Seller Carrybacks and Dental Practice Transitions Today
By Jen Bennett, Practice Transition Advisor
You’ve heard the term “Seller Carryback,” but what does it mean?
Seller carryback financing is when the seller of a given property, or in this case, a seller of a dental practice and assets, acts as a lender for the buyer if a conventional bank will not offer the full amount that the buyer needs to close the sale.
Years ago, it was commonplace for a retiring dentist to act as the lender for someone to purchase a dental practice. Seller financing was driven largely by the fact that banks and financial institutions had yet to embrace the industry like they do today. Therefore, there was a wide variety of structures, interest rates, terms, etc. that were built into those transitions and the exchange of funds between the buyer and seller.
Much like the rest of dentistry, the industry and the financing supporting transitions have evolved. In most transactions, it is quite common for the seller to receive all the cash at the time of closing, which is ideal. However, certain circumstances still exist where seller participation in financing is a requirement. In these cases, the buyer’s lender will require the seller to carry a certain portion of the purchase price. Usually, that amount is 10-25% of the total purchase price. Why would a bank need that, you might ask? Some common scenarios include: a declining revenue trend, uncertainty around the buyer’s production capability, and tight cash flow, to name a few.
Every lender has different standards around seller participation, but here are some common features of that path in the current environment:
- Term: Most carrybacks are amortized similar to the buyer’s bank loan. Payments based on a 10-year repayment are common.
- Rate: Since these loans are typically junior to the bank loan it is not unusual to see a seller note 0-2% higher than the banknote. Right now, around 5% is reasonable.
- Prepayment Penalty: Sellers typically want to receive the funds over a shorter timeline of 10 years. Most carrybacks do not have prepayment penalties so that the loan can be paid off or refinanced within 24 months of the transition.
With talks of increasing capital gains taxes in the near future only time will tell how prevalent carrybacks will become.
For more information, please feel free to contact Jen Bennett.