We’ve received many questions from chiropractors who are planning to sell a Chiropractic Practice but have Loans or Debt. Thanks to government assistance programs such as the Payroll Protection Program (PPP), Economic Injury and Disaster Loans (EIDL) or other loans that are common in the chiropractic profession, we’ve received this question more than ever before. This makes sense given the fact that there are a huge number of chiropractors who have taken these government-based programs to sustain their business – and because in the case of PPP or EID, these loan programs did not exist prior to 2020. But it also makes selling a chiropractic practice a bit complicated because we’re navigating new territory with some of these loans.
Here’s the good news:
THE GOOD NEWS if you are planning to Sell a Chiropractic Practice With Loans or Debt
We’ll start with the simple good news first:
If you have loans or have participated in one of these disaster relief measures, you did not just kill your sale!
In other words, if you are planning to sell a Chiropractic Practice but have Loans or Debt — whether it is from the PPP or EID programs — or even other types of loans, your sale will not be stopped in its tracks. Even though the loan programs are new, in many cases the debt is handled the same way it always has been in a chiropractic practice sale.
How Debt or Liabilities Are Handled in a Chiropractic Practice Sale
From one angle, debt is typically dealt with in two ways in your chiropractic practice sale – depending on how the sale is structured as an Asset Sale or Stock Sale.
Based on an analysis of business sale transactions, approximately 70% of small business sales are Asset sales. (From our experience, this figure is probably even higher for chiropractic practice sales). The remaining 30% are Stock Sales. While we won’t go into the details of the merits of each in this article, let’s focus on what happens to the debt during these sales.
In an Asset Sale, any existing debt will need to be satisfied either prior to the sale or the debt will be satisfied with your sale proceeds and paid off during closing. For example, if you have a $10k loan or lease on a piece of equipment, then the bank is going to want to make sure that asset is “free and clear” for the buyer. And, unless special arrangements are made, it will be paid off during or prior to closing.
In a Stock Sale, any existing debt or liabilities can transfer to the Buyer. So the same $10k loan in the example above would then be assumed by and become the responsibility of the Buyer.
THE CHALLENGE WITH Planning to sell a Chiropractic Practice and PPP or EID Loans
Assuming you are like the majority of chiropractors and will sell your business through an Asset Sale, there may be some additional steps for you to consider in planning to sell a Chiropractic Practice with loans or debt such as a PPP or EID Loan.
We will call the first category “General Debt.” These could be liens, loans, leases and other liabilities that your business has. Your business owes money on these liabilities and they will impact your sale as described above by either needing to be paid off prior to your sale or during closing with sale proceeds. If you have personal liabilities (you took out a personal loan) that were for business purposes, generally, these will not be included and would not need to be satisfied prior to the sale. But obviously, you will still have to pay them off somehow.
That’s the easy part.
For EID Loans, even though these are special disaster loan programs, they will be treated just like every other loan or liability against your practice. So not much different there, just a different name on a new program.
The Potential PPP Loan Problem
The potential problem comes with PPP loans and more specifically, their potential to be a Forgivable loan.
From your point of view, you obviously don’t want to repay the portion of your PPP loan that would be considered forgivable. But from the SBA’s perspective, they do not trust that you followed the rules properly and they will not automatically consider that your loan is Forgivable and just wipe out during your sale. So if you are planning to sell a Chiropractic Practice but have a PPP loan, you will have an extra step involved in applying for “proving” the forgivable portion of your PPP Loan.
For example, if you had a $50k PPP Loan and used it at the right time, for all the right purposes and to the degree that it was declared 100% Forgivable, then prior to your sale, you would submit an application to the lending bank (not the SBA) for the PPP Loan Forgiveness.
If the PPP loan is “proven” as 100% Forgivable, then your $50k goes away and you keep all your sale proceeds. And you sail towards your sale with a clean and simple slate.
How a PPP Loan May Delay Your Proceeds
While the situation above sounds great and certainly would be the outcome that most chiropractors who are planning to sell a Chiropractic Practice but have a PPP, EID Loan or Debt would want, that scenario will only happen if all the details and paperwork are wrapped up in a neat and tidy package prior to the closing of your practice sale. If you know you plan to sell your chiropractic practice in the near future, then it benefits you to apply to have the PPP loan forgiven — and keep the paperwork from your bank showing that the PPP has been forgiven! When you sell, the lender’s bank can verify that your PPP loan has been forgiven and your sale will move forward seamlessly.
On the other hand, it may be possible that all your PPP loan forgiveness is not wrapped up perfectly prior to closing. If that happens, the lending bank will likely force you to set up an Escrow account in coordination with your PPP Loan funds. Your sale can still close but the amount of the PPP loan will be held in Escrow at closing and will not be released to you. Once the PPP loan is confirmed as forgiven, then Escrow will release the funds to you. And what happens in the case where your PPP loans are not forgiven? You guessed it – you’ll be forced to repay the PPP loan – just like any other debt.
THE BOTTOM LINE AND NEXT STEPS
Even under normal circumstances, selling your chiropractic practice can be a complicated process that is important to get right since your business sale proceeds may be a significant portion of your retirement or “second act” funding. There are also tax and legal implications to consider that can be costly if done improperly or without experienced counsel. In addition to the financial risk, leaving your legacy under the right terms and transferring your patients to your successor in a positive manner is also critical to your sale success.
This is why I am a strong advocate that the typical sale is NOT a Do-It-Yourself project — beyond the obvious fact that we help chiropractors sell or transition their practice.
If you are planning to sell a Chiropractic Practice but have Loans or Debt — regardless of whether this debt is from PPP Loans, EID loans or otherwise — my recommendation is even stronger: get help so you can avoid common and costly mistakes!
And when you’re ready, we’re happy to be that help and resource for you…
If you’d like to learn what it takes to successfully sell your chiropractic practice, check out our FREE webinars – where we will discuss the factors that affect the value of your chiropractic practice sale and help you do it right!