced practice and be denied for a lower priced practice because it is about the practice’s performance supporting the debt and you, not just the size of the loan.
Protect Your Credit
As stated previously your credit report will be pulled early in the loan process. A credit report is simply your track history of owing and paying back borrowed money. Since we would be entering a similar business relationship, it is important for us to know how well you performed in paying back debt in the past. How you manage your personal credit is typically a good indicator of how you will manage your business credit. Be sure to not only check your score, but also examine your whole credit report. According to the FTC, approximately 20% of credit reports contain errors, so be sure you verify that the information reported is correct.
There are different loan options available for vet practice financing, and your lender can help you structure the deal to fit your needs best. Each bank may assess and structure the loan differently based on their credit policy.
The loan terms will differ depending on what exactly you are purchasing. You will save time during the loan process if you and seller agree on the purchase upfront. In general, you can expect:
- If you are purchasing the practice but not the real estate, the loan term could be stretched up to 10 years. Additional working capital for equipment purchases, hiring staff and upgrades can also be included in the loan proceeds.
- If you are purchasing both the practice and real estate and the real estate cost makes up the majority of the loan proceeds, the loan term could be extended up to 25 years. Spreading the payments over 25 years allows for lower monthly payments.
When meeting with your lender, ask if they base their loans on cash flow or collateral. A cash flow lender will analyze the cash flow of the practice to determine the amount of debt the business can support. A collateral based lender lends on a percentage of the tangible assets. This can leave the borrower to cover the remaining cost out of pocket.
The Small Business Administration (SBA) offers lending programs through banks that are designed specifically for small business. A few of the benefits include:
- Flexible equity and collateral requirements
- Longer terms that do not include balloon payments or loan covenants
- Fixed and variable rate options
Securing financing is one of the key components to becoming a practice owner. Start by preparing your personal financials and understanding the practice’s financials. Working with a lender who can structure the loan to meet your short term and long term goals is vital to the success of the ownership transition and practice.