Practice acquisition finance: funding the purchase of a professional practice

Practice acquisition finance is borrowing used to buy all or part of a professional practice, usually a term loan secured on the practice and repaid from its recurring fee income. It can fund the purchase of the shares of a practice company, the assets and goodwill of a sole trader or partnership, or a partner's share in an existing firm. Lenders size it mainly on the practice's sustainable profits after the buyer's own drawings and costs, not on the value of its physical assets. It is often combined with vendor finance, the buyer's own money and a working capital facility.

A practice is valued and funded on the strength of its relationships, so lenders focus on whether those relationships will survive the change of owner. These are the issues that set practice deals apart from ordinary business purchases.

• Goodwill. Most of the price is goodwill: the expectation that clients or patients keep coming back. It has no resale value on its own, so lenders rely on the practice's earnings rather than its assets.
• The client or patient bank. Lenders look at its size, age profile, how long people have stayed and how concentrated fees are among the largest clients.
• Recurring fees. Annual compliance work, monthly retainers, dental plans, repeat prescriptions and recall cycles make income predictable, and predictable income supports more borrowing.
• NHS contracts. Many dental, pharmacy, optical and GP practices hold NHS contracts. Lenders check the contract type, whether it transfers to the buyer and how much of the income it represents.
• Regulatory approvals. Depending on the profession, the buyer or the practice may need registration or approval from a regulator, such as the CQC for many healthcare providers, the GPhC for pharmacy premises or the SRA for law firm owners and managers. Lenders usually make these a condition of drawdown.
• Key-person risk. In a small practice, clients may be loyal to the outgoing principal rather than the firm. A planned handover reduces that risk.
• Retention after the sale. Some clients and patients leave when a practice changes hands. Prices and funding structures often allow for this through retention-linked deferred payments.

It suits qualified professionals with practice experience buying a profitable, established practice, and existing firms expanding by acquisition. Associates moving to ownership are often well received if they already know the practice or the sector. It is harder for buyers with no relevant professional background, for practices whose profits depend almost entirely on the departing owner, and for loss-making or declining practices where the price assumes a turnaround.

An indicative decision from a lender can often be obtained within a few weeks of a complete proposal, but the overall timetable is usually set by due diligence, legal work and regulatory approvals. Completion typically takes two to six months from agreed Heads of Terms, and longer where an NHS contract transfer or regulator registration is involved. It depends on the lender, the profession and how quickly both sides' advisers move.

Lenders usually take a debenture over the practice or the buying company, and often personal guarantees from the principals or partners. Where the practice owns its premises, a charge over the property may form part of the package. Life cover on key individuals is commonly required. Deferred consideration owed to the seller normally ranks behind the lender.

The main cost is interest on the term loan, fixed or variable, which reflects the lender's view of the practice, the buyer and the structure. Expect an arrangement fee, and possibly valuation and legal costs for the lender's own advisers, and check early repayment terms. Your own legal, accountancy and due diligence costs sit alongside. It is free to enquire; any broker fee is disclosed separately before you proceed.

The main alternatives to a bank-funded practice purchase are structures that reduce or delay the cash you need at completion.

• More vendor finance: a larger deferred consideration and less bank debt, if the seller agrees.
• A block of fees: buying part of a client bank rather than a whole practice; see our block of fees guide.
• A partner buy-in: joining an existing firm first with partner buy-in finance and taking a larger stake later.
• A merger: combining two practices for shares rather than a cash price.

For deals outside the professions, our main acquisition finance page covers management buyouts and buy-ins.