33. Writing offers that appeal to sellers in a competitive market

The corporate offers a lot of times are 80% cash and maybe 20% in equity. So they’re a lot more clean. If the seller is required to carry a portion of the note, you want to work with your lender to see if we have some creative financing solutions that we might be able to implement to make it more attractive.

Thanks for having me, Corey, nice to put a face with the name.

It is my first podcast. And this morning, when I woke up, I was doing my notes, and my my daughter ended up coming down, and it was about 5:00 in the morning due to the time change. Yeah. And she said, Hey, Dad, if you don't mind me asking, what are you doing? And I said, Well, Dad's got to do his first podcast today.

He's a little nervous. And she goes, Remember that time you made me sign up for piano lessons and tennis? I was nervous then too, but we can do hard things. And I was like, All right, that's great. I got this.

Yeah, she's good.

Yeah, I think if you talk to any of the traditional lenders, there's a couple of factors they're going to consider. One is going to be the buyer's credit history. Do they make their payments on time? You know, what's their credit score? Are there any 30, 60 or 90 day lates? And if there are, you know, do we have a good explanation for why? The next is probably going to be your liquidity.
Most lenders want to see a buyer have between 5 to 10% of the purchase price in their savings account. So to give an example on $1,000,000 deal, that would mean that they want the buyer to have anywhere from $50,000 to $100,000 in the bank, depending on the lender’s appetite. The third thing that's going to be pretty important is going to be the loan to gross.
You know, we've been fortunate with TPSG and Provide in our partnership to do a couple of deals over 100% of gross. But there's going to be a lot of factors that come in whenever we're deciding what's the buyer's personal, financial statement look like? Does the cash flow support it? So there's going to be a lot of things that they're going to decide if they're willing to be lenient on that.
And last but not least, is going to be the production numbers. If historically the sellers produced $1.2 million and now we have a buyer that's coming in and they can only produce $600,000. That's going to create a production gap. And anytime we have a production gap, if we have a tight cash flow, that might not be beneficial to the buyer because maybe their lifestyle, they have a big mortgage, they have a big car payment.
So it's always, yeah, these are kind of the fundamentals of what they're going to consider. Any time they're looking over a buyer and seeing whether or not they have, you know, the credit worthiness to get the deal approved.

You know, we've been in a seller's market for a long time, so I think you're going to have to get real creative on how you structure the deal. You know, there is going to be more seller participation and we make it advantageous for the seller. Maybe we put some balloon payments in there and after 36 months they can get refinanced. Because any time a seller is going to be required to carry paper that is coterminous with the bank, if it's only a 100 or $200,000, that's usually going to give them some level of rub because they're putting their trust in the individual moving forward.
And if you've owned a practice for 20 or 25 years, it's really hard to trust in someone else's legacy if you've already built it. So, you know, mitigating the risk is an important factor.

I think a lot of it's going to depend on the demographics. If you're in a major metropolitan city, you know, we do a lot of deals on the West Coast. If we get a deal in L.A. County, we're going to get a ton of activity, a ton of interest on it. So it's really going to depend on the demographics and where the practice is located.

I just think everyone wants to move to these major cities. And if they would take a step back and look at some of the opportunities out here, we have rural practices. You could live there for 3 to 5 years and the cash flow is pushing off three, four or $500,000. People just don't have the desire to move to those areas.
But I definitely think there's a lot of good opportunities if they go, you know, if they're willing to be open to, you know, any acquisition.

Yeah, and I think that's the biggest competition they're going to see is from the corporate groups they can bring in and give a $100,000 signing bonus over three years. Where that might be difficult for the individual just looking to get financed, you know, and might not be able to build up that much cash flow that short of time to pay, though.
So, yeah, you know, I think at the end of the day, it really does come down to is this a good decision for me and my pocketbook moving forward and, you know, ask the questions. You want to know what you're getting yourself into because this is a big financial decision. 

I think as the cost of capital has gone up, you've seen a lot of individuals move to the sidelines, especially the corporates. So in that instance, yeah, they're not buying as much. But again, if you go to a major metropolitan city and the practice is doing well, there's 3 to 4 doctors in there. We're still seeing 10 to 12 times and that's not going to be easy for a traditional buyer to get approval through a lender.

