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Borrowing to Buy or Grow a Medical Practice? Price It First
10 Nov 2026
Most SME owners think a business loan turns on credit history and collateral. A healthcare deal adds a harder question. The lender wants to know what the clinic is worth, and the answer rarely sits on the balance sheet.
That question decides how much you can borrow, and it is where a specialist valuation earns its fee. Nechay Advisors is a California firm that prepares certified, USPAP-compliant valuations of medical practices and ambulatory surgery centers, including reports written for SBA lenders. This article gives general background, not legal, tax or lending advice. Speak to your own adviser before you sign anything.
Why Does a Lender Care What a Clinic Is Worth?
Because most of what you buy in a clinic cannot be repossessed. Exam tables and imaging equipment carry some resale value. The patient base, payer contracts and referral habits carry most of the price, and they walk out the door if the deal goes wrong.
A lender lending against that kind of value needs an independent opinion of it. In the United States, many SBA-backed loans for a change of ownership require the lender to obtain a valuation from a qualified source. The exact triggers sit in the SBA's lender rulebook and change from time to time, so ask your lender which version applies.
Ownership changes are common enough that lenders see these files often. A September 2025 MGMA Stat poll of 421 medical group leaders found 8% had been acquired that year and 3% had bought another practice.
What Will the Lender Ask You to Hand Over?
Expect a document request long before any credit committee meets. A typical healthcare file includes the following:
- Three years of business tax returns and year-end financial statements.
- A current interim profit and loss statement and balance sheet.
- A payer mix report showing revenue by insurer and by self-pay.
- A provider roster with each clinician's pay, hours and contract terms.
- The premises lease, including any lease with an owner or relative.
- An equipment list with ages, serial numbers and any finance liens.
- An accounts receivable aging report for the last 12 months.
Gaps in this list slow everything.
How Does Normalized Cash Flow Change the Loan Size?
Lenders size a loan on the cash the business can spare for repayment. That figure comes from normalized cash flow, not from the profit line on a tax return.
Normalizing means restating the books to show what a new owner would actually earn. Owner pay is reset to a market salary. One-off costs are removed. A lease paid to the owner's own property company is adjusted to a market rent. Personal spending run through the business comes out.
Nechay Advisors uses a simple illustration of why this matters. Two practices can each collect $2 million a year. After paying the physician a fair market salary, one keeps $250,000 and the other keeps $600,000. Same revenue, more than double the cash flow, and a very different loan.
An owner drawing $700,000 where a replacement physician would cost $400,000 is hiding $300,000 of cash flow inside a salary. Restating it can lift the borrowing capacity of the deal.
Which Valuation Shortcuts Fall Apart In Underwriting?
Underwriters tend to discard quick numbers. Five of them break down most often:
- A rule of thumb that prices every clinic at one year of revenue.
- A headline multiple quoted from a deal in another specialty or state.
- A valuation commissioned and paid for by the seller alone.
- A number that ignores how much income depends on one physician.
- Earnings that still include a related-party lease at an inflated rent.
Each one either overstates value or hides a risk the lender will price in later. The safer route is an opinion that applies the asset, market and income approaches and reconciles them in writing. A report prepared under the USPAP appraisal standards also lets a reviewer trace how the number was reached.
What Changes When the Business Is a Surgery Center?
A surgery center stake raises the stakes further. These businesses often have several physician owners, a hospital or operator partner, and a small number of high-volume surgeons.
That structure changes the questions. A lender will look closely at payer mix and how concentrated the case volume is. It will also ask whether you are buying a controlling stake or a minority interest, since the two are valued differently. Nechay Advisors lists payer mix, physician concentration and control premiums among the factors its surgery center appraisals examine.
California adds a structural point. The state restricts lay ownership of medical practices, so outside investors usually work through a management services organization. A valuation has to show how value splits between the clinical entity and that company.
How Should an Owner Sequence the Paperwork?
Order matters, because a late valuation can stall a closing. A practical sequence runs like this:
- Agree on price ranges in principle, but keep the letter of intent subject to valuation.
- Ask the lender which valuation standard and report depth it will accept.
- Gather the document list above and send it in one package.
- Commission an independent valuation that names the lender's purpose.
- Review the normalization adjustments with your accountant before the report is final.
- Share the finished report with the lender and keep the working papers on file.
A valuation timeline only holds if step 3 happens early.
Before the Term Sheet Arrives
A loan for a healthcare business is really a bet on future cash flow. The owner who can prove that cash flow, in a form an underwriter trusts, borrows on better terms. Start with the types of small business loans open to you, then price the business before the lender does.
The same report can serve other purposes later. If the practice also features in estate planning, learn how estate and business valuation differ.
Borrowing Against a Practice: FAQ
Does Every Small Business Loan Require a Valuation?
No. Many working capital and equipment loans rely on credit and collateral alone. A loan used to buy a business, or a stake in one, is far more likely to need an independent valuation.
Who Usually Pays for the Valuation?
The borrower usually pays, although the purchase agreement can say otherwise. Treat it as a deal cost alongside legal and accounting fees. Your adviser can tell you whether it is deductible in your situation.
Can the Seller's Valuation Be Used for the Loan?
Often it cannot. Lenders generally want an opinion from a qualified source that is independent of the seller. Ask before you rely on one the seller already holds.
How Long Does a Practice Valuation Take?
It depends on the firm and the report depth. Nechay Advisors quotes one to two weeks once your documents are in. Missing records are the most common cause of delay.
