The Nuances of Veterinary Financing and Buyer Pre-Approval
With interest rates at an all-time low, it is a great time to buy a practice. In this article, I will explain what is expected of a buyer before their offer can be accepted to purchase a veterinary practice.
To understand veterinary financing, I would like to go over some basic terms.
Interest Rate The amount a lender charges for the use of assets expressed as a percentage of the principal
Variable Interest Rate (Sometimes called an “adjustable” or a “floating” rate) It is an interest rate on a loan or security that fluctuates over time because an underlying benchmark interest rate or index that changes periodically is its basis.
Fixed Interest Rate It is a constant rate charged on a liability, such as a loan or a mortgage period.
Closing Costs (Sometimes called settlement costs) The fees you pay when obtaining your loan.
SBA Loan This type of loan usually has a variable interest rate, is guaranteed by the Federal Government (U.S. Small Business Administration), and the borrower has to provide SBA insurance for the loan. The equity requirements and credit rating requirements are lower, but the interest rates and closing costs are higher.
Conventional Loan The Interest rate is usually fixed; the bank supports the loan; it has higher equity requirements and required a higher credit rating from the borrower.
Equity It is asset ownership that may have debts or other liabilities attached to them. Equity is measured for accounting purposes by subtracting liabilities from the value of an asset.
Amortization It is the length of time it will take to fully pay off the amount owed by paying incremental payments of principal and interest.
Term The mortgage term is the loan’s length of time at a set interest rate.
Balloon A type of loan that does not fully amortize over its term. The borrower agrees to pay off the remaining principal before the loan. The balloon payment is required at the end of the agreed time to pay the remaining principal balance of the loan
Seller Note An alternative form of business capital that is flexible but carries certain risks. The seller agrees to accept a portion of the purchase price in a series of deferred payments. Seller notes occur when the buyer is not required to make a downpayment.
CDA A confidential disclosure agreement is a legal contract that protects proprietary information and binds the parties to hold information in confidence.
Letter of Intent A non-binding agreement declaring the preliminary commitment of one party to do business with another. The letter outlines the chief terms of a prospective deal.
When I have a practice listed to sell, before an interested buyer can see specific information, I require them to sign a CDA. Once I receive a signed CDA, I send the potential buyer the practice marketing book. The Marketing Book has the basic financial data, photographs, and floor plans, and describes the location and demographics of the area. Buyers should realize that the gross production of a practice does not reflect its profitability. Buyers should concentrate on the net income, owner compensation, and owner benefits. I have seen practices grossing well under one million that are more profitable than a veterinary hospital grossing over a million.
If, after reviewing the marketing book, the buyer is interested in purchasing the practice, the buyer must be pre-qualified for a loan. Once they are pre-qualified, the buyer is eligible to submit a letter of intent. As the broker, I will assist the buyer in finding a loan that meets their needs. This process can take three to four weeks, so once the buyer signs a CDA, I immediately begin the pre–approval process. The seller will only accept a letter of intent from a pre-approved buyer.
Interest Rates are currently at record lows. Introductory rates for a conventional loan are as low as 2%, with fixed–rate financing as low as 3.5% with a term of 10-20 years. A buyer with an excellent credit rating and minimal credit card debt will qualify for a conventional loan. If the buyer is married, the shared income of the couple can enhance the buyer’s qualifications. In this situation, the lender requires the spouse to co-sign the loan. Student loans are generally not held against the buyer unless they are excessive.
If a buyer cannot qualify for a fixed interest rate loan, I will show them options using SBA loans.
Next month’s article will explain Seller’s Notes and their role in Veterinary Financing.
Dr. John Bryk
Total Pracice Solutions Group
Mid-west, Mid-Atlantic & Northeast