There is a version of this conversation that starts with the listing price. That is the wrong version.
Most people assume buying a medical practice requires either a mountain of personal savings or some specialized healthcare lending product that takes months to close. Neither is accurate. SBA 7(a) medical practice financing works the same way it works for any other cash-flowing small business. You need 10% down, a business that clears debt service, and a seller who understands how the deal gets structured.
Here is what you actually need to know before you start calling brokers or talking to lenders.
What Medical Practice Financing Actually Means
Medical practice financing refers to the capital structure used to fund the acquisition of an existing healthcare business. Physician group practices, dental offices, chiropractic clinics, optometry practices, and other licensed healthcare providers operating as small businesses all fall under this umbrella.
For deals in the $500K to $5M range, the primary vehicle is the SBA 7(a) loan program. It covers up to 90% of the acquisition price, requires a minimum 10% equity injection from the buyer, and offers repayment terms up to 10 years for business acquisitions. At those terms, even a modestly priced practice can clear underwriting if the cash flow numbers are right.
Why Medical Practices Work Well for SBA Financing
Healthcare businesses have characteristics that SBA lenders find attractive. Recurring revenue. Long-standing patient relationships. Referral networks the selling physician built over years that have real, quantifiable value. Cash flow is usually predictable once you understand the payer mix.
But medical practices also carry complexities that most first-time buyers underestimate.
The seller is often the primary producer. In a solo physician practice, a significant portion of revenue may walk out the door with the prior owner. Lenders know this. Underwriters will stress-test revenue concentration when the outgoing practitioner is responsible for a large share of collections.
This is exactly why structured transitions matter so much. A seller who agrees to a 6 to 12 month transition period, documented in the purchase agreement (not just a handshake, an actual binding provision), meaningfully changes the risk profile from the lender’s perspective. We have seen transition agreements make or break the lender’s credit decision on deals that were otherwise borderline.
The DSCR Math That Actually Matters
SBA underwriting runs on one core metric: debt service coverage ratio.
The formula is simple enough. Take the business’s seller discretionary earnings, subtract any owner compensation you plan to replace, and divide by the annual loan payment. Most SBA lenders require a minimum 1.25x, but that number is misleading if you treat it as your target. We target 2x on acquisitions. Our floor is 1.5x, and we only accept that when clear synergies justify working with a thinner margin. Anything at or near 1.25x is dangerous territory. The math leaves zero room for a bad quarter, a slow insurance reimbursement cycle, or any of the dozen things that can compress cash flow in year one.
Here is how that plays out on a real acquisition.
Say you are looking at a dental practice with $900,000 in annual collections. After clinical overhead, the practice shows $310,000 in SDE. You find a buyer-side dentist who will manage clinical operations at a $200,000 salary. That leaves $110,000 in adjusted cash flow.
If the acquisition price is $750,000, your SBA loan at 90% is $675,000. At a 10-year term with current rates, annual debt service runs approximately $95,000 to $100,000.
$110,000 divided by $97,500 is 1.13x. That does not clear. Not even close.
The deal either needs a lower price, a longer transition period that keeps the seller’s production on the books, or a buyer who can document that they will take over clinical production directly. Running this model before you submit an LOI is not optional. It is how you avoid wasting 6 weeks in due diligence on a deal that never had a path to close.
Side note: this is also where SDE reliability becomes an issue. We routinely discount reported SDE by 15% to 50% to get to real cash flow. If the tax returns and bank statements do not tie, the SDE number on the listing is just a story. Proof of cash is the gold standard.
How Seller Notes Fit Into Medical Practice Deals
SBA deals on medical practices often include a seller note as part of the financing stack. And in our experience, the seller note is where most of the structural creativity happens.
The structure we use on the vast majority of our deals: a 10-year full standby seller note at 0% interest. Zero interest. Zero payments. For the full 10-year term of the SBA loan. The SBA requires this standby provision to protect the senior lender’s position, and we achieve this structure on more than 90% of deals we close.
