Can Practice Acquisition Financing Help Physicians Compete With PE-Backed Groups?

PE-backed groups are acquiring independent practices all over the nation and out-bidding solo physicians looking to purchase a practice themselves. The good thing about practice acquisition financing is that it provides an avenue through which independent physicians can compete against the private equity groups in terms of deal and closings speed. 

As long as one understands underwriting and has the proper relationships with lenders, it’s possible to close faster than private equity buyers without losing ownership of your practice. National Medical Funding works with independent physicians looking to keep their practices from becoming owned by a corporate group. We will connect you to the right lenders for your situation.

Why Are Practice Transactions in PE-Backed Groups So Successful?

Over the last ten years, private equity organizations have changed the landscape of health care ownership. These groups work fast; they pay with cash; they do not demand any contingencies, which slows individual purchasers. The physician selling his/her practice definitely will prefer the PE group just because everything goes smoother and faster for him/her. 

An independent physician usually needs several weeks to get approval from the bank and satisfy its requirements. Here is the point when solo buyers are truly disadvantaged. Rarely does it depend on the reputation of the physician or the practice itself, as this is all about being ready to buy it. The physician who comes to the negotiating table with the financing already arranged makes the whole situation different.

How to Finance a Medical Practice Purchase

Raising funds for buying clinics is not similar to raising funds for a normal small business venture, as lenders consider factors like patient volumes, payer mixes, and credentialing along with traditional financials. Most doctors choose among the following options:

• Traditional bank loans supported by collateral and good personal finances, usually involving a substantial down payment.
• Lending schemes supported by SBA that are customized for healthcare and business acquisitions.
• Medical specialty lenders familiar with medical billing cycles and receivables.

The nature of revenue generated by clinics is recurring from patients and insurance payments, which makes healthcare lenders structure the transaction much more quickly than a commercial bank that does not know the industry.

How Does the Payment Structure of SBA Loans Affect the Purchase of a Practice?

The SBA loan payment terms will be longer compared to regular bank loans for this reason, making it possible for the physician to have easier monthly repayments as he gets used to running the practice. 

The SBA loan products were developed specifically for situations like this, where the physician will be able to finance everything, including his equipment, goodwill, real estate, and working capital, from one loan only. However, because of the lengthy application process, the physician will need a lender that can pre-qualify him for the deal.

Are Grants a Realistic Financing Option for Small Businesses?

Grants for small businesses exist on both the state and federal levels, and there are some that are targeted towards healthcare organizations that cater to underserved rural areas. 

Grant funding is not sufficient to finance an entire acquisition, but it can be used to finance things like renovations after the process of acquiring the business has been completed. The physician should consider grant funding as additional funding and not main financing since the timeline for getting grant money is very lengthy.

What Credit Score Is Needed for Medical Financing?

Most often, a borrower will require a credit score within the range of 680 or higher for medical financing on favorable terms, although some specialized healthcare lending organizations will finance physicians with a credit score below that range if there are good projections and collateral. There are other issues besides the actual credit score that must be considered:

• The personal debt-to-income ratio, as lenders need to know there is sufficient capacity to handle a loan payment
• The business credit history, if there are prior businesses owned by the physician
• How long has the physician been practicing

Even doctors who have just started out in their careers and do not yet have a credit history can be financed, but they may need a co-signer, more collateral, or even a bigger down payment.

How Does Acquisition Financing Level the Playing Field?

The reason why acquisition financing is so helpful for independent practitioners is that it is what gives them one key advantage that PE firms have been counting on for a long time: the certainty of close. Once a doctor enters negotiations with pre-approved funding, an established timeframe, and a lender who knows how to value medical practices, the likelihood that the selling party will give preference to a corporate acquirer is much lower.

If set up right, the process of acquisition financing will allow preserving working capital during the transitional period, thus ensuring the payment of salaries and expenses, including staff hiring, without dipping into the funds of the acquirer. It is very important for the first six to twelve months of operation.

Comparing Lenders When Looking for Funding to Acquire a Practice

Not all lenders will appreciate the details that go into purchasing a practice. Warning signs when comparing lenders may include the following:

• Lenders that cannot articulate their methodology of valuing goodwill and the patient list apart from tangible assets.
• Standardized medical business loans without consideration of payer mix and reimbursement timeline.
• Approval processes that take longer than what a competitive seller will accept.

Healthcare-focused lenders will likely go through the loan underwriting process more quickly since they are familiar with what documentation really matters.

What Happens to the Staff and Patients in the Transition Period?

Buying a medical practice doesn’t just involve making a deal; what transpires in the first few months after the deal closes could mean whether the patients keep coming in and the staff keeps working. The majority of sellers would expect assurances regarding the retention of their staff and the maintenance of a continuity of care for their patients, and doctors who can make such commitments during the process usually come out better, despite offering less than an all-cash bid by a private equity firm.

In the background, financing quietly does its part. Financing arrangements that include working capital provide a buffer period for the owner not to have to lay off any employees or hold back on payroll payments while still figuring things out.

Own the Practice Instead of Watching It Get Sold

Being an independent practice does not have to mean always losing out on the competition to a larger private equity company. This is not about having the best credentials, but rather whether you are financially prepared going into negotiations. 

National Medical Funding assists doctors in setting up unique lending partnerships, going from approval to funding within hours, and working with professional consultants who set up payment programs based on what your practice can afford. 

If you are a doctor willing to compete hard for ownership, contact National Medical Funding now to initiate your loan process.

FAQs:

Is practice acquisition finance inclusive of real estate or only the clinical business?

In some cases, all three can be included in a single package; however, different terms apply when it comes to real estate, depending on whether the physician is purchasing or leasing the property separately. Physicians need to specify this information before applying for a loan because real estate inclusion will affect the loan amount and collateral needed. 

How long will it take to acquire the loan for purchasing a practice?

Specialty healthcare lenders will do everything possible in order to close the loan within weeks after getting all necessary documentation; traditional banks and SBA programs will need more time to make a decision due to additional procedures required during the underwriting process. 

Is it possible to get a loan without owning anything previously?

Surely, it happens quite often, although the applicant can be asked to provide additional collateral, increase the down payment amount, or even find a cosigner in order to compensate for the lack of prior ownership.

Which paperwork does a lender typically ask for during the application process?

Be prepared to furnish your tax returns, the financials of the practice you want to acquire, payer mix information, the business plan, and your personal finances because the underwriter will need a complete overview of both the buyer and the practice. Collecting all the paperwork even before finding the target practice will greatly accelerate the whole process.

Which is more advantageous, negotiating the financing prior to or after making an offer for a practice?

Almost always, it is much better to secure the pre-approval prior to making the offer, as this enables the physician to compete with those buyers having cash in hand. The seller who is considering many offers would definitely prefer the buyer who has already cleared out the financing issue.