Financing Options Overview
Financing a dental practice acquisition typically involves one or more of three primary sources: SBA guaranteed loans, conventional bank loans, and seller financing. Each has distinct advantages, requirements, and optimal use cases.
| Factor | SBA Loan | Conventional | Seller Financing |
|---|---|---|---|
| Term | 10 years | 5 to 7 years | 3 to 7 years |
| Down Payment | 10% to 15% | 15% to 20% | Negotiable |
| Interest Rate | Prime + 2-3% | Prime + 1-2% | 5% to 8% |
| Approval Time | 45 to 90 days | 30 to 45 days | Immediate |
| Best For | Larger deals | Faster closing | Bridging gaps |
Most acquisitions use a combination of sources. A typical structure might include 80% bank financing (SBA or conventional), 10% seller financing, and 10% buyer equity. The optimal mix depends on the deal size, your financial position, the seller's preferences, and current market conditions.
"In our dental practice M&A work, we see financing structure drive more deal terms than most buyers initially realize. Lenders often have specific requirements for purchase agreements, non-compete provisions, and transition periods that affect what you can negotiate with the seller. We advise buyers to get pre-approved and understand lender requirements before making offers—not after you've already negotiated terms that your lender won't accept."
SBA Loans Explained
SBA loans are the most common financing vehicle for dental practice acquisitions. The Small Business Administration does not lend directly but guarantees a portion of loans made by approved lenders, reducing the bank's risk and enabling more favorable terms for borrowers.
SBA 7(a) Loan Program
The SBA 7(a) program is the primary vehicle for practice acquisition financing. Key features include loan amounts up to $5 million, terms up to 10 years for practice acquisitions (25 years if real estate is included), the ability to finance goodwill and intangible assets, and lower down payment requirements than conventional loans.
Down Payment
10% to 15%SBA loans typically require 10% equity injection for well qualified borrowers. Some lenders require 15% depending on deal specifics.
Interest Rate
Prime + 2.25% to 2.75%Rates are variable, tied to prime rate. Rates adjust quarterly. With prime at 7.5%, expect rates around 9.75% to 10.25%.
Loan Term
10 YearsStandard term for practice acquisitions without real estate. Longer terms reduce monthly payments but increase total interest.
Guarantee Fee
2% to 3.5%One time fee based on loan amount and term. Can be financed into the loan or paid at closing.
SBA Advantages
- Lower down payment requirements
- Longer terms reduce monthly payments
- Can finance goodwill and intangibles
- No balloon payments
- Many lenders specialize in dental
SBA Disadvantages
- Longer approval process (45-90 days)
- More documentation requirements
- Guarantee fee adds to costs
- Personal guarantee required
- Collateral requirements on larger loans
Get pre-approved first: Before making offers on practices, get pre-approved by one or two lenders. Pre-approval strengthens your negotiating position, speeds the closing process once you have a signed LOI, and identifies any qualification issues early.
Conventional Bank Loans
Conventional bank loans are direct loans from banks without SBA guarantees. They work well for smaller acquisitions, buyers with strong financials, or situations requiring faster closing.
When Conventional Loans Make Sense
Consider conventional financing when the acquisition is under $500,000 where SBA fees become proportionally expensive, when you need to close faster than SBA timelines allow, when you have strong personal financials and can qualify without SBA backing, or when the practice has minimal goodwill and the loan is primarily secured by tangible assets.
Typical Terms
5 to 7 year terms with potentially lower rates than SBA. Higher down payments (15% to 20%) but no guarantee fees. Monthly payments are higher due to shorter amortization.
Approval Speed
30 to 45 days typical, sometimes faster with established banking relationships. Less documentation than SBA. Good option when timing is critical.
Seller Financing
Seller financing means the seller agrees to receive a portion of the purchase price over time rather than all cash at closing. The buyer makes payments directly to the seller according to agreed terms, typically documented in a promissory note secured by the practice assets.
Why Sellers Agree To Finance
Seller financing benefits sellers by expanding the buyer pool to include those who cannot qualify for full bank financing, potentially achieving a higher total purchase price, spreading tax liability over multiple years, and earning interest income on the financed amount. For buyers, seller financing reduces cash requirements at closing, demonstrates seller confidence in the practice, may offer more flexible terms than bank financing, and can bridge gaps between bank approval and purchase price.