From a buyer’s perspective, the seller note functions as an extension of your equity. It reduces the amount of cash you need at close. If a seller agrees to carry back 10% of the purchase price as a seller note, you may be able to get into the deal with minimal out-of-pocket beyond the SBA’s required equity injection. With proper structuring, getting to roughly 5% buyer cash at close is achievable.
Not every seller agrees right away. Medical practice owners often have advisors, accountants, attorneys, and sometimes healthcare business brokers, who push back on standby provisions because the seller sees no cash flow from that note for a decade.
Your job is to frame this clearly. The alternative for the seller is often no deal at all. If the practice’s cash flow does not support a fully financed acquisition without the standby note, the note is not a negotiating position. It is a structural necessity.
Working Capital: The Line Item Buyers Forget
So that covers the financing structure and seller note side of things. The part most buyers skip is what happens the day after close.
You need working capital. Two to 6 months of operating expenses, depending on the practice’s payer mix and collection cycle. Medical practices are particularly sensitive here because insurance reimbursements can lag 30 to 90 days. If the practice is heavily insurance-dependent (and most are), you could be covering payroll, rent, and supplies for weeks before the first check with your name on it arrives.
This is non-negotiable. Lenders will want to see a working capital plan. More importantly, you need to actually have the cash available. Running out of working capital 60 days post-close is one of the fastest ways to turn a good acquisition into a crisis.
Factor working capital into your total capital requirement from the very beginning, not as an afterthought once you are already in underwriting.
What Lenders Look at in Healthcare Acquisitions
Medical practice acquisitions require the lender to get comfortable with a few things beyond standard underwriting.
Licensing and credentialing. The buyer must hold the appropriate licenses before close. For physician practices, this includes state medical licensure and potentially DEA registration. SBA lenders will not fund a deal where the buyer cannot legally operate the business on day one. Start the credentialing process early. Delays here kill timelines, and we have watched deals fall apart because a buyer assumed credentialing would take 4 weeks when it actually took 14.
Payer mix and contract transferability. A practice that derives 70% of revenue from one commercial insurer may face revenue disruption if those contracts do not transfer cleanly to the new owner. Lenders want to see that key payer agreements are assignable or that the seller will assist with re-credentialing. The FTC and state regulators have specific requirements around patient notification during ownership changes, which is another thing to get ahead of early.
Real estate. If the practice owns its location, the real estate can be financed separately under SBA or conventional terms, or included in the business acquisition. If it leases, the lender wants to see a lease term that extends beyond the loan maturity, or at minimum a renewal option.
Goodwill concentration. This is the big one. A practice where the selling physician’s personal reputation drives referrals is a higher-risk asset than one built around systems, staff, and location. Lenders will want evidence of durable patient retention, ideally demonstrated through 3 years of clean financials showing stable revenue. Three years of tax returns. Minimum.
Equity Injection Sources Most Buyers Overlook
The minimum 10% equity injection on a $1.5M medical practice acquisition is $150,000. That is the floor, per SBA requirements (you can verify this on SBA.gov). It needs to be documented, seasoned, and in your account or from an eligible source before close.
What most buyers do not realize is that the equity injection does not have to come exclusively from personal savings.
A 401(k) rollover through a ROBS (Rollover for Business Startups) structure is an eligible source. A home equity line of credit qualifies. Gifted funds are allowed with proper documentation showing they are a gift and not a loan. Seller-paid closing costs can reduce the total cash you need at close.
But the 10% figure is the SBA floor. Some lenders require more, particularly on deals with goodwill concentration risk, limited operating history, or a buyer with no industry experience. Know what your specific lender requires before you get deep into a deal. Not after.
Structuring the Transition for SBA Approval
The physician or dentist selling a practice is often the single largest risk factor in the acquisition. Lenders understand this, and they will ask about the transition plan.
