Finances

How to Buy a Practice with 100% Bank Financing–or Sell to a Young OD Instead of PE

By Alan P. Levitt, OD

Oct. 5, 2022

When I went to Miami Nice, our annual continuing education meeting earlier this year, and started talking to a banker who specializes in physician practice purchase loans, I learned something: It’s often readily possible to buy a practice with 100 percent bank financing, or sell to an associate OD, who can buy it with 100 percent bank financing.

Prior to selling my practice last year, I explored all available purchaser options: private equity, private group practice, and finally, private individuals or partnered optometrists.

In speaking to many of my contemporaries, who are also transitioning their practices, none of them were aware that numerous banks offer 100 percent financing for younger colleagues to purchase practices. They all found it remarkable that doctors burdened with substantial outstanding student loans generally qualify for full financing. Here is what I learned.

Opening Up Practice Ownership to Younger ODs
Before the explosion of PE in healthcare over the last 10 years, private practice optometrists typically would have sold their practices to associates or fellow optometrists.

Changes in graduate demographics, overwhelming student debt and risk-aversion all combined to diminish the pool of younger colleagues with the motivation and financial resources to purchase private practices. Self-financing a practice purchase was, and remains, an infrequent occurrence.

Interestingly, an increasing number of recent graduates are now investigating the possibility of purchasing a private practice. Over the course of a long career, successful independent owner-operators have significantly more opportunities to build net worth than associates. Well established, medically oriented practices are particularly attractive options for individual optometrists or groups of two or more.

Optometrists planning the process of selling their practices need to know that younger colleagues, even with large student loan balances, can readily secure 100 percent purchase financing with 10-to-15-year fixed terms from major banks such as PNC, Bank of America and Wells Fargo.

Community and local banks, or credit unions, such as Vision One Credit Union, are also options. Buyers and sellers may be surprised to learn that banks strongly base their decision to extend an acquisition loan on the financials of the practice being purchased.

While it’s true that bankers recognize that almost all recent graduates have substantial student loans, it’s not a deal-breaker. The important variable that will be considered is the total debt-to-income ratio that the OD will have post-close, since the bank will want to know that the net income from the practice will be capable of servicing both debts.

Who Is the Ideal Candidate for Purchase via 100% Financing?
The ideal candidate for a practice purchase bank loan will have a minimum of two years’ experience after graduation, limited personal debt, 3-4 months of cash savings for operating and personal expenses, and have not declared bankruptcy. If the doctor meets these prerequisites and the practice under consideration has good financials, multiple banks will likely offer 100 percent financing. Risk to the lender is low as less than 1 percent of doctors default on their loans. Banks may even finance a doctor purchasing more than one practice if each practice has solid financials and the doctor is current on all obligations.

Bankers want to establish long-term relationships with professional owner-operators. Find a local banker that works with independent professionals, open an account and create a plan together to purchase a practice.

Creating an Alternative to Selling to PE
With this knowledge, potential buyers are empowered to consider private practice, and sellers have now expanded their options for transitioning their practice beyond PE.

PE groups often prefer to purchase practices with annual gross collections of $1 million, or more, and pay a premium for larger practices or practices with multiple locations. Typically, they pay 60-80 percent at closing, pay the balance with interest over 3-5 years and require the selling optometrist to remain active in the practice for at least three years on a salary or salary with incentive basis.

The total PE purchase price will likely be much greater than a direct sale to a colleague, but realize that continuing to work in the practice at a minimal salary helps finance their purchase of your practice. For doctors who need to be in control of all practice decisions or desire a fast exit, a PE sale may not be the ideal option.

In contrast, a solid profitable practice with a gross under $1 million may be more attractive to a private purchaser than PE, though some PE groups have just recently started approaching practices grossing less than $1 million. Selling to a younger colleague or colleagues with 100 percent bank financing will allow the seller to receive their funds at closing. The seller may then just walk away, stay on to assist with the transition, or become a part-time or full-time employee of the new owners. The sale price is likely to be lower than a PE transaction, typically 60-75 percent of the last three years average gross collections.

Working an extra two or three years with full salary and benefits, retaining complete control of your practice and schedule, while contributing substantially more to your retirement accounts are huge factors to consider. If you do the math and compare the total value of a high multiple PE sale price combined with a significantly lower salary over three years versus retaining full ownership and selling for a lesser amount to a colleague, you may be surprised to determine the deferred private sale is equally, or more, profitable. It’s so easy to be overwhelmed by the proposed PE purchase price without looking at the whole picture.

Potential buyers: have confidence that major banks are telling you purchasing a private practice can be a great investment with manageable risk. They will help you determine if the practice under consideration is offered at a realistic price and has the finances to pay back your purchase loan, pay your personal debts and still allow you to make a living.

Potential sellers: you now know that PE is not the only viable option to sell your practice. Calculate and compare the total expected amount of sale price, salary and benefits over three years to determine which option makes the most financial sense. Can you accept being a contract employee with no input regarding how the practice is run? Educate your associates and younger colleagues that 100 percent bank financing is readily available and makes purchasing your private practice a viable option. Allowing your private practice to remain in the hands of a younger colleague, or colleagues, while receiving an immediate payout–priceless.

Alan P. Levitt, OD, now retired, was a practice owner in Miami, Fla, for three decades before selling his practice in 2021. To contact him: idocalmiaf@aol.com

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