What Is Seller Financing When Buying a Veterinary Practice?
Seller financing is an arrangement in which the seller of a veterinary practice provides financing for part of the purchase price. Instead of receiving the entire purchase price at closing, the seller receives payments from the buyer over an agreed period.
Seller financing can sometimes be used as part of a broader acquisition structure, depending on the transaction and financing requirements.
For veterinarians considering veterinary practice financing, understanding seller financing can help when evaluating different ways to structure a practice purchase.
How Does Seller Financing Work?
Under a seller financing arrangement, the buyer typically makes a down payment or obtains outside financing for part of the purchase while the seller finances another portion.
The buyer then makes payments to the seller according to the agreed terms.
The specific structure should be documented by the parties’ professional advisors.
Why Would a Seller Offer Financing?
A seller may offer financing to make the practice more attractive to potential buyers.
Seller financing can also provide the seller with an additional source of income after the transaction closes.
Why Might a Buyer Consider Seller Financing?
Seller financing may provide another source of capital when structuring an acquisition.
It can sometimes help bridge a gap between the purchase price and the amount available through other financing sources.
Seller Financing Does Not Eliminate Due Diligence
A buyer should still thoroughly evaluate the practice before agreeing to purchase it.
Financial statements, tax returns, equipment, leases, staffing, contracts, liabilities, client information, and other relevant records should be reviewed.
Interest Rate
The seller and buyer will need to agree on the interest rate if the seller is financing a portion of the transaction.
The rate and other terms should be documented clearly.
Repayment Period
The parties should establish how long the seller-financed balance will remain outstanding.
The repayment period can affect the buyer’s monthly obligations and the seller’s expected payments.
Down Payment
The buyer may provide some personal funds toward the transaction, while other portions are funded through third-party financing and seller financing.
The required amount depends on the overall transaction structure.
Subordination
When seller financing is combined with another loan, the lender may have requirements regarding the seller’s position relative to the primary lender.
The parties should determine these requirements before finalizing the transaction.
Seller Financing and Acquisition Loans
Seller financing can sometimes be incorporated into a larger acquisition financing structure.
However, lenders may have specific requirements concerning the amount, terms, repayment, and priority of seller financing.
Practice Cash Flow
The veterinary practice’s cash flow should be sufficient to support its ongoing operating expenses and debt obligations.
Buyers should evaluate projected cash flow carefully before taking on additional financing.
Seller Financing and Working Capital
A buyer should consider working capital separately from the purchase price.
After closing, the new owner may need funds for payroll, inventory, supplies, repairs, marketing, and other expenses.
Risks for Buyers
Seller financing creates another financial obligation for the buyer.
The buyer should understand the payment schedule, interest rate, default provisions, and other terms before signing an agreement.
Risks for Sellers
The seller takes on the risk that the buyer may not make all required payments.
Sellers should work with qualified legal and financial professionals to structure and document the arrangement appropriately.
Transition Considerations
Seller financing may sometimes be paired with a transition period in which the previous owner remains available to assist the buyer.
The parties should clearly define the seller’s responsibilities if continued involvement is part of the agreement.
Get the Agreement in Writing
Seller financing should be documented through appropriate legal agreements.
The documents should clearly establish the principal amount, interest rate, payment schedule, maturity date, collateral arrangements where applicable, and consequences of default.
Evaluate the Entire Transaction
Seller financing should not be evaluated in isolation.
The buyer should consider the purchase price, third-party financing, seller financing, working capital, equipment needs, real estate, and projected cash flow together.
Final Thought
Seller financing can be one potential component of a veterinary practice acquisition. It may provide additional flexibility for structuring a transaction, but both the buyer and seller need to understand the financial and legal obligations involved.
Veterinarians considering seller financing should evaluate the practice carefully, understand the complete financing structure, and work with qualified professionals before completing the transaction.
