Medical Practice Loan

Starting up your very own medical practice may not only be the best investment you ever make but it could also be the most professionally rewarding.

Discover how to get approved for a medical practice loan and learn some golden tips to find a great practice to buy.

How much can I borrow?

• Medical practice property: Borrow up to 100% of the property value (freehold).
• Medical practice business loan: Borrow up to 100% of the business value (leasehold) including fit-out and equipment.
• Maximum loan term for (freehold): 25 years.
• Maximum loan term for (leasehold): 10 years.
• Low doc loans are available.
• Principal and interest + interest only repayments available.
• Interest rate discounts vary from lender to lender and the strength of your application.
• You may be asked to provide a business plan including business forecasting.
• You need around 3 to 5 years experience as a qualified general practitioner (GP).

Do you need an indicative funding approval?

Call us on 1300 889 743 or fill in our free assessment form to speak with one of our commercial loan specialists.

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How can we help?

With exceptional knowledge of medical centre business loans, our mortgage brokers know exactly how to present a strong case to the right commercial lender so you don’t have to waste your time shopping around.

Choosing the right lender is not only the key to getting approved but, by showing your strength as a borrower, you may be able to borrow up to the maximum of the market value of the practice premises (the freehold) and the business (the leasehold). This is known as the Loan to Value Ratio (LVR).

For start-ups, we’re able to assess the application based on income forecasting and future business plans.

The strong relationships that Home Loan Experts has with the commercial lending arms of major Australian lenders means our brokers can also negotiate for competitive interest rates on your behalf.

Once we know that we can get you approved, we can provide you with a few loan options to choose from and help you set up a loan that best fits your needs.

Take a look at the commercial loan features page to get a better idea of what features may work for you.

Discover more about how the commercial loan process works and the other types of commercial properties we can help you finance. Alternatively, call us on 1300 889 743.

How do banks look at these types of loan?

One of the first things the banks will be looking at is if you’re a qualified doctor or practitioner with a few years of experience (generally at least 3 years) working in a similar operation to the practice you’re looking at purchasing.

Doctors and dentist may be required to provide evidence of a Medicare provider number.

Dentists, specifically, may be required to provide proof of registration with the Australian Dental Association. For veterinarians, you may need to provide a copy of your membership with the Veterinary Surgeons Board.

Banks will also be looking to see that you’re in a strong asset position. If you’re quitting your job to run the practice full time, you may require income protection and life cover, although this requirement will vary between lenders.

Our mortgage brokers are specialists in business loans for doctors and other medical professionals and we can help you prepare your application to highlight your strengths as a borrower so you have a better chance of getting approved the first time around.

Call 1300 889 743 or complete our free assessment form today.

How are doctors practices valued?

For the business itself, banks will take into consideration:

• Total revenue.
• Gross margin.
• Wages for revenue figures.

They’ll also consider the asset quality position, financial performance of each of the above aspects and how they impact the business overall, as well as the industry environment and existing market competition.

What security can I use for a medical centre commercial loan?

• Mortgage over freehold or leasehold. Charge over business assets.
• Registered fixed or floating charge over the practice.
• Directors’ guarantee.

How long does settlement take for a business loan?

Like other commercial properties, settlement on a doctors practice business loan usually takes around 6 to 8 weeks.

Tips For Buying

Have you gotten financial and legal advice?

Whether you’re looking at buying a healthcare practice, a dental clinic or a veterinary practice, you should seek out independent financial and legal advice first.

Initial consultations are sometimes free for accountants, financial advisers and lawyers but even if you have to pay a few thousand for these professionals, you have a much better chance at avoiding really common mistakes that can quickly put you out of business.

A business broker or commercial buyers agent who has experience in buying and selling doctors clinics can help you find great investment opportunities but you’ll need more professionals in your team.

A specialist accountant, for example, can also help you save a lot of money over the long term by helping you set up an entity structure that is more profitable for your situation.

Need help me negotiating the terms of the contract? A solicitor can help.

If you make an agreement with the vendor that all of the practice’s equipment is in working order before you sign the contract, you’ll want to make sure that there is a null-and-void arrangement in the Heads of Agreement just in case they fail to repair or undertake replacement work.

Such equipment can include diagnostic machines like x-rays and ultrasound, medical lasers and medical monitors.

Should you just buy the practice premises?