Yeah, I think we're seeing a lot more one, one and a half doctor practices that maybe the corporate groups didn't want to buy. So now they're sitting on the market. We prep our doctors to say, if you're going to list, it might be anywhere from six months to 12 months. What you don't know is, is there an individual that's moving back to the area that they're from?
And now you have the listing and it's a perfect world for both parties. So, yeah, I think it really depends on the market and where they're located to see if there's going to be an opportunity there.

Yeah, the letter of intent is going to be the framework for the offer. How is it going to be laid out, what it's going to look like? And a lot of times, you know, I don't recommend that you start negotiating any deals unless you've contacted industry professionals. You know, contact a broker, have them do a valuation, call a lawyer, ask them to walk you through the legal process.
And then you also want to make sure you're getting your CPA involved as well, because you want to make sure your tax structure is the most beneficial to you. You know, as you've set up your LLC and move forward.

Good question. It depends on the situation, because a lot of calls we get are from associates and they've already been in discussions with the seller. They just haven't arrived at a dollar amount right now. So at that point, I'm asking the associate to gather some financials. We have what's called an information packet and we're going to put together a valuation After we complete the valuation, we like to get the seller and the buyer to sit down together and kind of discuss how we came up with the offer.
And at that point, if both sides feel like it's fair, then we'll engage in the letter of intent. And then once the letter of intent sign we’ll typically provided to the lender for underwriting purposes.

It's going to be the purchase price, the offer for the building, the finance terms, you know how long the doctor is going to be required to stay on post-sale. So there's going to be a lot of items. It's going to be boilerplate because you can't have a true LOI because it's just a basis point to move forward because let's say the buyer can get approved for 100% financing.
So now the whole structure of the deal is changed because now we have to go back to the seller and say, Hey, we couldn't get 100%. Now we only have 80%. Would you be willing to carry the 20%? And what are those terms look like? So you want to make sure that everyone's on the same page, but really it's just a basis point to have the fundamentals of the deal laid out and those can change.
But not often.

They're non-binding, so there is no recourse. Typically, if you can't if a buyer for some reason couldn't get approval, but at the same time, you still want to make sure you're hiring individuals to review the documentation. I mean, for most people, this is going to be the biggest financial decision they ever make in their life. And you want to make sure you're going about it the right way.

I think if you've hired the right professionals, you shouldn't be. But at the same time, don't try to negotiate these things on your own.

Well, we agreed to this and now the lawyer comes in and they're like, You agreed to what? That's in the. You put that in there, Right?

Yeah, absolutely. So the due diligence period is the time between an accepted offer and closing. And typically what we're doing during this time is we're working with the lender to get any financial statements they need, production reports, answer any outstanding questions they have on how the practice is being run. And then once we have the approval in place, we're really working with the sales assistant at that point to get the insurance requirements together.
 We also want to make sure that if there's any real estate involved, that the appraisal has been ordered. And then lastly, we're going to be working with the title company to get that deal to close. So that's really what the that period entails.

We're typically prepping our buyers on the front side to ask those questions because you really do want to know the practice make up… who has what responsibilities, what kind of medicine are they practicing? Do they have equipment that I like? And if they don't, can I implement the type of medicine that I want to practice moving forward? And I think especially in this day and age, we've had an emphasis on the culture.

You want to make sure there's a good culture fit there and that the transition is going to be good. So yeah, those are some of the things that I would consider.

We've been in a seller's market for a while, so it's a little difficult to give any of those incentives. Yeah, you know, really if we see renegotiations, it's because what we've been talking about, the buyer's gone to the lender, they couldn't get full approval. And now we're going to go back to the seller and say, Hey, the financial terms have changed.
Would you be willing to carry 20, 25, 30%, or maybe, hey, I could get a 100% financing on the practice, but I can't get approved for the building? Are you willing to carry the building? Let me do a lease to own or just do an outright lease with me for the next 5 to 10 years where I try to work on building this up and then eventually getting the financing done for the real estate?

Everything's great. I really appreciate this. I think this is great, especially for educational purposes for anyone considering practice ownership or if they're industry professionals. So, you know, I'm excited to be a part of this and thank you for having us.

