We spoke to Chris Wallace, Practice Finance Business Development Officer at US Bank, to learn more about the borrowing process for those who wish to finance the purchase of a veterinary practice.

Financing a practice acquisition, particularly for a veterinarian, typically begins with looking at a conventional loan as the most advantageous route for the borrower and the business.
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‍Conventional vs. SBA Loans

• Conventional loans are generally preferred because they offer a fixed term and a fixed, significantly lower interest rate compared to an SBA loan. The terms may also be fixed, unlike SBA loans.
• SBA loans are considered a backup option if the conventional route is not feasible. These loans usually come with higher fees, a typically higher variable interest rate, and terms that may not be fixed.
• The speaker notes that the barrier to entry for financing is relatively easy for a conventional loan to acquire a practice and/or real estate.
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Financing Details

• Practice Acquisition: Lenders generally aim to provide 100% financing for the purchase price of the practice. They also provide working capital to cover fixed expenses like rent, payroll, and utilities from day one. Borrowers are not expected to make a down payment toward buying the business itself.
  • Lenders will lend up to a certain percentage of the practice's gross revenues, typically between 95% and 100%.
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• Real Estate Acquisition: When buying real estate with a practice, the financing is different. Lenders are generally comfortable lending 80% of the appraised value of the building, meaning the borrower is responsible for a 20% down payment component. Alternative options exist to fund this down payment, such as additional seller financing or leveraging equity left in the practice.
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• Repayment Terms:
  • Conventional practice acquisition loans typically have repayment terms between 10 and 15 years, with the 15-year term being the most widely used option.
  • Repayment terms for real estate can be extended to 20 or 25 years.
  • Most loans come with a five-year prepayment penalty, which is standard in the industry.
  • Lenders may accommodate 6 to 12 months of interest-only payments upfront to lessen the financial burden as a new owner steps into the practice.
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• Fees: For US Bank, the only fee on the acquisition loan is a commitment fee.
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Borrower Profile

Lenders look at a few main components for a borrower's profile:

• Credit Score: A credit score of around 700 is generally sought.
• Experience: It is highly important that the borrower has been licensed for around two years before buying their first practice, demonstrating real-world experience. Income is a factor but does not weigh as heavily as time licensed and experience.
• Liquidity: Lenders want to ensure the borrower has built up some savings (a "rainy day fund") for personal funds to fall back on if anything goes wrong, not as a down payment toward the practice.
• Production: For larger practices, the lender wants to ensure the new buyer can make up for the seller's production to avoid a shortfall in revenues.
• Location: Location is typically not a huge factor and lenders will finance across all 50 states. However, a borrower with ties to a new area—or who has lived there for a few years or has family there—makes the bank feel more at ease. Additionally, the lender requires the borrower to live roughly 60 miles from the practice due to the risk associated with a long commute.
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Associate Buy-ins

Associate buy-ins are different because the borrower is only buying a percentage of the practice. The major difference is the need for collateral. Most lenders, including US Bank, will not offer a personal loan for a buy-in but require a corporate guarantee of the practice up to the percentage the associate is buying in. This guarantee requires collateral on the practice and an additional conversation with the current owner.
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Due Diligence for Buyers

A buyer should ask the seller for the following documents:

• At least three full years of tax returns, which the bank requires.
• A full-year profit and loss statement (P&L) for the most recently completed calendar year if tax returns are not yet available.
• A practice profile including square footage and staff information.
• Staff wages, so the buyer knows the expense.
• The lease, ensuring it is assignable or transferable if real estate is not being purchased.
• Production reports.
• Equipment or lease contracts.
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Acquisition Process

Chris recommends the following steps for purchasing a practice:

1. Pre-qualification: Get in contact with a lender who understands the space to have a pre-qualification conversation. This shows seriousness to brokers and confirms the borrower is qualified.
2. Broker Search: Reach out to different brokers to see available opportunities in the desired area.
3. Narrow Search: Narrow down the search area to places where the buyer is certain they want to live and work to avoid a mistake that can happen when stretching the location.
4. Letter of Intent (LOI): Send an LOI to purchase the practice at a set amount for the purchase price.
5. Application: Once the LOI is accepted, start the application process with the lender to secure financing during the LOI's period for financial due diligence.

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