Example: Seller Financing Structure
Purchase Price: $900,000
Bank Financing (SBA): $720,000 (80%)
Seller Note: $90,000 (10%) at 6% over 5 years
Buyer Down Payment: $90,000 (10%)
Monthly payment on seller note: approximately $1,740
Coordinate With Your Lender
Never finalize seller financing terms without confirming they meet your bank lender's requirements. Banks have specific restrictions on seller note structure, subordination, and standby periods. Misaligned terms can delay or derail your financing approval.
"The most common financing mistake we see buyers make is negotiating seller financing terms before understanding their primary lender's requirements. Most SBA lenders require seller notes to be on full standby for 12-24 months and subordinate to the bank's security interest. If you negotiate a seller note with immediate payments or equal priority, you'll have to renegotiate—potentially losing credibility or the deal. Always confirm lender requirements before finalizing any seller financing terms."
Structuring Your Practice Acquisition?
Get guidance on financing structure, lender coordination, and purchase agreement terms that protect your interests.
Schedule ConsultationQualification Requirements
Lenders evaluate both you as a borrower and the practice you are acquiring. Understanding qualification requirements helps you prepare and identify potential issues early.
Borrower Requirements
- Credit score: Minimum 680 to 700 for most lenders. Higher scores qualify for better rates.
- Dental experience: At least 2 years of clinical experience post residency for most lenders.
- Liquidity: Sufficient cash for down payment plus 3 to 6 months of reserves.
- Debt to income ratio: Existing debt (student loans, personal loans) affects qualification.
- No recent bankruptcies: Most lenders require 7 years since discharge.
- Clean background: No felony convictions or professional license issues.
Practice Requirements
- Profitability: Practice must demonstrate ability to service debt and provide owner income.
- Cash flow coverage: Typically 1.25x debt service coverage ratio required.
- Stable or growing revenue: Declining practices may not qualify or require larger down payments.
- Clean financials: Tax returns and financial statements must be consistent and verifiable.
- Reasonable valuation: Purchase price must be supportable by practice financials.
- Lease security: Adequate remaining lease term or favorable renewal options.
Student loan considerations: High student loan balances affect your debt to income ratio but do not necessarily disqualify you. Many dental lenders understand the profession's typical debt loads and have programs designed for recent graduates. Income driven repayment plans can help manage ratios during qualification.
Structuring Your Capital Stack
The capital stack is how you combine different financing sources to fund your acquisition. Optimal structure balances monthly payment affordability, total cost of capital, closing timeline, and risk allocation.
Typical Capital Stack Examples
Example 1: Standard SBA Structure
Purchase Price: $800,000
SBA Loan: $680,000 (85%)
Buyer Equity: $120,000 (15%)
Total cash needed: $120,000 + closing costs + working capital = approximately $150,000 to $170,000
Example 2: SBA Plus Seller Financing
Purchase Price: $1,200,000
SBA Loan: $960,000 (80%)
Seller Note: $120,000 (10%) on 24 month standby
Buyer Equity: $120,000 (10%)
Total cash needed: $120,000 + closing costs + working capital = approximately $160,000 to $190,000
Working Capital Considerations
Beyond the purchase price, budget for accounts receivable float during the transition (collections lag production), payroll and operating expenses before revenue stabilizes, inventory and supply restocking, any immediate equipment repairs or replacements, marketing for new patient acquisition, and professional fees (legal, accounting, consulting).
Most lenders require you to demonstrate 3 to 6 months of operating reserves in addition to your down payment. Budget $50,000 to $100,000 in working capital depending on practice size.
When To Speak With A Dental Practice Transaction Attorney
Financing structure affects legal documentation and deal terms in ways that benefit from experienced counsel. Dentists should consider consulting with a dental M&A attorney when:
When To Consult A Dental M&A Attorney About Financing
- Negotiating seller financing terms — to ensure promissory note, security agreement, and subordination terms are properly documented and coordinated with bank requirements
- Reviewing bank loan documents — to understand personal guarantee scope, default provisions, and prepayment terms before signing
- Structuring the purchase agreement — to ensure financing contingencies, timelines, and conditions protect you if financing falls through
- Coordinating lender requirements — to align purchase agreement terms with what your lender will accept
- Addressing real estate decisions — when financing involves both practice acquisition and real estate purchase
- Navigating complex deals — when multiple financing sources, earnouts, or equity arrangements are involved
Jaffe Law PLLC represents dentists in practice acquisitions, including purchase agreement negotiation, financing coordination, and transaction documentation. Schedule a consultation to discuss your specific situation.
