For aspiring veterinary practice owners without significant cash on hand, seller financing may be a viable option when traditional financing methods fall short. In most transactions, the seller will receive all the proceeds at closing, but there are circumstances in which seller financing becomes necessary. While seller financing can be beneficial for both the seller and buyer of a veterinary practice, it takes a skilled veterinary attorney to close the deal.
At Mahan Law, our practice is dedicated to helping veterinary professionals navigate practice transitions. We have in-depth knowledge of the funding options available to buyers and a demonstrated track record of helping our clients engage in successful transactions. Contact our office today for a consultation.
What Is Seller Financing In Veterinary Practice Acquisition?
Also known as owner financing or a seller carryback, seller financing involves the practice seller acting as a lender to cover a portion of the total purchase price when a bank will not offer the full amount the buyer needs to close the deal.
Usually, buyers must obtain funding to cover the entire purchase price. In a seller carryback, the seller carries the note on the loan, and the buyer makes payments to the seller with interest. The seller agrees to finance part of the deal when they are confident the practice will generate enough revenue for the new owner to pay back the loan.
How does seller financing work?
Seller financing has many of the same characteristics as a traditional business loan. The buyer provides personal financial documents and other pertinent information to the seller. Because the seller expects the buyer to run the veterinary practice efficiently and make payments on time, the seller needs proof that the buyer understands the business aspects of running a practice and knows how to handle finances.
The seller will also likely request a business plan to verify that the buyer has a strategy to grow the practice. In addition, the seller has the ability to run a credit report on the buyer and the right to deny financing if the buyer doesn't meet lending criteria. As with traditional funding, buyers with a lower credit score can expect to pay higher interest rates and may be required to make a larger down payment and/or sign a personal guarantee.
Once the seller approves a buyer for financing, the parties will draw up a contract that specifies the terms of the loan. While no two veterinary practice sales are the same, common terms in seller financing include:
- Loan amount – Between 5 to 30 percent of the purchase price, depending on the amount of the down payment and the bank loan.
- Term length – The amortization of a carryback is typically aligned with the buyer's bank loan; 10-year repayments are common.
- Interest rate – Because these loans are subordinate to bank loans, the seller note could be up to 2 percent higher than the banknote; about 5 percent is reasonable.
- Prepayment Penalty – Most carrybacks do not have prepayment penalties, so the loan can be paid off within 24 months of the transition.
Benefits of Seller Financing for Buyers
Seller financing can be beneficial for buyers in many ways, such as:
- Access to financing – Motivated sellers (e.g those planning to retire) are often willing to finance transactions to cover the gap when bank loans alone do not cover the transaction.
- Attractive financing terms – Down payments are usually lower with seller financing. A seller that is motivated to close the deal may also be persuaded to make loan terms more appealing to the buyer.
- Expedited closings – When sellers are motivated, they will work to keep the financing process moving forward. Also, since buyers are asking lenders for a smaller loan amount, their odds of approval are higher.
Benefits for Sellers
Some of the benefits of financing for sellers include:
- Attracting more buyers – For sellers who want to sell their veterinary practice quickly, seller financing can dramatically widen the pool of potential buyers.
- Receiving a higher selling price – Seller financing may allow the seller to ask for a higher price for the practice while also receiving interest on the loan amount.
- Tax benefits – Because sellers receive monthly payments for their practice over months or years, such incremental gains will result in lower income taxes compared to a lump sum at closing.
Why Choose Mahan Law?
Whether you are looking to buy or sell a veterinary practice, we can help. Lead attorney Anthony Mahan is also the owner of a veterinary clinic, which makes him uniquely qualified to guide you through the requirements of seller financing. Our legal team has a well-earned reputation as well-informed attorneys who understand the challenges of buying and selling veterinary practices. Above all, we will work to ensure the intended transaction is handled expediently and professionally. Contact our office today to get started.