OBSERVATIONS ‘05

Q&A OF BLUNDERS, CAUTIONS, AND STRATEGEMS IMPACTING THE PRACTICE SALE THROUGOUT 2005 (PART IV)

by Sam Reader

Compliments of S.G.Reader & Associates, Inc.

  

  1.  How long should it take for the buyer to process the loan to buy my practice? 

 

  1. Anywhere from one to nine months, depending on loan origination.  If the funds are forthcoming from a home equity loan – under a  month.  SBA (Small Business Administration) loans I’ve seen from three to nine months, depending on the complexity of the project.

Complexity is not necessarily the size of the clinic, but rather the strength of the buyer and the straight forward cleanliness of the books, records, and tax returns of the seller.  The strength of the buyer is defined by how long he/she has been out of school and interning.  Most funders will not accept an application unless the borrower has interned for no less than two years.  Some funders will not accept an application under three years.

Credit Score is another important factor.  All funders are aware of the educational debt of the young borrower and can live with that as long as the Credit Score (FICO) is no less than 650.  Most borrowers can be a shoe-in with a Credit Score of 700 plus.  Bankruptcy is

frowned upon.  Most funders will not accept applications from those who have

filed in less than five years – preferably seven.  This, of course, is dependent upon how well the borrower has maintained his/her ability to stay current following the cancellation of the bankruptcy.

912’s are another problem that can slow down the loan process and, in many situations, kill the deal.  912’s may be one or more policy reports filed on the borrower.  This is typically something that happened during the borrower’s fun and careless youth which he/she had totally forgotten about.

Case in point.  Dr. A was fortunate enough to have the credit worthiness to purchase a clinic that was collecting $1.2m per year.  He was able to obtain an SBA loan with little to no money down on a clinic selling for $800k.  The loan process was now into its fourth month, projected to close within two weeks.  Dr. A had sold his home, quit his job, reestablished himself and family near the clinic he was purchasing.  Dr. A continued to receive positive emails and phone messages from the funder that “all was going well”.  Dr. A loved to party.  He had grand celebrations with family and friends as he approached his dream practice closing date.  One week prior to closing, the SBA pulled a character reference (standard policy).  To everyone’s surprise, Dr. A had nine incidences from his youth involving alcohol and other related problems on file from his hometown police department.  If there had been only three  incidences,  the SBA Regional Office could have easily cleared him and the funder would fund.  Unfortunately, there were nine.  The file was shipped to the FBI in Washington D.C. for review to seek a clearance level waiver.  Estimated time of clearance?  Nine months!  The reason for delay?  Government policy and procedure.

The loan approval was only good for forty-five days.  Then the long and painful process would start all over.

Dr. B (seller) was outraged.  He had his own timelines and critical responsibilities to manage.  His primary question: “How come we didn’t know this four months ago?”  Answer: Because no one thought to ask!

The strength of the seller is defined simply by the continuity and consistency of the practice.

  • Are the numbers holding strong?
  • Are the tax returns a true reflection of the practice profile promoted by the broker?
  • Are expenses as reported on the tax return fair and reasonable?
  • Are the add backs from those expenses acceptable?

Case in point.  Dr. G was three weeks from closing the deal and receiving a handsome amount on his ten-year California Workmen’s Comp clinic.  His tax returns were strong.  His net income was impressive to the funder.  Dr. G was now into the fourth month of the new year.  One week prior to funding, the funder naturally asked for the current interim report (profit and loss).  No good!  Collections had dropped 50%.  Dr. G’s accounts receivables could no longer support or perpetuate the California Workmen’s Comp law changes, which was not manifested in the tax returns.  The project died.

In another situation, the landlord refused to assign the buyer into first position on the lease.  The landlord wanted his current tenant, the seller, to remain in first position and the buyer to be assigned to second position.  The funder thought differently.  Unless the buyer was assigned to first position, the funder would not fund.  The deal died.  The seller and buyer’s primary question: “How come we did not know this five months ago?”  Answer:  Because no one thought to ask.

Again, the length of time for funding is usually based on complexity – not the size of the clinic.  These complexities can be easily identified and in many situations removed prior to the detailed process of funding.  Funding can be (surprisingly) smooth and uneventful when both parties show strong.

  1. Can the loan processor (packager) make or break the deal?

 

  1. Absolutely!  The processor is the one who packages the loan.  This individual may be working as a small independent who will place the loan with a larger banking (funding) institution.  The processor will have a checklist for both the seller and buyer.  From the seller, the major items on request . . .

1)  Three years’ tax returns on the clinic.

2)  Current year interim (P&L) report.

3)  Copy of the lease.

The buyer’s list is a bit more extensive.  One might think it shouldn’t take long to pull and process the seller and buyer information, and, in most cases, it won’t.  Unfortunately, however, you may find yourself working with a processor who is distracted and/or just has too many projects ahead of yours.  What has taken you only two/three weeks to pull together has now taken the processor three/four months to process!  I have worked with processors who have misplaced the information and/or claim the package is off to the underwriter, when, in fact, it is still incomplete – sitting on his/her desk with twenty projects ahead of yours.

This is totally unacceptable!  Like automobile accidents, it happens, and in most cases can be avoided.  This is the sloppy, irresponsible and cavalier attitude of a processor who single- handily kills the deal by simply exhausting the seller and buyer.

Solution:  The processor is usually chosen by the buyer.  The seller should be more involved in this step of choosing the processor to avoid a calamity six/eight months later.  Key questions to ask the processor …

 

How many chiropractic clinics has he/she processed successfully?

 

Approximately how many projects are ahead of yours?

 

How long will it take to package seller and buyer information before it is shipped off to underwriting?

 

Does he/she have key contacts with agents who can expedite a life and disability insurance policy for the buyer?

 

Can he/she be totally honest and upfront with the strength or weakness between the buyer and the clinic being purchased prior to accepting an application from the buyer? 

Will he/she place the loan with a tried and proven funder, or will you end up as an experiment with a new funder who has never funded a chiropractic clinic while tempting the processor with higher packaging and placement fees and encouraging words like “no worries; we can do it – we want your business”?

It is worth noting that a good processor can package the buyer and seller information within four to five weeks.  Once the underwriter receives the package, he/she will create a small checklist of additional needs to clarify statements within the package.  This is a good sign.  It shows strong interest from the underwriter.  If all goes well, the loan can be executed within three weeks from the time the underwriter receives the package.  This is an ideal situation where buyer and seller do not bring complexities to the table.

Be Smart.  Move Forward.  Enjoy!