Finance for medical and allied health practices

Health practices are among the more straightforward businesses to lend to, and among the easier ones to present badly. The demand is recurring, the practitioners are registered, and the income does not disappear in a downturn the way discretionary spending does. None of that helps if the earnings in the file are the wrong earnings, which in this sector they usually are.

This guide covers general practice, dental, veterinary, physiotherapy, chiropractic, osteopathy, optometry, psychology, podiatry and the wider allied health group, and pharmacy, which behaves differently enough to get its own section.

Why the sector reads well, and where that stops

A credit team likes a few things about health practices in general terms: the demand is not discretionary, a meaningful share of income is recurring rather than one-off, practitioners hold registration that is difficult to obtain and easy to verify, and the revenue mix often blends private fees with government-funded items, which behave differently in a downturn.

What that goodwill does not survive is a file that cannot answer the specific questions this sector raises. There are four, and they account for most of the practice files that stall.

Practice earnings, and the owner's clinical hours

This is where most practice files go wrong, and it goes wrong in a specific way. Practice earnings are commonly presented before the owner is paid anything at all, on the reasoning that a buyer will step in and do the work. That is true, and it is exactly why the cost of doing the work has to stay in.

An owner practitioner does two jobs: they treat patients, and they run the practice. Both cost money to replace, and a credit team costs both.

The gap widens as the owner's own billings grow as a share of the total. A practice where the owner generates most of the income is more profitable and more concentrated at the same time, and a credit team reads both halves of that.

Associates, contractors and who owns the patient

The structure of the practitioner group matters as much as the earnings. Whether associates are employees or contractors changes the cost base, the entitlements and, in some arrangements, who the patient belongs to. What a credit team wants to see is the agreements: the payment percentage, the notice period, and whether there is a restraint that survives departure.

Whether a restraint is enforceable is a legal question and not one we answer. Whether the earnings survive a practitioner leaving is a numbers question, and that one is worth modelling before you borrow against those earnings.

The billing mix

Two practices with identical revenue can carry very different risk depending on where the money comes from. A credit team will usually want the split, and it reads each part differently.

• Government-funded items are predictable and slow to change, which supports the downside case. They are also set externally, so the practice cannot price them.
• Private fees carry pricing power and more exposure to household budgets.
• Third-party funded work, including insurers and compensation schemes, can be stable and can also be concentrated in a small number of payers.
• Contracted or corporate work is often the most predictable line in the practice and the most damaging to lose, because it is one relationship rather than many.

The useful test is not which mix is better. It is what happens to cover if the largest single source falls away, and that is a sensitivity worth running before a lender runs it for you.

Goodwill, and what actually secures the facility

In most practice acquisitions goodwill is the majority of the price. It is also close to worthless as security, and holding both of those thoughts at once is the key to understanding how these files are assessed.

The tangible assets in a practice are usually modest: fit-out, chairs, imaging or diagnostic equipment, a small amount of stock. Equipment can be financed against itself on ordinary terms. The rest of the price is being lent against earnings, which means the facility is cash flow lending whatever the security schedule says.

• A general security agreement over the practice entity, registered on the PPSR.
• Specific security over financed equipment.
• Personal guarantees from the practitioner owners, which are close to standard.
• A mortgage where practice premises are owned, which changes the terms available substantially.

Pharmacy is a different business

Pharmacy sits inside the health sector and behaves like retail. It carries substantial stock, it turns that stock at a much lower margin than a consulting practice earns on time, and its cost base is dominated by purchases rather than by wages.

That has a practical consequence when a lender assesses a pharmacy from its lodged activity statements rather than from full financials. Purchases should account for the large majority of sales in this sector, and where a return reports purchases well below that level the return is contradicting itself rather than revealing an unusually profitable pharmacy. Our own BAS surplus tool applies a minimum purchases benchmark of 67% of sales for pharmaceutical, cosmetic and toiletry retailing for exactly this reason.

The other pharmacy-specific point is working capital. Stock on the shelf is cash that has already left the business, and a pharmacy that grows its range or its dispensing volume funds that growth itself before any of it comes back.

Owning the premises

A practice that owns its building is a different lending proposition from one that rents. Rent stops being an operating expense and becomes debt service, the balance sheet gains a real asset, and terms and pricing on the property component are typically better than anything available against goodwill.

It is not automatically the right move. It concentrates the owner's capital in one place, it can reduce flexibility if the practice outgrows the site, and the servicing test now has to carry both the practice debt and the property debt. What it is, reliably, is a decision worth modelling rather than assuming, in both directions.

Covenants for a practice

The standard package applies. Two tests deserve particular attention in this sector.

• Debt to EBITDA, because goodwill-heavy lending means there is little to realise if earnings fall. This is usually the tightest test on a practice acquisition.
• Debt service cover, tested at an assessment rate above the offered rate and on the earnings after the owner's clinical role is costed, not before.
• Where practice premises are financed, a loan to value test on the property alongside the trading covenants.
• Some agreements add a practitioner retention or key person condition after an acquisition, which is the covenant equivalent of the concentration risk above.

As everywhere, the definitions decide the outcome more often than the thresholds. Whether the EBITDA definition in your agreement is before or after the owner's remuneration is a question worth asking at term sheet stage, because in this sector the two figures can differ by more than half.

What the file needs

• Two to three years of financial statements and tax returns, plus current management accounts.
• Billings by practitioner, so the owner's own contribution can be separated and costed.
• The revenue split by funding source, and the concentration within each.
• Associate and contractor agreements: payment percentages, notice periods, restraints.
• Registration details for the practising owners.
• For an acquisition: the sale agreement, the goodwill and equipment split, any handover or retention terms, and the lease if premises are rented.
• For a pharmacy: stock on hand, and the purchases figure reconciled to activity statements.
• Details of every existing facility, because new debt is tested on top of what the practice already carries.

The acronyms, in one place

What we can and cannot tell you

Andorra Advisory Group does not arrange credit and is not a credit representative. We build the analysis and the documents. Where a client wants the finance arranged as well, that is a referral to The Lending Lab Pty Ltd, a separate broking business, disclosed in writing at engagement. Our fee is fixed and payable regardless of whether finance is approved or what the analysis concludes.

That is why no lender appears in this guide and no policy is quoted, including the practitioner concessions that genuinely exist. Every threshold here is a level commonly seen, and every lender sets its own. We give no taxation advice, no legal advice and no financial product advice: whether a restraint binds is for your solicitor, and what a structure costs in tax is for a registered tax agent.

We also do not price practices. What we do is test whether the earnings behind a price service the debt raised against them, on the earnings a credit team will actually adopt rather than the ones in the sale memorandum.

General information only. Not credit advice, not a credit assessment, and not an offer of finance. Lending decisions rest with the lender and depend on your circumstances and their criteria.