Although buying the leasehold tend to generate a higher return on investment than just investing in the freehold, the worst case scenario, the clinic failing, usually means the loss of any money you outlaid for the business.

By purchasing the freehold, you can avoid much of these upfront costs and you can enjoy a stable rental income from the outset.

Deciding on which ownership to choose comes down to your circumstances and how much work you’re willing and able to put into building a business.

The great thing about a freehold arrangement is that the land itself retains value even if the business sinks.

Please get in touch with us on 1300 889 743 or fill in our free assessment form so we can properly assess your situation and discuss freehold and leasehold options based on what you’re trying to achieve.

Have you done your due diligence on the property?

Whether you’re buying the freehold or the property and the business (freehold going concern), what should you look for in the property?

You have to put yourself in the shoes of the patient:

• Is the property located on a main road with plenty of foot traffic? Clinics located near shopping centres or near pharmacies are prime locations because of their convenience.
• Is the property standalone or attached to a building? Medical practices attached to a shopping centre can generate a lot of traffic.
• Is there parking available on the premises or located nearby?
• Is there competition in the area?
• Is the property purpose-built or converted residential? This can affect the terms of the commercial loan and your borrowing power.
• Is renovation work required to make the practice look good? First impressions are important to patients and this should be conveyed to potential tenants (if you’re buying an untenanted freehold).
• How many consulting rooms are there?
• Is there opportunity to renovate should the lessee require it? Perhaps a larger or just refurbished reception area.
• What’s the zoning of the property?
• How big is the local community? How much business is the practice likely to receive? This is essential general practice but less of a concern if the practice premise will be used for a specialist clinic i.e. patients will travel for expertise.
• Is the property near a base hospital? Great for building referrals.
• Is the property structurally sound?
• Are there covenants, easements or other restrictions that apply?

Once you’ve considered these questions, it’s important to have an architect or other building expert look at the premises before deciding to buy.

If you’re taking over a freehold with existing tenants consider the nature of the business:

• Is there strong management in place?
• Are staff there loyal? This can have a massive impact on the practice staying afloat and ensuring stable rental income for the long term.
• How many days is the practice open for? 5.5 days (half day on Saturday) compared to 5 days a week can have a significant impact on the profitability of the business.

Should you just buy the business?

There are huge differences between buying the leasehold or the freehold, not least of which are the business and tax implications that come along with it.

Leasehold arrangements don’t require you to outlay money for the property for renovations or bringing the property up to standards. As a result, they tend to offer a much higher yield on investment than freehold investments.

Even though there can be a greater reward in buying a leasehold property, there’s also a greater inherent risk so it comes down to your ability to put in the hard work.

If you’re looking at a challenge, then a buying a leasehold may be a better option for you.

To make it a little easier for yourself, decide if you want to buy the practice, along with the name and equipment, or just the space and the equipment.

If you’ve found a clinic with a good patient base with repeat business, you’re probably not looking at changing the business too much, at least in the beginning, so you may best continuing operating under the practice name.

If you want a “set and forget” commercial property, you might be better off buying the business as a freehold and earn rental income.

Obviously, buying both the property and the business (freehold going concern) will require a large outlay upfront but you have some cushion in case your practice doesn’t succeed.

Can you speak to someone who’s already taken the leap?

A medical practice, like any commercial property, requires you to do your homework.

Luckily, doctors tend to be highly ambitious and understand the power of having a mentor.

Do you know a senior doctor who has started their own practice?

Ask them for advice and you’ll not only have a better chance of turning a profit but you’re also showing the lender that you’re undertaking all of the proper due diligence to run a successful practice.

If you don’t know someone personally in the industry, have you spoken to the Australian Medical Association (AMA). They can give you essential tips and resources on managing your practice such as streamlining your bulk billing process and recruiting new staff.

Of course, you’re probably best off getting advice from the vendor you’re considering purchasing from.

It pays to have a decent consulting contract or handover period written into the Contract or Sale or Heads of Agreement to ensure that you can mine the former practitioner for information about his patients, staff and the practice premise as a whole.

How can you identify goodwill in a doctors practice?

As a qualified medical professional, you’re likely earning a considerable income working in the public sector, so one of the first questions you’ll need to answer is whether you’ll actually be earning more by running your own practice.

A mark of a good lease is one that can show a regular above average return on investment, otherwise known as goodwill.