They’re fewer and fewer, but we're definitely seeing them. And like you said, the demographics. So in a good city, if the practice is being run and has good numbers, we're definitely seeing a lot more activity on a practice like that. Not to say anything's wrong with the outlier cities, but if it's in a place like Kansas City, it might take a little bit more to sell, you know, depending on what city it is.
So yeah, yeah, definitely seeing multiple offers, but the demographics are going to play a big part in that.

I think the easiest is to get as close as possible to 100% financing. You know, I'm typically prepping my seller that they can get 100% financing on the practice and usually an 80/20 on the real estate. So the bank would finance that 80% and then the 20 would come from a seller carry back. Now, the banks don't always like this, but we like to add a balloon payment in there so that as long as the practice is doing well, we can typically, after 24, 36 months, have that ascending debt refinance and then my seller can be whole on his money.

Yes. So a typical improvement in the lending space would require any seller hold back to be coterminous with the bank terms. So if a bank does have financing for ten years at a seven and a half percent now, the seller is going to be required to do $200,000 just to use a round number over the next ten years at seven and a half percent.

That might not be the best decision for them or not be advantageous. So what we want to do is if we can add a balloon payment in there, if the practice is doing well and the bank is never going to say that they will do this, just know that they'll never put this in the documentation. But as long as the practice is doing well, they will typically refinance that outstanding debt.
But you're going to need to be around 24 or 36 months. So they have enough of a variable that they can see how well the practice is performing. Should the seller leave or with the new additions of any new associates or employees.

So I think I'm going to go back to what I similarly said before is that if the seller is required to carry a portion of the note, you want to work with your lender to see if we have some creative financing solutions that we might be able to implement to make it more attractive. The corporate offers a lot of times are 80% cash and maybe 20% in equity, so the’re a lot more clean.
Any time we have to step up the risk for any seller, they're going to kind of get a little weary. If you were to ask me if you can initiate some of those balloon payments, it'll really help out with any negotiations with the seller.

For us, it's been the seller's timeline post-closing. We know with corporate offers they're going to require the seller to be on for 3 to 5 years post-sale. So if a buyer can come on and say, Hey, I talked to the bank and under these lending guidelines, you can leave 6 to 12 months, that's going to be a lot more attractive to a seller so that he can stay on as long as he wants to.
If he wants to be on for a while, he can. But if he's not happy and the transition's not going well and he doesn't get along with the partnership, he can step out. He doesn't have a lot of risk and he can walk away at that point. So yeah, I would say it's definitely the timeline that the seller will be required to stay on post-closing.

Like you said, they are tense deals right now. It's really going to depend on the relationship between the seller and the buyer. So if the seller and buyer have a good relationship and the associate, you know, she's been at the practice for two years, she's a hard worker. The seller's going to be a lot more flexible with those terms than if it's an individual that he doesn't know.
And maybe it's a stranger moving from out of town that's going to buy that practice. So I think anytime the relationship is strong, they're willing to get a little bit more aggressive on what they're willing to do. But yeah, I would say with the market being the way it is, it's just it's really tough, you know? And then the increase in interest rates have made it more difficult to get approved for the real estate because we also had interest rates so low since January of 2021.
That price of commercial real estate, obviously everyone's worried that doomsday’s around the corner, but we're still seeing ten year leases with two five year options and, you know, a strong resilient market. So we'll see.

I like that question because I'm a lot different than other people. I've been married for as long as I have because I believe in communication, whether it be personally or professionally. So you want to make sure that you're communicating because as we mentioned earlier, you want to understand questions about the practice. I don't believe in the philosophy of just give me your best offer.
This is capitalism and that's it. You want to make sure there's a good fit there because this is a big decision and you don't want someone to come in and buy a practice. And now it's not only good bad for the lender because it wasn't a good fit, but now the staff isn't happy. The seller and the buyer can't work together.
So yeah, I would say at the end of the day it's really to make sure that it's going to be a good fit for all parties.

I don't know that it will be the best advice, but it will be the statement that I believe to be true. And that's being a practice owner right now is really difficult. We have a tight labor market, interest rates have increased and you have the corporate competition. But I believe that if you want to achieve true financial independence, it's to be a practice owner.

You can go to our website www.totalpracticesolutionsgroup.com and under the about us section you can scroll down we have all our brokers in there. We’re in all 50 states and we do buyer and seller representation.

Thanks for having me. Corey.