A well-structured transition agreement includes a defined consulting period, typically 6 to 12 months, where the seller remains in a clinical or advisory role. It includes specific obligations around patient introductions, referral source hand-offs, and staff retention. And it is written into the asset purchase agreement, not just agreed verbally.
For heavily relationship-dependent practices, some lenders will require an earnout provision or escrow holdback tied to patient retention milestones. This protects both the lender and the buyer if revenue drops materially in the first year post-close.
If you are buying a practice where the seller is the only physician and has operated it solo for 20 years, factor this into your price. The business is worth less to an SBA lender than the financials suggest on the surface. Meet the seller on price if you need to, but win on terms. Structure matters more than the number on the purchase agreement.
Medical Practice Financing: Getting the Deal Done
The mechanics of medical practice financing are not complicated once you understand what lenders are evaluating.
You need clean financials going back 3 years. You need a DSCR that clears our 1.5x floor with a realistic view of post-transition revenue. You need a seller who can be structured into the deal in a way that protects cash flow during the ownership handoff. You need working capital lined up for the first several months of operations. And you need to start licensing and credentialing before you think you need to.
Most deals fail not because the business is bad but because buyers wait too long on licensing, underprice the revenue concentration risk, or agree to a purchase price that the numbers never supported in the first place.
One more thing worth saying plainly: buying a medical practice is not passive income. You are acquiring a business that requires active operator involvement, clinical oversight, and hands-on management of staff, payers, and patients. The buyers who treat acquisitions like investments instead of operations are the ones who struggle post-close.
Getting experienced advisory on medical practice acquisitions pays for itself. The variables are specific, the lender requirements are exact, and the mistakes are expensive.
Frequently Asked Questions
Can you use an SBA 7(a) loan to buy a medical practice?
Yes. Medical practices are eligible businesses under the SBA 7(a) program, provided the practice operates for profit and meets standard SBA size requirements. The buyer must hold applicable clinical licenses before close. The loan can cover up to 90% of the acquisition price up to $5M, with a minimum 10% equity injection from the buyer. Licensing delays are the most common reason these deals stall, so start early.
How much do you need to buy a medical practice with SBA financing?
The minimum equity injection is 10% of the acquisition price. On a $1M practice, that is $100K. This can come from personal savings, a 401(k) rollover through a ROBS structure, home equity, or gifted funds with documentation. Some lenders require more depending on the deal’s risk profile, particularly for practices with significant goodwill concentration or a buyer without clinical experience.
What is a realistic DSCR target for a medical practice acquisition?
Most SBA lenders cite a minimum 1.25x debt service coverage ratio, but we consider that dangerously thin. We target 2x on acquisitions and treat 1.5x as our working floor. For medical practices where the seller is the primary producer, lenders will apply a haircut to projected revenue until the transition is complete, which can push the effective DSCR well below what the historical financials suggest. Build your model conservatively.
How does a seller note work in a medical practice deal?
A seller note is a portion of the purchase price the seller agrees to carry as debt owed by the buyer. On SBA deals, we structure seller notes as 10-year full standby at 0% interest, meaning the seller receives no payments until the SBA loan is paid off. This reduces the buyer’s cash needed at close and satisfies SBA requirements to protect the senior lender’s position. We achieve this structure on more than 90% of deals.
What is the biggest risk in financing a medical practice acquisition?
Revenue concentration. When the selling physician is the sole or primary clinical provider, a significant portion of patient revenue may not transfer to the new owner. Lenders account for this in underwriting by discounting projected revenue. A well-structured transition agreement with a defined consulting period, documented patient hand-offs, and referral source introductions substantially reduces this risk and improves your odds of SBA approval.
Thinking About Acquiring a Medical Practice?
Regalis Capital advises buyers on business acquisitions from deal sourcing through close. We run the financial models, structure the seller note, manage the SBA process, and coordinate the transition planning to get deals done.
If you are evaluating a medical practice acquisition and want to know whether the numbers work, start here.