This means that when buying a practice, you’re not only buying the space but you should also expect to pay a premium for what makes the practice successful. These aspects include:

• Existing patient base, repeat business and reputation.
• Long-term and efficient support and administration staff that have good relationships with long-time patients.
• Clean, modern premises with adequate parking and in a good location.
• Ambient environment.
• Established relationships with allied health professionals.
• Plant and equipment.
• Specialist equipment.

The AMA suggests a good rule of thumb for goodwill as equal to one third of a practice’s gross billings. A half share of a practice with gross billings of $900,000 would therefore be valued at around $150,000 (i.e. $900,00 times 50% times 33.3%). Plant and equipment should then be purchased separately at market value.

These competitive advantages can all be passed on to you as the new owner but in order to accurately calculate goodwill, it’s best to speak to an accountant.

Should I buy a GP or a specialist clinic?

The first thing to consider when considering getting a medical practice business loan is what kind of practice you’re going to run, that is, either a GP or a specialist clinic. The answer to this question will come down to your skills and experience.

General Practice

At the moment, there is a shortage of family doctors across the country, especially in rural areas, so owner doctors are highly sought after.

The benefit of buying a property and then starting your own practice (as a freehold going concern) is that you can avoid paying a goodwill premium and you’ll have total control over location, staff and the premise fit out.

You also have the opportunity to create your own goodwill and sell the business for a profit down the track. This will come down to your ability to build or bring to the table a significantly large patient base.

By buying existing, the patient load will already be in the business which means you have a much better chance to generate a profit from the outset.

You also won’t have to waste time and expense in acquiring new medical equipment and staff. if you’re buying and operating under the existing practice name with a good reputation you have the added benefit of avoiding costly marketing activities.

You’ll also be able to leverage existing relationships with allied health professionals, including but not limited to, chiropractors, dietitians, occupational therapists and psychologists.

Of course, reputation may work against you if the practice doesn’t have a positive reputation to begin with. Well before making the decision to purchase, observe the practice and perhaps even turn up as a patient to weigh up the pros and cons.

This includes both the service and staff as well as the practice premise itself.

Specialist

Generally speaking, specialists rarely buy practices because the service is too attached to their particular set of skills.

As a result, paying a premium for goodwill in an existing practice just isn’t worth it most of the time. The return on investment just isn’t there.

Location doesn’t matter and there is a stronger emphasis on a refined and focused body of knowledge and the greater need to rely on a body of referring doctors.

Generally speaking, specialists usually start their practices from scratch and gradually build up to full time private practice.

Where you may consider paying goodwill for a specialist practice is in situations where a large part of the clinic’s income comes from plant and equipment such as radiology, sleep disorder units, cardiac assessment centres and specialist dentists.

Have you done your due diligence on the business?

One of the first things you’ll need to do when you find a potential doctors practice is to find out why the vendor is selling in the first place.

Is the clinic sinking and does the current practitioner want to jump ship?

To get a clearer picture, ask for three years business bank statements for the clinic and go over them with your accountant. Make sure they’re bank statements and not profit and loss statements – these aren’t as reliable.

You’ll also want to be provided with evidence that all rates, taxes and other outgoings have been paid up to date.

These records should be readily available so if it seems like the vendor is trying to hide this information, that should send up a red flag about the deal.

In relation to the medical centre’s service offering specifically, it may be a good idea to ask another doctor, or an external practice consultant, to prepare a critique of the practice and to list ways the practice can be improved:

• What (if anything) about this practice would appeal to a patient? What (if anything) about this practice would appeal to different types of patients?
• What hours is this practice open? How does it deal with after hours calls?
• What type of services does this practice offer its patients? Is there a special niche this practice provides creating a unique demand for its services?
• How many doctors are involved?
• Do the assistants and associates engaged by this practice have their own patient following and loyalties?
• Do the practice’s premises have easy access and good parking facilities?
• Does it rely on repeat business and build up strong personal relationships or is it a high turnover practice? Are the patients loyal?
• Is the business located in a rural area? There is the potential for greater turnover in rural areas, where healthcare professionals are in high demand, compared to metropolitan areas, where there is much more competition.
• What is the average time spent with a patient?
• What proportion (if any) of patients are bulk billed?

If a practice is operating from premises that are not as ideal as the premises occupied by other practices in its locality, it could pay to upgrade them.

Generally speaking, patients don’t like visiting sub-standard practice premises and doctors tend to spend too little money on their premises.

