Internal Medicine Practice Seller Financing: How It Works
Internal medicine practice seller financing occurs when the physician selling a practice agrees to receive part of the purchase price over time instead of all of it at closing. The buyer signs a promissory note to the seller and repays it from the practice’s cash flow, usually alongside a bank or SBA loan that funds most of the price.
Seller financing can help bridge a gap between the price and what a lender will finance, and it can show the buyer that the seller believes in the practice’s future. It also introduces risk for both sides. This guide explains how seller notes typically work and how lenders view them. Rules vary by state and program, and nothing here is legal, tax or accounting advice.
How Internal Medicine Practice Seller Financing Works
In a typical structure, the purchase price is funded from three sources:
- The buyer’s equity: cash the buyer contributes at closing
- A senior loan: from a bank or SBA lender, secured by the practice’s assets and often personal guarantees
- A seller note: the portion the seller agrees to receive over time, with its own interest rate and repayment schedule
The seller note is usually documented in a promissory note and related agreements reviewed by both parties’ counsel. Seller notes are typically subordinate to the senior loan, which means the bank is repaid first if problems arise.
Why Sellers Agree to Carry a Note
Sellers have different reasons for offering financing:
- It can widen the pool of qualified buyers, particularly younger physicians with limited savings
- It may help support the asking price when a lender will not finance the full amount
- It can show confidence in the practice’s ongoing performance
- It may spread taxable income over time, which an accountant should evaluate
A retiring seller who wants the practice to continue under a trusted successor may be especially open to it. Our guide to buying a practice from a retiring physician covers those transactions.
Why Buyers Value Seller Financing
For buyers, a seller note can reduce the cash needed at closing and keep the seller invested in a successful transition. If the seller’s payments depend on the practice continuing to perform, they may be more motivated to introduce the buyer to patients, staff and referral sources.
Buyers should still understand that a seller note is real debt. Payments on the senior loan and the seller note together must fit within the practice’s cash flow after the buyer’s own compensation and operating expenses.
How Lenders View Seller Notes
Lenders generally welcome a seller who stays invested, but they set conditions. Depending on the lender and program, they may:
- Require the seller note to be subordinate to the senior loan
- Limit or delay payments on the note for a period, sometimes called a standby
- Restrict the note’s maturity, interest rate or remedies if the buyer defaults
- Include the note payments when evaluating whether cash flow can cover all debt
SBA 7(a) loans have specific rules on seller notes, including when, and under what conditions, a seller note may count toward the buyer’s required equity contribution. Those rules have changed over time, so buyers should confirm the current requirements with their lender. Eligibility and terms depend on the business, the buyer, use of proceeds, program rules and lender review. Every loan is subject to approval, and nothing here is a commitment to lend.
Conventional practice loans follow each lender’s own policies, which may be more or less flexible about seller notes depending on the deal. Our article on the down payment needed to buy an internal medicine practice explains how equity requirements fit into the overall structure.
Key Terms to Negotiate
Buyers and sellers should agree on the main terms early, ideally in the letter of intent:
- The amount of the seller note and its share of the price
- Interest rate and whether it is fixed
- Repayment term and any interest-only or standby period
- Whether payments can be accelerated, deferred or forgiven
- Security for the note and how it ranks behind the senior loan
- What happens if the practice underperforms or the seller breaches obligations
- Whether the note can be offset against indemnification claims
The senior lender will usually need to approve these terms, so it helps to involve the lender before they are finalized.
Seller Notes vs. Earnouts
A seller note is a fixed obligation: the buyer owes the amount regardless of future performance, subject to the note’s terms. An earnout ties part of the price to future results, such as collections or patient retention. Lenders and programs may limit earnouts, and they can create disputes if the measurements are unclear. Our article on medical practice earnouts and holdbacks explains the differences.
Risks for Each Side
For sellers, the main risk is that the buyer cannot pay, and because the note is subordinate, the seller may have limited remedies. Reviewing the buyer’s experience, finances and transition plan can help reduce that risk.
For buyers, the main risk is taking on more total debt than the practice can comfortably support. Running conservative cash flow projections that include both loans can help buyers avoid overextending.
Final Thoughts
Internal medicine practice seller financing can help a deal come together when buyers and sellers want to bridge a gap or share in the transition’s success. Understanding how seller notes interact with senior loans, what lenders allow and which terms matter most can help both sides structure a fair and financeable transaction.
US Medical Funding helps physicians finance internal medicine practice acquisitions, including deals that combine senior loans with seller financing. Learn more about our internal medicine acquisition financing and our full range of internal medicine practice financing options.
