Can Seller Financing Help You Buy an Ophthalmology Practice?
Not every ophthalmology practice acquisition is structured in exactly the same way. In some transactions, the seller may agree to finance a portion of the purchase price rather than requiring the entire amount to be paid at closing.
Seller financing can be one component of an acquisition structure, although it is important to understand how it works and how it interacts with other financing.
For physicians considering ophthalmology practice financing, understanding the potential role of seller financing can help when negotiating an acquisition.
What Is Seller Financing?
Seller financing occurs when the seller allows the buyer to pay part of the purchase price over time.
Instead of receiving the entire amount at closing, the seller receives scheduled payments according to the terms agreed upon by both parties.
The arrangement is generally documented through a formal agreement.
Why Would a Seller Offer Financing?
There are several reasons a seller might consider it.
Seller financing can potentially make an acquisition more attractive to buyers, provide the seller with an additional source of income after the sale, or help bridge a gap between the buyer’s financing and the negotiated purchase price.
The seller may also view financing as a way to facilitate a transaction that otherwise might be more difficult to complete.
Why Might a Buyer Consider It?
For a buyer, seller financing can potentially provide additional flexibility when structuring an acquisition.
It may allow the buyer and seller to negotiate terms that complement the primary financing used for the purchase.
However, seller financing still represents debt and should be evaluated based on the practice’s ability to support the resulting payments.
Seller Financing Is Not Free Money
One important point is that seller financing does not eliminate the cost of purchasing the practice.
The buyer still has an obligation to repay the seller according to the agreement.
The interest rate, repayment period, payment schedule, and other terms can affect the total cost of the arrangement.
How Does It Work With a Bank Loan?
Seller financing can sometimes be combined with other financing, but the structure has to meet the requirements of the primary lender.
The lender may have specific rules regarding subordinate debt, repayment terms, collateral, and the seller’s position in the transaction.
These requirements should be understood before finalizing the purchase agreement.
What Should the Agreement Address?
A seller-financing agreement should clearly establish the terms of the obligation.
Important provisions can include:
- Amount being financed
- Interest rate
- Payment schedule
- Repayment period
- Collateral
- Default provisions
- Prepayment terms
- Relationship to other financing
The buyer should have qualified legal and financial professionals review the agreement.
Does Seller Financing Reduce the Purchase Price?
Not necessarily.
Seller financing changes how the purchase is paid for, but it does not automatically mean the practice is worth less.
The buyer should evaluate the purchase price separately from the financing structure.
Consider the Practice’s Cash Flow
The most important question is whether the practice can comfortably support its obligations after closing.
The buyer should consider the primary loan payment, seller-financing payment, payroll, rent, supplies, insurance, taxes, and other operating expenses.
What Happens During the Seller’s Transition?
Seller financing can sometimes be accompanied by a transition period in which the previous owner remains involved.
For an ophthalmology practice, this can help with patient introductions, staff relationships, referral sources, and the transfer of operational knowledge.
The financing agreement and transition arrangement should be treated as separate considerations even when they are negotiated together.
Get the Structure Right Before Closing
The financing structure should be established before the purchase agreement becomes final whenever possible.
Changing the debt structure late in the process can require additional lender review and potentially delay the closing.
Final Thought
Seller financing can be a useful tool in some ophthalmology practice acquisitions. It may provide additional flexibility for both the buyer and seller, but it also creates another financial obligation that needs to be evaluated carefully.
Physicians should consider the seller-financing terms alongside the primary loan, purchase price, practice cash flow, working capital needs, and other obligations before completing an acquisition.
