While most buyers primarily leverage banks and other traditional financing methods to fund the purchase of a dental practice, there are some situations when a buyer may need to look for other alternative options for lending. One of these options is seller financing.
Seller financing provides funding to the buyer from the seller, either as a partial amount to help supplement a lender’s financing or a full amount without any involvement of a financial institution.
This option is often considered when the buyer is looking for more attractive rates and/or terms, but that’s not necessarily what seller financing can offer.
To help determine if seller financing is a beneficial option for your practice sale, you must first understand the full picture and why seller financing is being proposed.
Interest Rates and Terms
When it comes to lending, buyers typically have their eyes set on finding the lowest rates, causing seller financing to be put on the table. While seller financing can sometimes offer lower rates than banks, the terms typically aren’t as comprehensive as what a lender can offer.
For instance, the seller may give the buyer a lower rate, but due to the seller not having the same risk thresholds as a bank, this oftentimes leads to offering a far shorter loan term than a bank can offer. This can require refinancing after a number of years and needing to use a third-party lender in the end.
The lending picture involves more than interest rates, so understanding the full terms is key to navigating your options.
Common Seller Financing Situations
Sometimes, a buyer looks toward seller financing as a way for sellers to have some “skin in the game,” or the seller wants to provide financing “as a gift” to the buyer. In NDP’s experience, these aren’t necessarily viable reasons to enter into a seller financing agreement.
While it’s not advantageous in all situations, seller financing can be an appropriate solution for some, especially in complicated lending instances.
Low Buyer Liquidity: Most business loan lenders will typically lend 100% of a dental practice loan with no money down for buyers who have access to cash readily available. For buyers who don’t, seller financing could be a helpful tool.
Low Practice Cash Flow: If the practice has inadequate cash flows, the bank may not approve of the deal or only offer a partial approval, and the seller may need to finance to get the deal done.
Price Above Market: The practice price may be high above market price, leading the bank to have limitations and the seller to partially finance the deal.
Partnership Situations: In a partnership, the seller may have debt on the practice that they can’t or don’t plan to pay off with the buy-in of the new partner. The buyer could either use the same lender that currently has a lien on the assets, or they could enter into a seller financing agreement if it’s allowed under the seller’s current loan terms.
Familial Transitions: Seller financing is often seen in familial transitions, such as a parent selling their practice to a son or daughter, when the buyer lacks liquidity or in efforts to simplify the transition process. While third-party lending offers great benefits, it does take time and effort to reach the approval stage. With stable familial relationships, seller financing can be a way to streamline the transition process.
Keep in mind, with seller financing, the seller may be more involved in the practice since they are the lender. This can make it difficult for walkaway sales where the seller wants a clean break from the practice. But in familial relationships, where there can be a strong natural connection compared to sellers and buyers who aren’t biologically related, seller financing can work more smoothly in this instance.
As seen in the examples above, the need for seller financing is often driven by some sort of hurdle that the buyer or seller faces. It’s a useful tool when implemented for the right reasons.
Determine the True Intention
Before making a decision about seller financing, consider the why behind it and envision what this means for the future. Ask these questions: What does this deal look like for me with seller financing in place? What am I giving up? What am I gaining?
It requires digging beyond the surface to uncover the true intentions.
Our team of dental transition advisors can walk you through your options and the implications, helping you to make an informed decision for your situation. We can also connect you with dental-specific lenders to gain insight on the industry’s economic landscape and further details on your financing options. Contact NDP today.
