Many dental practice purchases occur through financing, whether from a traditional financial institution, the SBA, a state business agency, or the seller. For this reason, buyers should familiarize themselves with the process of obtaining financing for a dental practice and how financing can affect negotiations and transaction structure.
Common Financing Options for Dental Practice Purchases
Buyers of dental practices have several options for financing the purchase price. Some of the most common financing options include:
- Traditional commercial loans from financial institutions, including regional banks or credit unions that specialize in lending to local businesses and lenders that focus on the dental industry
- SBA loans, which can offer more advantageous interest rates and loan terms for first-time buyers
- Seller financing, under which the seller agrees to accept installment payments for part or all of the purchase price
Each option comes with different legal risks and considerations when negotiating purchase agreements.
How Loan Terms Can Affect Purchase Agreements
Financing terms for a dental practice purchase can affect the terms of the purchase agreement in various ways, such as:
- Interest rates and amortization periods may influence how much a buyer can pay for the practice, given the buyer’s financial resources and assessment of the practice’s cash flow to support financing payments
- The payment structure, including whether the financing agreement calls for balloon payments
- Whether the financing agreement imposes prepayment penalties or refinancing restrictions that can restrict the buyer’s ability to pay off the loan early, when the practice’s financial performance allows them to do so
- Cross-default provisions, which can make breach of the purchase agreement (including representations and warranties or indemnification provisions) a default under the loan
Due to these issues, negotiating the financing agreement for funding the purchase of a dental practice usually occurs in conjunction with negotiations of the purchase agreement.
Asset vs. Stock Purchase Agreements and Financing Considerations
The structure of a dental practice purchase as an asset purchase versus a stock purchase can also affect the terms of the buyer’s financing. Some lenders may prefer asset purchases over stock purchases because they can take security interests on tangible assets, such as real estate or equipment. Asset purchases also allow lenders to assess the reasonableness of the loan amount relative to the value of the assets purchased. However, because asset purchases may result in the lender taking security interests on the assets, the buyer may have limited opportunities to obtain future financing with those assets until the buyer pays off the purchase loan.
How Due Diligence Affects Financing Approval
The due diligence process can also influence the process of securing financing approval to buy a dental practice. Lenders will also want to see copies of the practice’s financials, production reports, and collection history to assess the business’s stability and determine the potential risk of a purchase loan. Lenders will also consider the practice’s long-term financial obligations, such as commercial leases, equipment leases, and outstanding operational loans (which may include existing security interests on practice assets). Finally, ongoing legal issues, such as licensing problems or lawsuits, can derail financing due to the risk they pose to loan repayment.
Timing Considerations and Coordinating Financing Approval, Closing, and Transition
Financing the purchase of a dental practice will also require buyers to coordinate financing approval with closing, as closing usually cannot occur until the buyer secures lender approval, and the lender may require the buyer to meet various closing conditions before approving the loan. Failing to meet requirements in a specified order may delay financing and closing and potentially derail the purchase.
Contact Our Law Firm Today
Buying a dental practice may become one of the most expensive transactions you undertake. As a result, you may need financing to afford the purchase price. Contact Polished Legal today for an initial consultation with a dental attorney to learn more about what to expect when financing the purchase of a dental practice.
