Partial Practice Acquisition Loans – Problems and Solutions

May 23, 2019 | Articles, Coffman Capital, Practice Acquisition Financing

Partial Practice Acquisition Loans – Problems and Solutions

From time to time, Coffman Capital and other financing sources are asked the age-old question: Can I get a loan to buy a part of another professional’s practice?

Let’s break it down:

From a fundamental lending perspective, the lender must perfect an interest – usually in first position – in the whole business, i.e. they have to file a lien in first place and secure all of it at once.  The only way to do that is for the current owner to guaranty the loan with their own shares – and possibly a personal guaranty.  Even without a personal guaranty, the owner is going to resist risking the business on the performance and payments of the new partner.  Then you know the owner won’t be thrilled (or advised by a good attorney) to take the personal risk.Accounting-Practice-Loans-Coffman-Capital-

And in case someone wants to try using an SBA loan, that agency specifically prohibits the current owner from retaining any ownership interest at all.  The only exception to that rule is a partner buy-out.  An outside buyer has to completely replace the current owner, with transition rules even prohibiting the owner from working there for more than 1 year (and not be a “key employee, director or officer”).

Therefore – a partial buy-in loan on the existing business itself is difficult if not impossible to do. There are ways of accomplishing the buy-in:

  1. A buyer can form a new entity and buy specific assets from the owner, and put up personal collateral, along with a hopefully strong personal guaranty. The lender can’t count on the cash flow of the business because they can’t secure it. If the borrower is strong enough on their own, they are likely to have a bank already in place, so we aren’t needed to help – but let us know if you do.
  1. A traditional stock purchase or installment sale could be arranged so that the buyer is buying shares according to a contract with actual payments made into an account and shares credited to the buyer. At some point, when fully documented that at least 10% of the stock has been accumulated, those shares can be credited as the amount paid in and then the buyer can actually qualify for a full buy-out loan if that’s what both parties want to do.
  1. The seller can simply finance it themselves. The downside is that to refinance that debt and pay it off with a full buy-out, if the buyer is to use SBA financing, you have to wait 2 full years, though conventional lenders don’t have that requirement. It depends on the business being bought as to how welcome the refinance would be to a conventional (non-SBA) lender.

 

Coffman Capital is ready to help with all of the options when it comes to executing the full buy-out.  Someone using the first option of financing a buy-in probably won’t need us to help because a lender is probably ready to go, and that’s great!  We’re here to help those who need it!

That’s how we see it.  Always feel free to discuss your own particular situation with us, and we learn how to do things every day!  That’s the power of being an independent loan consulting firm with decades of experience and literally dozens of lenders to draw from.  Thanks again for choosing Coffman Capital for your Business Financing!

Matthew Parker
President
Coffman Capital, Inc.