In a practice acquisition, the buyer is mostly not buying things. Chairs, cabinetry, imaging and instruments are usually a minority of the purchase price. The majority is goodwill: the patient base, the recall schedule, the referral relationships, the staff who know how the place runs, and the reasonable expectation that all of it keeps producing after the name on the door changes. That is a real asset. It is also an asset that cannot be repossessed, which is what makes acquisition lending in this sector its own discipline.
The good news is that practices transfer better than most small businesses. Patients rebook, hygiene recall carries forward, and a well-handled transition typically holds the large majority of collections. Lenders know this, which is why practice acquisitions are financed at loan-to-price levels that would be unthinkable in most other industries. The condition is that the file demonstrates the transition has been designed rather than assumed.
What the purchase price is actually made of
Purchase agreements allocate the price across asset classes, and the allocation has tax consequences for both sides that are worth professional advice. From a credit standpoint the allocation matters for a simpler reason: it tells the desk how much of the loan is secured by something and how much is secured by an expectation.
| Component | Illustrative share of price | Credit treatment |
|---|---|---|
| Equipment and furnishings | 10% – 25% | Tangible collateral, valued well below replacement cost |
| Leasehold improvements | 0% – 10% | Generally not recoverable; attached to premises you lease |
| Supplies and instruments | 1% – 3% | Immaterial to the credit |
| Accounts receivable, if included | Varies; often excluded | Discounted by age; frequently retained by the seller |
| Goodwill and intangibles | 60% – 85% | Unsecured in substance; underwritten on cash flow |
| Restrictive covenant | Small but important | Protects the goodwill you just financed |
Shares are illustrative and vary widely by specialty, equipment age and deal structure. The pattern that holds is the last two rows: most of the money is buying goodwill, and the non-compete is the only thing keeping that goodwill from walking across the street.
How the price gets tested
Two tests run in parallel. The first is a sanity check of price against collections. Practices are commonly discussed as a percentage of trailing twelve-month collections, and while the range varies enormously by specialty, region, profitability and equipment condition, a price far outside the local norm needs a reason.
The second test is the one that decides the loan: can the practice's cash flow, after paying the buyer for clinical work and after paying the buyer a living, cover the debt with margin. A price can be perfectly reasonable as a multiple and still fail this test if the practice is overstaffed, the rent is above market, or the seller was producing at a pace the buyer will not match in year one.
Why the multiple alone misleads
Two practices each collect $1.3 million and each are offered at the same percentage of collections. One runs at 58 percent overhead, the other at 72 percent. After replacement compensation, the first produces roughly twice the residual of the second. Same headline multiple, completely different coverage. This is why an experienced desk will ask for the P&L before commenting on price.
The buyer's compensation is a real expense
The single most common modeling error a first-time buyer makes is treating all post-acquisition cash flow as available for debt service. It is not. The buyer has to be paid for clinical work at something like market associate rates, and the buyer also has to live: mortgage, education debt, family costs. An underwriter deducts the first explicitly and considers the second when sizing.
Run that arithmetic on any target before you sign a letter of intent. It takes fifteen minutes and it tells you whether the price works, which is a different question from whether the practice is good.
Transition risk and how structure absorbs it
The risk that defines this asset class is attrition: patients who do not rebook once the familiar doctor is gone. Well-managed transitions hold most of the base, but the outcome is sensitive to how the handoff is run, and lenders price for that with structure rather than optimism.
| Structure | How it works | Effect on the credit |
|---|---|---|
| Seller note on full standby | Seller finances part of the price; no payments until senior debt is retired or a set period passes | Reduces senior loan size and keeps the seller economically invested |
| Seller note on partial standby | Interest-only or reduced payments during the early period | Some support; the payment still sits in the coverage denominator |
| Earnout or holdback | Part of the price paid later based on retained collections | Aligns seller incentives directly to the risk being managed |
| Transition employment period | Seller stays on as an employee or contractor for a defined term | The strongest practical mitigant; introduces the buyer to the base |
| Restrictive covenant | Geographic and time-limited non-compete and non-solicit | Standard requirement; protects the intangible you financed |
Availability and terms for each of these vary by lender and program, and a seller note is a negotiation with the seller rather than something a lender can grant. What is broadly consistent is the preference: structures that keep the seller economically exposed to the transition are viewed more favorably than structures that pay them in full at closing and hope.
The lease, the real estate, and the question of both
If the seller owns the building, you face a choice at closing and it is worth deciding early. Buying the real estate alongside the practice changes the financing structure (real property supports longer amortization and different programs) and it converts rent into equity. It also raises the total borrowing and requires a separate valuation process.
If the seller owns the building and you are only buying the practice, you become the tenant of your seller. Get that lease negotiated as part of the purchase, not after. A lease at above-market rent is a permanent tax on the cash flow you just paid goodwill for, and one signed under time pressure at closing rarely favors the buyer.
If the practice leases from a third party, the requirement is straightforward: a lease term that extends at least as long as the loan, and a landlord who will consent to the assignment. Both take time. Start on them the week the letter of intent is signed.
