Volume 37: Organize your Debt in Order to Sell your Practice
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:
- 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.
- 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
- One Year Later
- Dealing with Unsolicited Offers
- Covid-19 Practice Sales Update
- When is the Right Time to Sell Your Practice and Why?
- Partnership Pitfalls
- The Real Cost of a Dental Practice Set-up
- Smaller Practice Realities
- Dental Market Update - 2019
- Creating Your Own Most Valuable Practice (MVP)
- Small Practice Economics
- The Market is Very Efficient
- How Can Dental Practice Values be Rising and Declining?
- Hygiene as a Value Driver
- The Value of a Good Team
- Is it Time to Move?
- Staging A Dental Practice
- The High Cost of Dying
- Patients - Attract and Retain
- Should I Stay or Should I Go?
- Is There a Buyer for Every Practice?
- Good, Better, Best - The Market has Spoken
- Buying Time
- Patients, Patience, Patients
- A Real Patient
- Why Do a Practice Valuation? I'm not Selling
- Irrational Exuberance or The New Normal?
- Do dental equipment and dental technology affect a practice value?
- Finding and Being a Mentor
- Bigger is Better
- Dave's Top Ten List for Buyers (Vendors should read this too!)
- How Well Do You Know Your Practice?
- Dave's Top Ten List for Vendors
- What will happen to dental practice Values in the next 10 years?
- Your Premises Lease is an Important Asset
- What are Associates Thinking?
- There is Life Outside the GTA
- When Is the Right Time to Sell My Dental Practice?
- Mergers are a Viable Option
- Is Your Associate an Asset or a Liability?
- Has your Practice Facility Kept Up With Your Billings?
- The 100 per cent of Gross Myth
- The Past, The Present and The Future
- Caveat Emptor
- Overpaid Long Term Staff
- Selling your Practice in Stages
- A Potential Pitfall of Selling Shares
- Value in Your Practice Through Balance
- Only Trusted Staff Can Defraud You
- To Own or Not to Own Practice Real Estate? That is the Question.
- Coping With A Large Patient Base
- Successful Dental Practice Transitions
- Taking Care of Business
- The Investing Dentist Phenomenon
- Two areas to focus upon that could negatively impact the value of your practice
- Organize your Debt in Order to Sell your Practice
- Having a Better Team
- How Do I Prepare My Practice For Sale
- How Do I Prepare My Practice For Sale? Part 3
- How Do I Prepare My Practice For Sale? Part 2
- How Do I Prepare My Practice For Sale? Part 1
- Advice to My Son or Daughter Graduating from Dental School
- Transition - What to Expect
- Discussion on Digital X-Rays
- Partnerships and Shotguns
- Strategic Planning - How to Get Started
- Calling All Vendors - Practices have Gone Up in Value
- Purchasers: Expect to Pay More for a Practice because of Lower Professional Corporation Tax Rates
- Matrimonial Practice Valuations
- Purchaser's Guide to Affording a Practice
- Location Improvements Throughout Your Career
- Small Practice Valuations
- Partnerships – The Best and The Worst
- Changing Location When the Opportunity Comes Along
- Visual Presentation of Your Practice
- Presentation of Charts
- Your Premises Lease Can Be Your Worst Enemy
- How to Select an Appraiser for Your Practice
- How Are Your Billing Ratios?
- It Pays to Invest in Your Tangible Assets
- The Importance of Separate Financial Statements
- Five Time Frame Levels to Sell a Practice
- 12 Suggestions to Safeguard Computer Data
- How to Buy a Visible Practice
- Why is there a shortage of good practices today?
- The Importance of Equipment in the Purchase of a Practice
- The Balanced Practice
- Will My Practice Be Saleable in The Future?
- Buyer Be Aware
- Excess Profit - The Second Key
- Patients and Profits are the Keys
- Plan Ahead