Spending more will generally mean you attract more patients beyond your referral base and repeat business.

What are you actually buying?

It’s really important to understand what you’re getting for your money when you’re buying a practice.

For example, you’ll normally agree to take on all liabilities owed to staff, including any sick leave, annual leave or long service leave. An estimate of these liabilities will be deducted from the agreed sales price.

Depending on the size and nature of the medical centre, staff entitlements can outweigh goodwill so the purchase price should be negotiated with the help of your solicitor.

You should also consider what equipment and medical supplies, if at all, are included in the purchase price. This will vary depending on whether the practice is a specialist clinic or not and, again, this can be negotiated when it comes time to setting an agreed purchase price.

Should you defer payment if certain terms aren’t met?

The vendor may advertise that the practice generates a certain amount of turnover per annum. If for any reason the results from the practice are not met, you may want to withhold all or part of the final payment owed to the vendor.

Another thing to consider is that the vendor will be looking to minimise the amount of the total consideration apportioned to plant and equipment in the practice. The reason is that the extent that this amount exceeds the market value of the business will be assessable income in the vendor’s hands for taxation purposes.

On the other hand, you’ll want to maximise the amount of the total consideration apportioned to plant and equipment because this will maximise the depreciation expense able to be claimed by the vendor in subsequent years.

Often the matter is settled by giving the plant and equipment a value equal to the vendor’s depreciation values for income tax purposes. Please seek professional financial advice before making a decision.

Do you need licences and permits?

After your initial 8 years of medical training, it’ll take about 3 to 4 years to become a family doctor through vocational training but it really depends on what you want to specialise in.

For example, it takes 5 years to complete a fellowship with The Royal Australian and New Zealand College of Ophthalmologists and 4 years to complete the fellowship of The Australasian College of Dermatologists.

Once you’re qualified to practice medicine, you’re free to open your own practice but the medical industry is strictly regulated, particularly when it comes to Occupation, Health & Safety (OH&S).

Medical professionals like GPs, dentists and optometrists will have to ensure they’re meeting the requirements of the Health Practitioner Regulation National Law and state equivalents, while vets will need to adhere to the Veterinary Practice Act 2003.

Is there key man risk?

Beware of practices that are overly reliant on one doctor. You may want to engage someone to take over a group of patients. In this way, you’ve traded personal goodwill for practice goodwill.

Other key members of the practice may not be doctors or specialists at all but may be part of the support team, administration, accounts or reception.

They often go above and beyond what is set out in their job description and can easily run their part of the business. The practice would be lost without them.

Depending on how important the staff member is in keeping your business profitable, you may consider getting key man risk insurance.

What you can do in the meantime though is put in systems and procedures in place that help to replicate what this staff member undertakes on a daily basis to ensure you can continue to run an optimum business.

What kind of lease term should you get?

Most medical practices are sold for 5-year lease terms as a minimum although there is a 5-year waiver that you can apply for in Victoria.

Generally, 3-5 year lease terms are appropriate but it really comes down to how much work the practice premise needs. If it’s just cosmetic renovations (typical with converted residential properties) than 3 years may be enough.

Five year lease terms or longer may be required if major construction and fit-outs are required over the period that you’re running the practice.

The good thing about a long lease is that it provides you with stability to firmly establish your practice in town and protects you from having to move in case the landlord decides to sell the premises. This would be a disaster.

Although you’re likely planning to spend the rest of your career building up your practice, you can generally negotiate for more from the landlord the longer the lease is. For example, you may be able to negotiate for free rent for a few months.

This really depends on the nature of the practice premise (location and structure) and the market in general i.e. how desperate is the landlord for new tenants?

It’s essential you speak to an accountant or financial adviser about which lease term will fit better with your long term financial goals.

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What should be in the lease arrangement?

Are you taking on existing debt from the vendor?

There should be a detailed schedule of plant and equipment. The vendor should confirm that they have good title to these items and they aren’t subject to any charge or other encumbrances. All debts owing should be paid before proceeding with the sale.

It can sometimes make sense for you to take on responsibility for specified debts of the vendor. For example, the practice may be one year into a five-year lease on an imaging machines that cost $150,000. The lease is at a competitive interest rate and there are no unpaid arrears.

By taking on this debt, you’re part paying off the purchase price. You should contact plant and equipment lessors and notify them that the lease for the equipment is changing hands.

