How do you finance buying a medical practice?

First question: who is allowed to own it

Many states apply a corporate practice of medicine doctrine: a medical practice must be owned by licensed physicians, and a business owned by non-physicians cannot employ doctors to practice medicine. States differ widely in how strictly they apply it. For a physician buying a practice in the state where they are licensed, it is rarely an obstacle. For anyone else it shapes the whole deal.

Non-physician buyers, including investors assembling several practices, typically use a management services structure: a physician-owned professional entity holds the licenses, payer contracts and patient relationships, and a separate management company owned by the investors provides staff, space and administration under a long-term agreement. Lenders can finance these structures, but they look hard at where the cash flow legally sits, how the management fee is set and whether the agreement survives a dispute with the physician-owner. SBA lenders in particular tend to prefer a physician buyer as owner of the borrower. The SBA lending data for physician offices shows how active the program is in the industry.

Collections, not charges

A practice's billed charges say little about its cash. Lenders underwrite what is actually collected, broken out by who pays, because each payer class carries a different risk under a new owner.

Lenders also look at collections per provider and the practice's days in receivables. A practice that collects slowly may simply have poor billing, which a buyer can fix, but a lender will not lend on the improvement until it shows up in the figures.

The cash gap after closing

This is where medical practice purchases most often run short. In a typical asset purchase, the seller keeps the receivables for services performed before closing. The buyer's practice starts with no receivables, full payroll and rent, and claims that insurers will pay on their own schedule. If the buying entity is new, it must also enroll with Medicare and be credentialed with commercial payers before it can bill under its own number, which can take months.

A simple illustration: a practice collects 100 a month and pays 80 a month in expenses and loan payments. If insurers take two months to pay the first claims, the new owner needs roughly 160 of cash to cover the first two months before any collections arrive, and more if credentialing is still under way. That amount belongs in the sources and uses from the start, funded by the buyer's cash, working capital in the loan, or a line of credit sized for it. See working capital at close and lines of credit for medical practices.

Plan the credentialing timeline before signing the letter of intent: a lender will ask how payroll gets paid while the first claims are outstanding.

A stock purchase avoids much of the gap, because the entity keeps its enrollments, contracts and receivables. It also keeps its history: past overpayments, pending audits and any billing problem travel with the entity. Lenders financing a stock purchase want more diligence on billing and compliance for that reason, and a buyer usually wants an indemnity backed by an escrow or holdback. The trade-off is covered in asset purchase vs stock purchase and escrows and holdbacks.

Physicians, patients and the seller

The practice's value is its providers and the patients who keep coming back to them. Lenders want each physician's and advanced practice provider's production and collections, how long they have been with the practice, how they are paid, and whether they have signed on with the buyer. Restrictive covenants in physician employment agreements are enforceable in some states and limited or barred in others, so a lender will not assume that a departing doctor's patients stay behind.

When the seller is a retiring physician with a long patient panel, the question is how many patients transfer to the buyer. Lenders get comfortable when the buyer has already been practicing there as an associate, or when the seller has spent the last year introducing patients to the physician who will take over. In an SBA-financed complete change of ownership the seller may not stay on as an owner, officer or employee, which rules out the common arrangement of the seller continuing to see patients part-time. The seller may consult for up to 12 months, extended to up to 24 months under SOP 50 10 8.1 from 1 October 2026. More in buying a business from a retiring owner.

Buying into an existing group, rather than buying all of it, runs under different rules; see financing a partner buyout. Where one physician produces most of the revenue, lenders commonly require key-person life insurance on that physician.

Compliance a lender will ask about

Healthcare revenue can be taken back after it is paid. A lender therefore asks about the practice's regulatory history as part of the credit, not as a legal formality:

• Coding and billing. A recent independent coding audit, or the buyer's own review of a sample of charts, shows whether the revenue would survive a payer audit.
• Audits and repayment demands. Any open audit, recoupment or overpayment the practice has identified and not yet repaid.
• Referral and ownership arrangements. Ancillary services, medical directorships and space or equipment arrangements with referral sources are governed by federal self-referral and anti-kickback laws; lenders want them documented.
• Licenses and registrations. Each provider's state license and DEA registration, and certificates for an in-office laboratory, which require notice or a new application on a change of ownership.
• Malpractice. Claims history for each provider and how the seller's prior acts will be covered after closing, usually through tail coverage.
• Records and systems. The electronic health record contract and whether it can be assigned, and how patient records are transferred and kept.

Structuring the loan

SBA 7(a) finances goodwill, equipment, working capital and real estate in one loan, with goodwill and working capital over up to 10 years. Where the amount financed, less appraised real estate and equipment, exceeds $250,000, SBA requires an independent business valuation and caps the purchase loan at it; see the SBA valuation requirement. From 1 October 2026 every change of ownership requires financial due diligence, and a quality of earnings report on acquisitions of $3 million or more excluding real estate; given how much a practice's earnings depend on payer and coding detail, many buyers want that work anyway. See quality of earnings for acquisition loans.

Banks with healthcare lending groups compete for physician buyers and can be flexible on structure, including a seller who stays on clinically. Larger groups and investor-backed buyers generally use senior cash-flow debt, commonly 2x to 3.5x EBITDA. SBA prohibits an earnout to the seller, so any price tied to post-closing collections has to be restructured, often as a seller note. A seller note counts for up to half of the equity injection only if it is on full standby for the life of the SBA loan; otherwise it is debt and counts in coverage. See seller notes and SBA's full-standby rule.

Coverage is measured after a market salary for every physician, including the buyer. SBA requires at least 1.15x today, and from 1 October 2026 a change of ownership must show 1.25x on historical results, the level conventional lenders commonly look for. Medical office space, whether a freestanding building or a condominium unit, can be financed through the 7(a) loan over up to 25 years or through SBA 504 if the practice occupies at least 51% of an existing building; see SBA 7(a) vs 504.

What goes in the file

Start with the standard acquisition documents in what lenders need to finance an acquisition: two to three years of business tax returns, the P&L and balance sheet, the latest full year of figures (never an older year), a year-to-date P&L, the debt schedule, the letter of intent, and personal tax returns and a personal financial statement for each 20% owner. Then add the practice-specific items:

• Collections by payer and by provider for each year, and the payer mix.
• Receivables aging by payer, with write-offs.
• A provider roster with licenses, tenure, compensation terms and who is staying.
• The major payer contracts and the credentialing plan for the buying entity.
• Any coding audit, payer audit correspondence and malpractice claims history.
• The lease or real estate details, the health record system contract and equipment leases.

When the documents are in, Transparent builds the financing model, lender presentation, blind teaser and underwriting memo in a day and takes the practice to the lenders in its book that finance healthcare. See the package and how we underwrite.