Financing sale of a mental health practice

How to finance the sale of a mental health practice

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Figuring out how to finance the sale of a mental health practice is a massive part of making the deal happen. But fortunately, there are many with financial resources who are willing to get involved in the buying or financing of mental health practices. And there are several options to consider.

How to finance the sale of a mental health practice

Once you, as the current owner, have done all that you are willing or able to maximize your practice’s value, it is time to think through what the deal would look like. Typically, the deal’s financial structure is central to making it happen. 

In addition to a willing buyer, we need some notions about where the money will come from. Otherwise, there is no deal possible. Moreover, it often falls to the current owner’s creativity to find the best financial structure. Here are some typical sources of financing for the purchase of mental health practices.

1. The new owner uses private financial resources

Some potential owners may have financial resources from an inheritance or investments that they are willing to commit to financing the sale of a mental health practice. This arrangement works exceptionally well with smaller practices where the price for the sale is manageable. The existing owner gets their payout, and the new owner takes over the practice. This structure is both transparent and efficient.

Unfortunately, some excellent potential owners may not have the capital to pay for the value of the practice. The practice is too expensive for the new owner. So what is possible then?

2. The new owner gets a loan

Several places will loan money to purchase a business. For example:

Equity from other assets might provide some collateral for a loan. For example,

  • A home equity line of credit or other real estate
  • Equity in a whole life insurance policy

However, most financial institutions will only finance a practice’s acquisition up to a point. While these lenders will not fund 100% of the sale price, they might contribute enough to close the gap when mixed with the new owner’s contribution. 

Of course, the purchaser needs to be sure that the payments are manageable with any loan. And how does one do that?

How to add loan payments into the mix

Some arrangements require the new owner to make monthly payments for the loan. How is that even possible?

Fortunately, with the sale of the practice, one substantial expense goes away. The new owner will no longer have the previous owner’s salary and benefits to contend with. It may be possible to structure the loan payment to be less than what was paid previously for the owner’s salary. And typically, the seller was the highest-paid employee in the corporation, which can mean significant savings. 

Above all, the repayments schedule must work. In my discussions with banks, they get it. They are interested in finding the right balance. After all, they gain nothing if the new owner cannot meet the payment schedule. They do not want to create an unsustainable arrangement. 

3. Using money from other places

Other people you know may also be a source of finance the sale of a practice. For example:

  • Friends and family
  • Personal savings
  • Angel investors, i.e., people with money willing to use it in the purchase of a business

Certainly, clarifying expectations and outcomes is critical. However, the concern is entangling personal relationships with business ones. Again, these arrangements only work with the proper setup. 

4. Current owner finances part or all of the purchase price

The possibility of the seller serving as the “bank” to finance the sale is a bit messier but sometimes acceptable. In this scenario, the purchaser makes monthly payments on a loan that the seller provides. The seller is willing to wait for the monthly payments to “cash out.”

This arrangement works well when both the new and prior owners have substantial trust in each other. The buyer must trust that the practice will support each month’s payment. The seller counts on the buyer doing a good enough job of running the practice to make the monthly payments for the loan term. 

Additionally, this arrangement works exceptionally well if the seller does not need an immediate payout to fund the seller’s goals. In other words, when there is substantial trust and the seller does not require speedy payment, this approach may be optimal. 

In this arrangement, there will be at least two contracts –one about the sale and the other for the loan. 

5. Equity company buys stock

In recent years, private equity and venture capital funds have shown interest in the mental health sector. These companies purchase mental health practices hoping for short to mid-term growth. At a minimum, their goal is to create a large enough mental health company to gain negotiating power with insurance companies. 

Some equity funds have greater ambition and want to bundle all the practices into a larger entity to sell to an even larger company. Some expect a company like Google, Amazon, Apple, or perhaps Walmart to move into mental health in a big way. We will see.

The difficulty of selling to an equity firm is not the challenge of making a deal. After all, these companies are experts at putting a deal together. Instead, the challenge is figuring out where the new owner is going. Equity firms notoriously focus on short-term profit. They buy, build-up, and then sell at a rapid pace. 

However, there do seem to be some companies that prefer to partner with existing owners. Furthermore, they hold on to the company for a longer time. And some of these companies do not intend to purchase 100% of the practice. Instead, they may buy 60% and keep the current owner, who retains 40% ownership, as a manager/partner. Of course, the current owner may sell further down the road, presumably when the equity has grown and that 40% has greater value. 

I have written more about equity firms in this post: How to sell your practice: Finding the next owner of your practice.

Managing the risk of finance the sale of a practice by trusting your advisors

As with any financial transaction, there is a risk. Consequently, thinking through the financial picture is critical. And most of us will need financial advisors to help us evaluate and manage the issues involved. 

I have found that therapists are not very good at trusting financial advisors. All of us fear that our lack of financial knowledge makes us vulnerable. Therefore, we struggle to trust because we see ourselves as pretty easily fooled. To a certain degree, that may be true.

But I think that ultimately, our intuitive sensibilities can help us pick the right advisors. And fortunately, most advisors are honorable people who do a good job assisting people in making sound financial decisions. 

In short, trust your people and use your best judgment. 

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