Practice Ownership and Student Loan Debt

While the recent grads understand all too well the effects of their Student Loan debt, doctors seeking to transition their practices for the most part remain clueless on how this liability does (or does not) impact the process. Not a week goes by that someone doesn’t fail to point out to me that “buyers can’t get money to buy my practice” because of their student loan debt. I’m sure that is disappointing for all of the lenders to hear in the face of their marketing efforts so let’s set a few things straight;

  1. We can get a qualified buyer 100% financing for a practice purchase PLUS operating capital for cash flow expenses PLUS 80% financing for the practice occupied real estate through a number of sources at very competitive rates.
  2. A “Qualified Buyer” does not mean someone without debt. Student Loan debts are a fact of life and virtually ALL buyers will have some. Nor does it mean that they have piles of cash in savings. The opposite is the norm.
  3. A Buyer’s credit score and work history is more important than their net worth.
  4. Unlike the good old days of the ‘70s and ‘80s, only a very small percentage (<5%?) of graduating students will go directly into practice ownership.
  5. One of the effects of Student Loan debt is the need for immediate income. The first installment payment is due in November after graduation. Consequently, start-ups or opportunities with minimal cash flow but “great potential” are not attractive.
  6. If your practice does not collect enough revenue to pay the overhead, Acquisition and Student Loan debts and have money left over to provide a reasonable standard of living, it will not be a very attractive opportunity, regardless of location.
  7. In our market, the buyer may need a working spouse or a part time job to qualify for financing if practice revenue is less than $500,000.
  8. Interest rates are at an all-time low and this is having a positive effect on practice values. This will NOT last forever. Raise your hand if you remember borrowing money in the ‘80s at 20+%!
  9. Good news for potential sellers; young doctors will eventually need to own their own practice if they aspire to your lifestyle. Over the long haul, practice ownership affords a better standard of living, both financially and in personal freedom.
  10. To be fair to those doctor’s comments I referred to earlier, in some parts of the country, monstrous Student Loan debts are having a serious impact on the ability of a buyer to acquire a practice. $300,000 is not unusual here but some areas are creeping up toward $500,000. So far we have been able to make the numbers work but simple math suggests that market values and access to capital could be in for some tough times if this becomes the norm.

Steve Wolff, DDS, UMKC Class of ‘77