It’s not an uncommon scenario for chiropractors looking to sell their practice to be asked to carry part of the note or offer partial seller financing. Your buyer may be buried in student loans, without enough credit, collateral or other circumstances that equate to getting a bank to loan them enough money to buy your business.
Other times you as a seller are required to hold paper because the buyer is worried about something happening that could decrease the revenue of the business they bought. The buyer could be anxious about losing patients, having lawsuits appear that the buyer didn’t know about, or employees riding off into the sunset along with you. These are all legitimate concerns and as a seller you need to do everything in your power to minimize the chance of any of these things happening when it comes time to sell your chiropractic business.
I’ve seen it too many times: A seller (you) finally finds someone to buy their chiropractic business. The buyer doesn’t have enough cash and can’t get financing from the bank to pay you cash.
Your broker or intermediary says that if you want the deal to close you’ll have to provide owner financing. You agree because you don’t think you have any other options.
Fast forward to a year or eighteen months down the road. Your buyer has made some really dumb business decisions. As a result their numbers are down, patient visits are decreasing, collections are not what they were when you had the practice and the business is now in trouble.
The new owner decides that they have to save money somewhere. Guess where they’re going to look? Yup, that’s right, there going to look at that nice monthly payment they make to you. First they’re going to start making late payments. Before you know it they’ve managed to miss a payment or two. Then your buyer has really screwed up the business. They don’t have the cash to pay you and just plain stop paying you at all.
Now you try to collect but it’s too late. There is no money in the business, the business isn’t worth anything because the buyer has ruined it, and you don’t have any recourse because that personal guarantee that you thought had value turns out to have no value. This story happens way too often and too often has the same result: Buyer gets business, buyer ruins business, seller doesn’t get paid.
But it doesn’t have to be this way…
BEFORE you provide seller financing
Whatever the circumstances, you may be considering the possibility of offering seller financing. Before you do, keep these things in mind to lower your risks:
- Get Assets Secured: Get security agreements in place that make ensure you’ll be paid if for any reason the buyer decides to stop paying. To do this, you will need real assets behind the buyer’s promises. If the buyer can’t provide security, then realize that there is a chance and often a good chance you won’t get all of the money that is owed you.
- Be Aware of First Position Lenders: Even if you secure assets, you need to be aware of lenders that may be ahead of you in line. For example, if a chiropractor obtains a loan for the majority of the practice purchase, that lending entity is typically the “first position” lender. What that essentially means is that if things go wrong, they seize the assets first. In some cases, if there are not enough assets to seize, you could be left empty handed. So, be aware of other lenders and take into consideration the size of their assets. If the practice purchase was for $300k, the bank lends $250k and you are lending $50k then there’s no reason to worry if the buyer has assets that exceed $300k. On the other hand, if they own a car worth $10k and not much else, you may not be in a good position.
- Know Your Lending Terms: Some Sellers naively believe that if they finance the sale, they can charge whatever they want an make a ton of interest “on the back end.” This typically is a fantasy. First, if you have another lender involved, they will often limit the interest rate you can charge for the secondary note to a point or two above or below their rates. (After all, they don’t want to look bad). Secondly, your state may limit the amount of interest you can charge without becoming a creditor. Thirdly, if your interest is exorbitant, your buyer may not be able to make the payments because of cash flow struggles.
In the end, seller financing (full or partial) can be a great way to earn some additional revenue on your practice sale and/or provide a path to practice ownership for your buyer. It also can be a bit of a minefield.
Keep these thoughts in mind and get wise counsel to prevent mistakes as this is rarely a total DIY project!