Working capital is part of the deal, not an afterthought
Closing day is not the day cash starts arriving. The seller typically keeps pre-closing receivables, so the buyer inherits a practice that is producing but has thirty to sixty days of collections still in the pipeline: while payroll, rent, supplies and the first loan payment all arrive on schedule. New-owner credentialing with payers can extend that gap further.
Diligence documents the lender will want
Acquisition file, seller side and buyer side
- Three years of seller practice tax returns plus year-to-date financial statements.
- Production and collections by month by provider for 24 to 36 months.
- Accounts receivable aging and a statement of whether receivables transfer.
- Payer mix and credentialing status, including which contracts assign and which require new enrollment.
- Active patient count, new patients per month, and hygiene recall statistics if applicable.
- Equipment list with age and condition, plus any leases or liens to be paid off at closing.
- Current lease, remaining term, options, and landlord contact for consent.
- Draft purchase agreement with the price allocation and the restrictive covenant language.
- Transition plan in writing: how long the seller stays, in what capacity, and how patients are informed.
- Buyer personal financial statement, two years of personal returns, student loan documentation and CV.
- Buyer post-closing budget including personal living expenses and the first-year staffing plan.
The item most often missing is the last one. A buyer who arrives with a written post-closing budget (including what they intend to draw personally) is treated as a manager rather than a candidate.
What weakens an acquisition file
- Declining collections in the trailing twelve months with no explanation offered by the seller.
- A seller who intends to leave at closing with no transition period and no non-compete.
- Production concentrated in a departing associate rather than in the seller or the hygiene base.
- A price negotiated against production rather than collections.
- Deferred maintenance on equipment that the buyer will have to fund immediately after closing.
- A lease with less remaining term than the loan, or a landlord who has not been approached.
- No working capital in the request, and no personal reserves behind it.
How much of the purchase price can typically be financed?
Practice acquisitions are commonly financed at high loan-to-price levels compared with other small business purchases, because transfer rates are strong and cash flow is predictable. The exact amount, the required buyer injection and whether a seller note is expected all vary by lender, program and the specifics of the transaction.
Is goodwill really lendable?
Yes, and in this sector it is the majority of what gets lent against. The lender is underwriting the cash flow that goodwill produces rather than the intangible itself, which is why the analysis focuses so heavily on collections history, transition planning and the restrictive covenant. It also explains the personal guarantee and life insurance requirements that accompany these loans.
Should I buy the receivables?
Often the cleaner answer is no. Sellers usually prefer to keep and collect their own receivables, and buying them means paying today for money that may or may not arrive. If receivables do not transfer, plan and finance the working capital gap that creates: that is the trade you are making.
What is a reasonable transition period for the seller?
It depends on how personally attached the patient base is and on the specialty. A seller with a long-tenured base generally needs to stay longer than one in a practice already staffed with multiple providers. What matters to a lender is that the period is defined in the agreement, compensated, and paired with a written plan for how patients are introduced to the new owner.
Can I buy a practice as an associate with no ownership experience?
It happens routinely and is a normal profile in this sector. The desk will look at your clinical production history, your personal credit and reserves, and whether you have a written plan for the parts of the job you have not done: hiring, billing oversight, vendor management. Weak spots are usually addressable with an advisor or a strong office manager staying on.
How do I know if the asking price is fair?
Test it two ways. Compare it to collections as a sanity check against local norms, then run the coverage arithmetic after replacement compensation and your own living costs. A price that clears both is defensible; a price that clears only the first is a valuation somebody produced rather than a deal that works.
Should I buy the building at the same time?
It can be a strong long-term move, since real property supports longer amortization and converts rent into equity. It also increases total debt at the moment you are absorbing the most transition risk. Some buyers acquire the practice first and the building a year or two later once collections have stabilized; both approaches are common.
What if collections drop after closing?
Plan for some attrition rather than assuming none. That is precisely why working capital in the request, a seller note on standby, and a real transition period matter. They create room for a slower first year without a missed payment. Build your own model at a conservative retention assumption and confirm coverage still works.
Where to start
Before you sign anything, get twenty-four months of collections and a full P&L from the seller and run the coverage arithmetic yourself, with a realistic replacement compensation deduction and your actual living costs in the model. That number tells you what the practice is worth to you, which is the only valuation that governs your decision.
Then get three things moving in parallel, because each has a timeline you do not control: the lease consent, the buyer credentialing, and the seller's financial records. Deals rarely fail on the arithmetic. They slip on the third parties.
Qualified Commercial Underwriting Desk
Credit and capital markets
The Qualified Commercial underwriting desk reviews commercial real estate, dealer and Main Street files daily. The Academy is written from that work (how files are actually read, priced and declined) rather than from a rate sheet.
Educational content only. Nothing here is a commitment to lend, an offer of credit, or tax, legal or accounting advice. Program terms, timelines and thresholds vary by lender, file and market conditions, and any figures shown are illustrative.