Buying a Dental or Medical Practice with an SBA Loan

The short answer

Buying a dental or medical practice with an SBA 7(a) loan is common, and practices are often good fits: steady demand, recurring patients, and records that show years of collections. What makes them different from most acquisitions is that the buyer is usually the business’s main producer. The lender is underwriting the practice’s history and your ability to keep producing at a similar level, under rules that limit how long the seller can stay involved.

If you’re new to how acquisition financing fits together, start with buying a business with an SBA loan; this page covers what’s specific to practices.

What lenders look at in a practice

Collections, not production. Production is what was billed; collections is what was received. Lenders work from collections and from tax returns, and they reconcile the two. A practice with a big gap between production and collections, or with growing receivables, will draw questions.

Who produces the revenue. How much comes from the selling doctor, from associates, and from hygiene or other providers? If most of it depends on the seller personally, the lender will want to see why patients will stay when the seller leaves. A practice with a strong hygiene program and an associate who is staying is easier to underwrite than a solo practice built around one personality.

Payer mix. Fee-for-service, PPO or other insurance, and government programs each behave differently. A practice concentrated in a single payer or network carries more risk if that contract changes. For medical practices especially, reimbursement depends on contracts and enrollments that generally do not move automatically to a new owner (see licensing below).

Patient base. Active patient counts, new-patient flow and recall rates are the practice equivalent of customer retention. Bring them; lenders and valuation analysts use them to judge whether historical cash flow will continue.

Equipment and technology. Old chairs, imaging or practice-management systems mean spending soon after closing. Lenders deduct ongoing capital spending the business must fund, and they notice when a big replacement is due.

The lease. Most practices lease their space. The lease has to be assignable to you, with enough remaining term (including options) to support the loan. If the seller owns the building, you may be buying it too; see buying your building.

Add-backs: what’s usual and what gets challenged

Practice financials often run personal expenses through the business, so add-backs matter. The usual ones:

• The seller’s own compensation, which goes away and is replaced by yours.
• Depreciation, amortization and interest on debt being paid off.
• Personal vehicle, travel or family members on payroll who won’t stay.
• Genuinely one-time costs, such as a buildout or a lawsuit.

Then the lender deducts a realistic salary for you, the producing owner. This is where buyer and seller math often parts ways: a seller’s “cash flow” figure that ignores what it costs to replace the doctor is not the number a lender uses. When a lender adjusts owner compensation, the current rulebook requires the adjustment to be supported by a global cash-flow analysis showing the principals can still meet their obligations. In practice that means your pay has to cover your household, including any student loans. The add-backs entry explains the general idea, and how lenders calculate cash flow walks through the method.

Licensing, ownership and transferability

• Who can own the practice. States regulate who may own a dental or medical practice, and in many states ownership is limited to licensed professionals. Confirm your structure with a healthcare attorney before you sign anything.
• Your license and registrations. You need to be licensed in the state, and registrations that are personal to the provider, such as controlled-substance registrations, are yours to obtain.
• Payer contracts and credentialing. Insurance contracts and government program enrollments often need to be re-established or reassigned for a new owner or entity. Until that’s done, claims can be delayed, which is a working-capital problem, not just paperwork. See working capital in a business acquisition.
• Patient records. Custody and privacy obligations for records transfer with the practice and belong in the purchase agreement.

The selling doctor’s role after closing

This is where practice deals most often need restructuring. Many sellers want to “work back” for a few years. Under the current SBA rulebook, when an SBA loan funds the purchase of the whole business, the seller may not remain as an officer, director, stockholder or employee. If a transition period is needed, the business may contract with the seller as a consultant for up to 24 months in total, including extensions.

Whether a particular arrangement, such as the seller treating patients a few days a week, fits within those limits is a question for your lender and attorney, and it should be answered before the letter of intent. If the seller wants to keep part of the ownership, that’s a different transaction type with different rules; see the partner buyout guide. More on structuring the handover is in the seller transition period.

Valuation and price

Practices are often priced as a percentage of collections or a multiple of cash flow. Lenders care about the second. The lender orders an independent business valuation from a qualified, credentialed appraiser, and it must be prepared for the lender, not for you or the seller. If the price comes in above the valuation, the gap generally has to be filled with equity rather than more debt. How to value a business for an SBA loan explains how that plays out.

Questions to settle before the letter of intent

1. What are collections, net of refunds, for the last three years and year to date, and do they tie to the tax returns?
2. How much revenue depends on the selling doctor personally?
3. What is the payer mix, and which contracts or enrollments must be re-established?
4. Is the lease assignable, and for how long?
5. What role will the seller play after closing, for how long, and is it consistent with SBA rules?
6. What equipment needs replacing in the next few years?

Test your own price and coverage in the acquisition calculator, then see how business acquisition financing is put together. If you’re looking at a practice now, tell us about it; we’ll give you an honest read on the structure, including options that aren’t an SBA loan.