Seller Financing in Urgent Care Transactions
When buying and selling urgent care centers, sometimes it’s not feasible or possible to pay the entire purchase price upfront. Seller financing in urgent care transactions can offer benefits to both the buyers and the sellers, but there is some added risk involved.
“The seller essentially takes the place of a bank that might otherwise lend money to a buyer, and the buyer would repay the purchase price to the seller, rather than repaying a loan to a bank or another financial institution,” David Hyman, healthcare attorney at Doerner, Saunders, Daniel & Anderson, LLP, says.
“Most buyers either borrow money from the bank or some financial institution to acquire a center, but it’s a lot easier to borrow money for the seller because then buyers don’t have to go through all of these different qualifications and pay finder’s fees, points and tackle a bunch of different issues,” Michael Schaff, business law and healthcare attorney at Wilentz, Goldman & Spitzer P.A., says. “However, a lot of the time, a seller is not willing to do that; they want to put their money away. When using seller financing, sellers will tend to act like banks where they try to get the appropriate collateral.”
“Collateral may include a promissory note, a personal guarantee, a lien on the company’s assets and a collateral assignment of the lease for the center,” Grace Mack, business law and healthcare attorney at Wilentz, Goldman & Spitzer P.A., says. “Sellers can also include negative covenants, restrict the company from doing certain things without their consent, or have acceleration clauses in the promissory note saying that if a buyer misses payments, then they have the right to declare the whole balance due.”
If the buyer is an entity like an LLC or a corporation, the seller may seek to obtain guarantees from individual members of the LLC or individual shareholders of the corporation.
“If the LLC or the corporation defaults, then the seller can go after the individual owners of the company who have executed a guarantee of the obligation,” Hyman says. “The seller has the right to look to the members or shareholders to step in to fulfill payment obligations. It’s fairly straightforward, and it’s almost unheard of to not see a guarantee sought from the individual owners.”
When using seller financing in urgent care transactions, it’s also important to find out if the seller still owes money on their mortgage.
“The buyer needs to make sure that the mortgage is satisfied at the closing,” Dennis Hursh, healthcare attorney at Pennsylvania Physician’s Lawyer, says. “If the buyer doesn’t do that, then once the bank receives notice that the property owners have changed, they could come and foreclose the center. So now the buyer has paid the seller, but they also owe the bank money.”
Typically, seller financing involves an initial down payment, and then subsequent, periodic payments after that, as well as interest. Payment plans will vary based on the negotiations of the parties involved.
“Buyers could have quarterly or annual payments, payments tied to revenue or a set monthly payment plus a percentage of the revenue generated by the center,” Hyman says.
Hyman says that since the buyer is dealing with the seller instead of a bank, they might be able to have a more creative financing structure.
“From the buyer’s point of view, they might be able to get a more favorable interest rate or repayment plan, or less onerous payment obligations than if they went to a bank,” Hyman says.
In addition, buyers may also be able negotiate a lower down payment.
“For the buyer, a lot of the times a down payment can be flexible,” Hursh says. “A lot of banks may require a 20% minimum down payment, whereas the seller may be able to take less than that.”
This can be a double-sword though. In return for a lower down payment, buyers will often have a higher interest rate.
“From what I’ve seen, the interest rates tend to be higher than a bank because the seller is taking an extra risk, and that’s how they’ll compensate for it,” Hursh says.
While seller financing offers many benefits to the buyers of urgent care centers, it also has some advantages for the sellers.
“One big advantage for the sellers includes a tax advantage,” Hursh says. “If the buyer gives the seller cash in a lump sum, the seller has to pay capital gains the day of the sale. If they take back a note, they can get installment treatment of the gain and spread that gain over several years.”
“If the seller receives all of the money in a lump sum on day one, they have to pay taxes on that amount on day one,” Schaff says. “If the seller finances it, they will pay taxes as they receive the money, and they’ll be able to get a good return on it. There’s interest on it that may be higher than what they could get elsewhere.”
In addition, seller financing can come into play if a seller is desperate to get rid of their center.
“If the seller is in a hurry to get rid of their center, they may want to do something to encourage a sale, in which case they would make a better office of financing than a bank would,” Hyman says. “However, it depends on the financial positions of the parties whether or not they want to do seller financing.”
Seller financing is also an option for buyers that may not be able to seek loans from other financial institutions, or may not have the investors willing to put up the money upfront for an acquisition.
“If the buyer is unable to get a loan from another lending institution, they’re going to be somewhat at the mercy of the seller,” Hyman says. “If the buyer isn’t borrow-worthy, that would encourage the seller to require a higher interest rate and more onerous terms in the agreement that would tend to reduce the seller’s risk of default.”
“Seller financing helps the buyer, but it’s risky for the seller if the center is not successful,” Mack says.
Seller financing will depend on the relative needs of the parties, and whether or not there are any better alternatives to it. If it doesn’t make economical sense, then the parties should not pursue the option of seller financing.
If the parties do opt for seller financing, Mack says it’s important to make sure that the agreement is carefully structured.
“There may be compliance if the purchase price is paid out over time,” Mack warns.
Even though there are lots of pros and cons to using seller financing in urgent care transactions, Schaff says he recommends that buyers and sellers explore it.
“It could make the deal a lot better,” Schaff says. “Buyers won’t have to deal with a third party financing company, and there’s assured cooperation from the seller.”
“Seller financing can be a really good option under some circumstances,” Hursh says. “If the property is free and clear of any liens, it can get buyers in the doors faster, and sellers can often close a deal more quickly, which can be a benefit.”
Under the right circumstances, Hursh says that seller financing can be a win-win situation for all of the parties involved.
“The seller can get a higher interest rate, and the buyer may be able to finance more of the purchase price,” Hursh says. “The seller will get a higher price and be able to spread the taxes, and if it’s done correctly, it can be a much better deal for everyone involved.”
If you have an interest in learning more about the subject matter covered in this article, the M&A process or desire to discuss your current situation, please contact Blayne Rush, Investment Banker at 469-385-7792 or Blayne@AmbulatoryAlliances.com