What Is Seller Financing for a Dental Practice?
Seller financing is one potential structure that can be used when purchasing a dental practice. Instead of receiving all of the purchase funds from a traditional lender, the seller agrees to finance a portion of the transaction.
For dentists considering dental practice financing, understanding seller financing can help when evaluating acquisition structures and negotiating the purchase of an established practice.
How Seller Financing Works
With seller financing, the seller effectively provides a loan to the buyer for an agreed-upon amount.
The buyer typically makes payments to the seller according to the terms established in the agreement.
The exact structure can vary significantly from one transaction to another.
Why Would a Seller Offer Financing?
A seller may offer financing for several reasons.
It can potentially make the practice more attractive to buyers, provide another source of income after the sale, or help facilitate a transaction when traditional financing does not cover the entire purchase price.
Why Might a Buyer Consider It?
Seller financing can provide an additional financing source for an acquisition.
In some transactions, it may be used alongside financing from a bank or other lender.
The structure can potentially help bridge a gap between the purchase price and the amount provided through primary financing.
Seller Financing Is Not Free Capital
The buyer remains responsible for repaying the seller according to the agreed-upon terms.
The agreement may establish an interest rate, payment schedule, maturity date, and other conditions.
Buyers should evaluate the total financial obligation before agreeing to the arrangement.
Terms Should Be Clearly Defined
A seller-financed agreement should clearly establish important terms.
These may include:
- Principal amount
- Interest rate
- Payment amount
- Payment schedule
- Maturity date
- Collateral
- Default provisions
- Prepayment terms
The exact terms should be reviewed by appropriate legal and financial professionals.
Seller Financing Can Be Part of a Larger Transaction
A dental practice acquisition can include several sources of capital.
For example, a transaction might involve primary acquisition financing, buyer funds, and seller financing.
Whether multiple financing sources can be combined depends on the specific lenders and transaction structure.
Subordination Can Matter
When seller financing is combined with another loan, the senior lender may require the seller’s loan to meet certain conditions.
This can involve subordination or other restrictions designed to establish the priority of the different financing arrangements.
Buyers and sellers should understand these requirements before finalizing the transaction.
Seller Financing Does Not Replace Due Diligence
The existence of seller financing does not eliminate the need to evaluate the dental practice carefully.
Buyers should still review financial statements, revenue, expenses, accounts receivable, equipment, staffing, patient information, lease terms, and other relevant areas.
Evaluate the Practice’s Cash Flow
The buyer should determine whether the practice can support all of its financial obligations after the acquisition.
This includes operating expenses as well as payments associated with any primary financing and seller financing.
Seller Financing May Help With Negotiations
Seller financing can sometimes become part of the negotiation between the buyer and seller.
Instead of focusing solely on the purchase price, the parties may negotiate the amount financed by the seller, interest rate, payment schedule, and other terms.
There Can Be Risks for Both Parties
Seller financing creates obligations for the buyer and credit risk for the seller.
If the practice does not perform as expected, the buyer may have difficulty making payments.
The seller may also face the risk that the buyer defaults on the agreement.
Have the Agreement Reviewed
Seller financing arrangements can involve significant legal and financial considerations.
Both parties should have the transaction documents reviewed by qualified professionals who can explain the terms and potential consequences.
Final Thought
Seller financing can be a useful tool in certain dental practice acquisitions. It allows the seller to finance part of the purchase price and can potentially be combined with other sources of acquisition capital.
However, seller financing should be evaluated carefully. Buyers should understand the interest rate, payment obligations, maturity, and interaction with any other financing while also confirming that the practice’s expected cash flow can support the overall transaction.
