Credit scores trump educational debt load

CLEVELAND—Though many veterinarians fret about student loans prohibiting them from buying a practice, the real killer is revolving credit, such as credit cards and car loans.

"You can get money to buy a practice with student loan debt, but you must talk to the right people to make it happen," says John Campbell, Matsco's regional manager..

Matsco, based in Emery, Calif., lends money exclusively for medical practices. Though traditional lending via banks and mortgage companies often fit the bill, Matsco boasts having the exclusive recommendation by the American Animal Hospital Association since 2001.

Regardless of the size or type of lending institution you might select, they all likely will be hunting for the same information: your credit rating.

Composite scores

A composite score is a compilation of credit history that is assigned a numerical value. A score originates from several locations, but the most influential loggers of credit history are Equifax (Beacon score), Experian (Fair Issac or FICO score) and Trans Union (Emperica score). These companies can be contacted directly to keep tabs on who is reporting your credit information and why.

A potential buyer will have plenty of explaining to do for any black marks that might appear on reports from any of these three agencies, but a composite score between 650 and 700 likely will qualify a prospective buyer for a practice acquisition, according to Simmons & Associates, a nationwide brokerage network that works exclusively toward veterinary practice sales.

"The first thing we are going to do is determine whether or not they have made on-time payments to current debt that they have outstanding," Campbell says. "If a candidate has any kind of revolving personal credit card or open lines of credit that they don't use, then we recommend that they pay those down or close out accounts.

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"There is a certain amount of credit allowed to each individual, called revolving availability, which is based on your income level. If you have too much debt outstanding or if you have too many open lines of credit, then it can affect your overall credit score."

First contact

While lenders front veterinarians money based on good faith and a healthy composite score, a prospective buyer likely will have his or her first contact with a broker, a real-estate agent who helps align the right candidate with the right property, as well as make introductions to the lending community.

"We don't run a credit check; the first thing we do have a heart-to-heart, come-to-Jesus talk about their debt load. Excellent credit is of paramount importance," says broker Dave Gerber, DVM, president of Simmons & Associates Northwest. "If it requires you to murder someone to keep your credit good, then by all means do it. It's far more important than having cash on hand. With good credit, you don't need a lot of cash."

Simmons & Associates has 10 offices nationwide, each independently owned an operated, but they share revenue for sales, marketing and promotions. The combined companies conduct approximately 75 transactions each year, including internal sales, which occur when an associate buys into a practice where he or she already works, and external sales, which include transactions where the buyer has no pre-existing relationship with the seller.

"One of the biggest things that we determine at Simmons is: Is this person a good fit for this style of practice and market, Gerber says. "It's critical, so we work pretty hard at it."

The right fit can include a number of things, including familiarity of the practice location, the market and the type of client the market produces.

"Most lenders are going to ask for some history on that person and their character," Campbell says. "They are going to ask for a resume and inquire about ties to the area and practice history to get to know what this candidate is about."

Professional accomplishments will come into play, too. Lenders might pull productivity logs to ensure a candidate has the medical prowess to handle the volume and nature of a particular clinic. Any professional censures or licensing problems likely will put a kink in the deal.

"The character weights just about as heavily as the credit does," Gerber says. "Credit can kill a deal in a second, but if they have a derogatory remark or two coupled with average credit, then those factors can compound."

Ideal candidate

Although there are several hallmarks and criteria that brokers and lenders look for in a candidate, some are seldom negotiable, including a minimum threshold of experience, typically at least three years, and at least a hint of management experience.

"At a couple of years out of school, they are trying to get their arms around the medicine and the surgery and frankly don't have the time to devote to management duties until they've become more comfortable clinically and surgically," Gerber says.

As associates begin to assume more management duties, it might be a good idea to update your resume and cover letter to reflect burgeoning skill sets. Coupled with experience and clean credit, cash flow for a down payment often takes a back seat.

"We generally can help get financing in the 85 to 100-percent range, and the higher threshold is becoming more common, so we are securing financing with zero down," says Kurt D. Liljeberg, DVM, president of Superior Business Brokerage in Cleveland. He also is president of Veterinary Practice Sales Group (VPSG), a marketing cooperative with 11 independent offices nationwide. The VPSG network closes about 40 transactions to 60 transactions each year.

Other brokers agree that 100-percent financing is available, but it typically is reserved for the lowest-risk candidates—those with a history of on-time payments, a low burden of revolving debt and a healthy medical and business acumen.

"Certain lenders are cash flow-based lenders, and some lenders are balance sheet-based lenders," Campbell says. "Balance sheet-based lenders typically look at your assets and your liabilities, and if that ratio is lopsided or your debt is too great for the assets that you have on hand, then lenders are less likely to be able to help a newer graduate.

"Cash flow lenders are looking at the practice itself and the practice's ability to support the personal month-to-month living expenses of the client, as well as the note for the practice purchase."

Campbell adds that lesser-qualified candidates often pay the price with higher interest rates or are required to pay more money down.

In these cases, a car loan would be considered revolving debt, but a mortgage payment is considered "good debt" and even might be used as collateral for the practice loan. Regardless, the lender will ensure that the cash flow of the potential practice will be able to cover the personal expenses of the applicant, as well as the business overhead for the practice.