Bud or Bloom?

A professionally licensed colleague recently asked the question: “Will the Bank provide financing for Acquisitions or do they just provide start-up loans?”. Excellent topic for this week’s Making a Point Blog!

If you are in a professional services role and have been wrestling with taking the next step in your personal practice and wish to venture out of your current employment where you have no ownership stake, you essentially have three (3) main options:

1.) Start up a brand new practice,

2.) Buy into an existing practice with other owners, or

3.) Make a full Acquisition of an existing practice on your own.

As you can imagine, each of these comes with their own set of opportunities and challenges. Let’s examine them.

A start-up venture often has more risk than the other options. It usually involves creating a brand new stream of revenue, which may be very unknown and hard to quantify. Do not rely on clients to automatically follow you. People are generally lazy when it comes to making change, especially one they did not initiate. Yet, the expenses associated with starting-up a firm can be reasonably estimated and, some of your highest expenses will be set in stone. Those would include your rent or mortgage debt service, the minimum salary you need to take out of the business to continue a reasonable lifestyle, and any fixed equipment and human resources needed.

From a bank financing perspective, this is the riskiest option. The best manner to mitigate this risk with a bank is to offer a 20% or more equity infusion, personal guarantee, or hard collateral, such as a building. Often, you will see Banks providing start-up loans with the use of an SBA guarantee. This is how they mitigate the risk on you as a borrower.

The most distinct advantage of this option is that you are creating a brand new entity, no baggage, no weathering, only a future. It is the proverbial bud or seedling that you plant and help nurture through its growing phases. In many ways, there can be no more professional pride than growing a successful business from scratch. It is a true endorsement of your success as an Entrepreneur. The most risk equals the most reward.

Buying into an existing practice is a great choice if you would prefer to enter the Entrepreneurship world slowly. Think of it as a test drive of sorts. You will be able to understand what it means to be an owner of a business and how to work within the constraints of having other decision makers, beside yourself. It is also a good avenue to learn how to be a better owner. Often professional firms will set a percentage of buy-in that comes with a financial contribution but not necessarily carte blanche on running the operation. This can be an excellent option if you really just want to test the waters and can manage to work within an environment where, although you are an owner, you are not the only decision maker. The ability to compromise is essential here. Without that talent, do not even consider this option as you will be doomed from the start.

Financing this option is a bit more tricky. Often, there is little to no collateral that can be offered to your bank as you are not the only owner of the firm. Your best bet in this scenario is to identify a lender which specializes in your industry and offers Buy-In Loans. They are often on the Consumer side of the Bank, in the form of a private practice individual loan or utilizing a Home Equity Option if one exists on your residence. This is the trickiest of options for Banks to segment. Is it a commercial loan or is it a consumer/individual loan? Bank regulations are applied very differently, depending on where the loan is housed. So, do your homework on this one and often asking one of the existing partners of the firm in question about how previous partners financed their buy-in will set you in the right direction. If that is not an option, your CPA will likely have banking relationships that can be leveraged by you to find the perfect fit.

The third option of making an all out 100% acquisition of an existing practice may be the most attractive to a traditional bank lender while likely being the most expensive choice. Identifying an existing practice to purchase brings with it a tried and true client or patient base. Contractually, the entire stream of income cannot be assumed to stay with you as the new owner but, reasonably speaking, most will not leave you unless they do not like the new set up.

Key to this option working for both you and the Bank is a NonCompete Contract with the Seller. Without one, the seller can walk away with a large pay-out and open up an office down the road from you wooing back the patient or client base. I never saw an acquisition deal in my banking career that did not mandate a Seller NonCompete. Normal timing is a three (3) to five (5) year timeframe. This is your protection, your security, and your pathway to continuing the profitable entity you are buying. Without a NonCompete, you likely will not find a bank to finance your acquisition.

The greatest risk in this option is Reputation Risk. Both the reputation of the seller and you as the buyer. Will the client/patient base have enough faith in you as the new leader to continue patronizing your firm? And what about the reputation of the Seller? Is it stellar or marked with a few abrasions that can be cleaned and cleared? Purchasing an existing venture has a current brand identity. Know that brand identity and either be prepared to embrace it and build on the success of it or change it with a clear path forward.

If you find yourself in the quandary of to bud or bloom, new versus old, existing versus to be created, only you can decide which option holds the most promise for you. It will often come down to the best financing alternative and your style of Entrepreneurship. There are drivers and there are passengers in life, there are buds waiting to burst open and there are those already blooming in beauty. Identify your style and then find a target that fits your style.

Be like Uncle Chouffe, a Barbet in The Netherlands, pictured herein, embracing himself in the safest path in that which is already blooming. He found his safe place among the Beauty of the Bloomed. Where will you find yours?

Be well.