How Lenders Evaluate Veterinary Practice Cash Flow
When a veterinarian applies for a loan to buy, expand or refinance a hospital, veterinary practice cash flow is usually the center of the lender’s analysis. Revenue shows how busy a practice is, but cash flow shows whether the business can pay its expenses, compensate the veterinarian who runs it and still cover the proposed loan payments with room to spare.
Understanding how lenders look at cash flow can help buyers evaluate a practice more realistically and help sellers present their financials more clearly. This guide explains the basics. Lending criteria vary by lender and program, every loan is subject to approval, and nothing here is accounting or tax advice. An accountant familiar with veterinary practices can help with the details.
Starting With the Tax Returns
Most lenders begin with the practice’s business tax returns and financial statements for several recent years, along with interim year-to-date statements. Tax returns are often treated as the most reliable source because they are filed with tax authorities. Lenders may compare returns with internal financial statements and ask about any differences.
Our article on the documents needed to buy a veterinary practice lists what buyers and sellers should be ready to provide.
Adjusting for Add-Backs
Reported profit rarely tells the whole story in a privately owned practice. Owners may run certain personal or discretionary expenses through the business or take compensation in ways that reduce taxable income. Lenders may “add back” certain items to estimate the cash flow a new owner could expect, such as:
- Depreciation and amortization, which are non-cash expenses
- Interest on debt that will be paid off at closing
- Owner compensation above a market salary
- Personal expenses paid by the practice, if documented
- One-time expenses that are not expected to recur
Lenders generally require add-backs to be documented and reasonable. Unsupported or aggressive add-backs may be rejected. Our article explaining EBITDA for a veterinary practice covers related concepts.
Replacing the Owner’s Salary
One of the most important adjustments is owner compensation. If the selling veterinarian took a very low salary and large distributions, a lender will typically subtract a market-based salary for the doctor who will do that work after the sale. If the seller took an unusually high salary, some of it may be added back.
The goal is to estimate what the practice earns after paying a fair wage for the clinical and management work the owner performs. Buyers should also think about their own personal living expenses, since lenders may consider whether the buyer can support their household from the salary the practice provides.
Debt Service Coverage
Once adjusted cash flow is calculated, lenders compare it to the total proposed debt payments, including the new loan and any other obligations the practice will carry. This comparison is often called the debt service coverage ratio, or DSCR.
A practice whose adjusted cash flow comfortably exceeds its debt payments is generally viewed as lower risk. A thin cushion may lead a lender to adjust the loan amount, term or structure, require more equity or decline the request. Each lender and program sets its own coverage requirements.
What Drives Veterinary Practice Cash Flow
Lenders also look beyond the numbers at the factors that shape cash flow, including:
- Staffing costs: veterinarian and support staff compensation is typically the largest expense
- Drug and supply costs: inventory management and pricing affect margins
- Rent or occupancy: lease or mortgage costs and whether they will change after closing
- Revenue mix: wellness, diagnostics, surgery, dentistry and product sales
- Owner dependence: how much revenue relies on the selling veterinarian
- Trends: whether revenue and margins are stable, growing or declining
Our guide to veterinary practice overhead explains how expense categories affect what a buyer can afford.
Interim Results and Recent Trends
Lenders often pay close attention to the most recent months. A practice that performed well in prior years but shows declining revenue or rising expenses in its interim statements may face additional questions. Sellers should be prepared to explain changes such as the departure of an associate, a temporary closure or a large one-time purchase, and buyers should ask about these trends early.
Personal Credit and Global Cash Flow
Many lenders evaluate the borrower as well as the business. They may review personal credit, other debts such as student loans or a mortgage, and other income. Some calculate global cash flow, combining the practice’s cash flow with the borrower’s personal income and obligations. Our article on the credit score needed to buy a veterinary practice explains how credit fits into the review.
How Cash Flow Affects Loan Structure
Cash flow influences more than approval. It can affect how much a lender will finance, the repayment term and whether working capital can be included. SBA-backed loans may offer longer terms that reduce monthly payments, which can improve coverage. SBA 7(a) loans may be used for practice acquisitions, subject to eligibility, use of proceeds, program rules and lender review.
Preparing for the Lender’s Review
Buyers can strengthen their request by:
- Requesting complete financials early in the process
- Asking the seller to document each add-back
- Building a realistic post-closing budget with a market salary for the owner
- Planning for working capital during the transition
- Being ready to explain any dips or unusual items in the financials
Final Thoughts
Veterinary practice cash flow is the foundation of most lending decisions. By understanding how lenders adjust reported earnings, replace owner compensation and compare cash flow to debt payments, buyers can evaluate opportunities more realistically and enter the financing process better prepared.
US Medical Funding helps veterinarians evaluate practices and secure acquisition financing. Learn more about our veterinary practice acquisition financing and our full range of veterinary practice financing options.
