Volume 37: Organize your Debt in Order to Sell your Practice

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I have been in the dental industry for over 20 years, the last 17 of which with CIT Financial, a large commercial finance company where I had overall accountability for the Healthcare Division. We were specialists in providing practice financing to dentists. I am now very pleased to be a partner with Graham Tuck at Professional Practice Sales, and look forward to being a regular contributor to The Professional Advisory.

Organizing your Debt:

When you’re getting ready to sell you need to organize your practice debt. This should be done when you arrange the debt as opposed to when the closing date is looming large. By then it is too late. The type of debt I’m referring to are the term loans and leases that are commonly used to buy assets, not the revolving debt that is used for your day to day cash flow. The latter is usually open for prepayment at any time.

The offer you receive for you practice will include a clause that states you will transfer the assets free of liens and encumbrances. This essentially means you must pay off all debts that are secured by practice assets, including goodwill, in order for the purchaser to be able to close. What some people are not aware of is that there may be penalties owed to the bank or financial institution in to order retire your obligation. These penalties may be far larger than the “three months interest” that everybody believes is standard. Penalties vary by institution, and range from zero to the balance of payments due under the contract.

A natural question at this point might be: why don’t I just transfer the debt to the new owner of my practice and reduce the selling price by the remaining principal? While this is a possibility, it also complicates the deal for a couple of reasons:

  1. Your lender will likely have a blanket security registration, meaning you would be forcing the purchaser to use the same lender. Purchasers normally have their own financing lined up.
  2. Your guarantee may not be released on closing.

So how do you organize your debt to avoid this problem? If you are more than 5 years away from selling your practice, set the term on the loan or lease to expire 6 months before you think you will sell. This will give you a little cushion for unforeseen circumstances.

If you are less than 5 years from selling, or if this is not possible for cash flow reasons, take a loan that has a shorter term than amortization. For instance you could take a 4 year term with a 7 year amortization. This would give you an opening at the 4 year point to pay off the balance with no penalty. Of course you would be exposed to the then current interest rates should your plans to sell change. If you are within 2 years of selling and you need to take on debt for some reason, I suggest you think very carefully before you do so. If you decide to proceed, expect to pay penalties to retire the debt on the sale of the practice.

I look forward to sharing more practice strategies with you in the months and years to come. I would welcome your feedback (positive or negative) on this, my first article, and encourage you to offer suggestions for future topics that would interest you.

The Professional Advisory

  1. One Year Later

  2. Dealing with Unsolicited Offers

  3. Covid-19 Practice Sales Update

  4. When is the Right Time to Sell Your Practice and Why?

  5. Partnership Pitfalls

  6. The Real Cost of a Dental Practice Set-up

  7. Smaller Practice Realities

  8. Dental Market Update - 2019

  9. Creating Your Own Most Valuable Practice (MVP)

  10. Small Practice Economics

  11. The Market is Very Efficient

  12. How Can Dental Practice Values be Rising and Declining?

  13. Hygiene as a Value Driver

  14. The Value of a Good Team

  15. Is it Time to Move?

  16. Staging A Dental Practice

  17. The High Cost of Dying

  18. Deal-Busters

  19. Patients - Attract and Retain

  20. Should I Stay or Should I Go?

  21. Is There a Buyer for Every Practice?

  22. Good, Better, Best - The Market has Spoken

  23. Smooth-Sale-ing

  24. Buying Time

  25. Patients, Patience, Patients

  26. A Real Patient

  27. Why Do a Practice Valuation? I'm not Selling

  28. Irrational Exuberance or The New Normal?

  29. Do dental equipment and dental technology affect a practice value?

  30. Finding and Being a Mentor

  31. Bigger is Better

  32. Dave's Top Ten List for Buyers (Vendors should read this too!)

  33. How Well Do You Know Your Practice?

  34. Dave's Top Ten List for Vendors

  35. What will happen to dental practice Values in the next 10 years?

  36. Your Premises Lease is an Important Asset

  37. What are Associates Thinking?

  38. There is Life Outside the GTA

  39. When Is the Right Time to Sell My Dental Practice?

  40. Mergers are a Viable Option

  41. Is Your Associate an Asset or a Liability?

  42. Has your Practice Facility Kept Up With Your Billings?

  43. The 100 per cent of Gross Myth

  44. The Past, The Present and The Future

  45. Caveat Emptor

  46. Overpaid Long Term Staff

  47. Selling your Practice in Stages

  48. A Potential Pitfall of Selling Shares

  49. Value in Your Practice Through Balance

  50. Only Trusted Staff Can Defraud You

  51. To Own or Not to Own Practice Real Estate? That is the Question.

  52. Coping With A Large Patient Base

  53. Successful Dental Practice Transitions

  54. Taking Care of Business

  55. The Investing Dentist Phenomenon

  56. Two areas to focus upon that could negatively impact the value of your practice

  57. Organize your Debt in Order to Sell your Practice

  58. Having a Better Team

  59. How Do I Prepare My Practice For Sale

  60. How Do I Prepare My Practice For Sale? Part 3

  61. How Do I Prepare My Practice For Sale? Part 2

  62. How Do I Prepare My Practice For Sale? Part 1

  63. Advice to My Son or Daughter Graduating from Dental School

  64. Transition - What to Expect

  65. Discussion on Digital X-Rays

  66. Partnerships and Shotguns

  67. Strategic Planning - How to Get Started

  68. Calling All Vendors - Practices have Gone Up in Value

  69. Purchasers: Expect to Pay More for a Practice because of Lower Professional Corporation Tax Rates

  70. Matrimonial Practice Valuations

  71. Purchaser's Guide to Affording a Practice

  72. Location Improvements Throughout Your Career

  73. Small Practice Valuations

  74. Partnerships – The Best and The Worst

  75. Changing Location When the Opportunity Comes Along

  76. Visual Presentation of Your Practice

  77. Presentation of Charts

  78. Your Premises Lease Can Be Your Worst Enemy

  79. How to Select an Appraiser for Your Practice

  80. How Are Your Billing Ratios?

  81. It Pays to Invest in Your Tangible Assets

  82. The Importance of Separate Financial Statements

  83. Five Time Frame Levels to Sell a Practice

  84. 12 Suggestions to Safeguard Computer Data

  85. How to Buy a Visible Practice

  86. Why is there a shortage of good practices today?

  87. The Importance of Equipment in the Purchase of a Practice

  88. The Balanced Practice

  89. Will My Practice Be Saleable in The Future?

  90. Buyer Be Aware

  91. Excess Profit - The Second Key

  92. Patients and Profits are the Keys

  93. Plan Ahead