Handover agreement and non-compete clause

Apart from the contract stipulating the terms and period of the transition period, you actually want to receive the benefit of the goodwill and not lose customers to the current practitioner simply opening up another practice down the road.

The leasehold agreement should include restrictions on the type of activity restricted, the geographic area and the time period. Deferring payment can give you bargaining power should they not hold up their end of the agreement.

Lease tenure

There should be a guarantee of lease tenure in the lease agreement and, if it can’t be guaranteed, the goodwill should be reduced.

• If the vendor is leasing: the agreement should stipulate that the vendor’s rights as a tenant under the lease agreement to the purchaser. The landlord’s consent is required.
• If the vendor owns the premises: arrange for a fresh lease to be granted for, say, five years with options to extend the lease.

Zoning

It shouldn’t be assumed that a practice is eligible to run from the premises because one is run from there now.

You should consider getting written confirmation from both the vendor and council before proceeding with the sale.

If the property is zoned B4 mixed use or business, you’ll be able to run a medical practice.

If the property is zoned residential only, you’ll have to apply with council to change the zoning and convert the property to a commercial property.

What else do you need to know?

Send a letter to patients

You should consider asking the vendor to send a letter to their patients highlighting your skills and experience. This should be sent to patients one month from the change of ownership.

If the new doctor is buying into a partnership, it can be a good idea for the retiring doctor’s patients to be invited to see the remaining partners as well as the new practitioner. This gives them a choice, and should be reflected in a better retention rate for the partnership as a whole.

This is even more important in a solo practice (transition period is important).

Consider rural property

Doctors just don’t want to work in rural locations so there a really great practices out there that are selling at a massive discount with virtually your choice on the price you put on goodwill.

Contractors versus employee doctors

One of the big headaches of managing your own practice is ensuring that you meet your tax obligations.

It’s no secret that many medical professionals work as contractors, operating not only under an Australian Business Number (ABN) but also under a registered business name.

This is usually done for asset protection purposes but you should understand your obligations as a practice owner.

Just because you employ a doctor who holds an ABN, doesn’t necessarily mean they’re a contractor or a subcontractor for tax purposes.

Depending on whether they’re employed on a regular and ongoing basis, they may be considered employees.

It all comes down to the specific terms and conditions of their employee contract.

Why is this important?

Well it means that you may have to meet certain tax obligations as an employer that you weren’t aware of, such as adhering to particular awards like annual leave and sick leave as well as paying superannuation.

You should speak to your accountant about how doctors that you hire or contract will be treated by the Australian Taxation Office (ATO).

Keep in mind the following.

Doctors employed on an “on call” or locum basis to handle patients during heavy loads may be still be considered as employees.

An ABN holder can work for a medical centre for more than 80% of their working week and still be considered a contractor.

The 80/20 relates to personal services income (PSI) and how a contractor reports their income of their own tax return.

It has nothing to do with the tax obligations of a medical practice.

Example of a good investment in a doctors practice

After a few years working at an inner city hospital, Dr Ben, 37, decided now was the time to take the leap start his own practice.

Always wanting to make a sea change and move to the country with his wife and two children, he found a quaint looking practice in a beautiful rural town.

After getting his business loan approved, he bought the practice for about $50,000 and it came complete with a practice nurse and two other family doctors. The good news was that the nurse and the two doctors wanted to stay on.

Because John was now the sole owner of the practice, it could be run through a practice trust using a standard discretionary trust deed.

The practice is now making more than $600,000 a year and a large part of this profit is taxed at about 30% thanks to the discretionary trust.

John is now making more than $400,000 more than he was before he bought the clinic.

On top of that, he’s working shorter hours and he’s able to take more time off to spend with his family.

This is a scenario only and shouldn’t be taken as financial advice.

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Do you need a medical practice business loan?

The shortage of doctors almost creates a bidding process to attract and retain good quality doctors to a practice at the moment.

In saying that, it’s important to speak to a financial professional such as an accountant or financial adviser before jumping into a medical practice.

If you think you’re ready to take the next big step in your professional career, speak to one of our commercial mortgage brokers today.

We’re specialists in business loans for doctors and we know to build a strong case so you have the best chance of getting approved. Get a pre-approval before you start shopping around for your dream practice.

Call 1300 889 743 or fill in our free assessment form today.