Buying your dream healthcare practice: how to wow sellers in today’s competitive marketStrategic insights and innovative financing approaches to make your offer stand out against the rest.
With the market becoming increasingly competitive, utilizing strategic thinking and innovative financing solutions can make your offer more compelling to sellers. By understanding the dynamics of market conditions and employing the right tools and strategies, you'll leave a lasting impression on sellers, enhancing your chances of securing the healthcare practice of your dreams. Let's begin with exploring what makes a buyer 'bankable' in today's market.
First things first
Before crafting an offer, it's important to understand what makes a buyer "bankable". When it comes to securing financing for a practice acquisition, traditional lenders consider various factors to determine a buyer's creditworthiness. These factors include:
- Credit history: Lenders survey a buyer's credit history, looking at their payment timeliness, credit score, and any late payments.
- Liquidity: Buyers are often required to have 5% to 10% of the purchase price in their savings account to demonstrate financial stability.
- Loan-to-gross ratio: This ratio assesses the buyer's ability to cover the loan based on the gross revenue of the practice. Flexibility may be possible based on the buyer's financial statement and cash flow.
- Production numbers: Historical production numbers of the practice and the buyer's ability to maintain or improve upon them are critical considerations.
We recommend having a conversation with a lender who specializes in practice finance to discuss your aspirations and financial situation early on. (Did we mention that we’re kind of experts in this?) If you're not prepared to speak with someone just yet, you can begin by pre-qualifying in as little as two minutes, without impacting your credit score.
Taking a creative approach
In general, the current market conditions strongly favor sellers. The rise of corporate healthcare has shifted the potential buyer landscape. Corporate offers usually involve 80% cash and 20% equity. Consequently, innovative financing solutions hold value for entrepreneurial healthcare providers. We recommend partnering with a lender who can help you understand and mitigate risks (and extra bonus points if they can provide 100% financing or at least as close to it as possible). If traditional financing poses challenges, the right lender can assist in exploring creative solutions to structure your deal more attractively. Getting creative might involve a combination of cash and equity, which can effectively alleviate any doubts the seller may have. Additionally, your lender could propose options such as balloon payments or refinancing after a specified period, especially if the practice performs well; in such cases, lenders typically refinance outstanding debt. Deals that minimize risk for the seller tend to be more appealing and are more likely to be accepted.
Time is money (literally)
Want to be the buyer of their dreams? Offer flexible post-closing timelines. Sellers love the idea of freedom after the deal is sealed. It's like saying, "Hey, we're in this together, but you're free to fly solo when you're ready." It also sets you apart from corporate offers that often mandate a longer post-sale commitment.
Structuring a deal: the importance of effective communication
Navigating the offer and negotiation process involves clear communication between buyers and sellers. The Letter of Intent (LOI) serves as the framework for the offer, covering essential aspects such as purchase price, building offer, finance terms, and post-sale commitments. Effective communication between parties, guided by industry professionals, ensures a smooth process. Buyers are advised to involve industry professionals, including brokers, lawyers, and CPAs, to navigate negotiations effectively. (ICYMI, we wrote two articles on this: 5 experts you need on your practice acquisition team and How to build your dream practice acquisition team.)
Sizing up the competition
Competing for your dream practice can feel daunting. Another successful strategy in the practice acquisition process begins well before the deal-making and offer extension stages. It involves finding and defining the type of practice you’d like to own. (We’re talking about everything from location to practice philosophy.) When it comes to location, major metropolitan areas often see heightened competition; however, experts highlight the potential advantages of seeking opportunities in less-explored regions. Don't count out the suburban and rural gems (you might find a jackpot there!).
Besides location, there are other aspects to consider, like the demographic of patients you aspire to serve and your practice's mission and vision. (We’ve written several articles delving into these topics, so check out these resources for more info.) When looking for the right practice, if you can align your practice philosophy with that of the seller's, your offer may become more desirable in their eyes.
Opportunities are everywhere if you're willing to look. A great place to start is our practice marketplace, which pulls thousands of listings from top brokers across the country and makes it easy for you to find your dream practice from a trusted broker.
How do I know if I found the right practice?
With so many practices for sale, how do you know if you’ve found the right one? Upon receiving the initial information regarding the practice, team up with lenders, sort out financial statements, and address outstanding queries during the due diligence period (the detective work before the big commitment). Collaborating with your sales representative, documenting insurance requirements, and completing the real estate appraisal processes are all integral components of due diligence. This period aims to ensure a smooth transition and address any unforeseen issues before closing. Additionally, understanding market trends, evaluating practice culture, and assessing the compatibility of buyer and seller philosophies during due diligence can influence the decision to proceed.
The path to financial independence
Becoming a practice owner is undoubtedly challenging. Tight labor markets, unpredictable interest rates, and corporate competition contribute to the complexity. But guess what? The payoff of true financial freedom is sweet! Navigating the challenges with a strategic approach, effective communication, and creative financing solutions can pave the way for success in the competitive market of practice acquisitions.
So, future practice owners, gear up for the challenge, get creative with your offers, and don't be afraid to shake things up. Your dream practice might be just around the corner, waiting for your unique touch to make it yours.
Editor’s note: This article has been adapted from episode 33 of The Path to Owning It podcast with Nick Elliston, a managing partner with Total Practice Solutions Group, which specializes in veterinary hospital sales and appraisals. Listen to the episode for a deeper dive into this topic and much more!
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