Twenty years ago, the local vet would walk into their local bank to introduce the new partner or director who was buying into the business. A courteous meeting with the bank manager would ensue and after an appropriate time, the meeting would be concluded. The funding to allow the buy-in would have been agreed and all parties would be satisfied with the outcome.
Fast forward to 2008 and the world changed. Even though the risk profile of veterinary practices had not changed, the banks became reticent to lend and in some cases, closed their doors altogether. Long-term track records counted for nothing as the banks were forced to repair their balance sheets. Unsecured lending became particularly unattractive and where it was still available, the terms were far removed from what went before. So, what does one do now? Surely our bank will support us?
The following case studies underline why it pays to speak to an independent financial broker to ensure you get the best deal from a bank.
Buying out a retiring partner
We were approached by a long-established and profitable mixed practice regarding the buy-out of a retiring partner. The practice felt it had an adequate succession plan in place but this was affected by the unforeseen retirement of a partner. The incoming partner had little or no cash to input and as a result, took a substantial loan from the incumbent bank. The other three partners also had “personal” loans with the bank and all were at very attractive rates.
When the senior partner came to retire, the bank was, at best, lukewarm regarding further exposure and wanted to reorganise all the debt on more attractive terms for the bank. This included additional borrowing covenants and a requirement to move a substantial part of the overdraft facility on to a loan. The remaining partners were none too happy and as a result, I called to see them.
The partnership agreement allowed the retiring partner to be paid out over a period of three years and the bank was insisting that this was adhered to in order to limit their exposure. In addition, financial performance covenants were going to have to be met to allow drawdowns on the loan in years two and three. The dangers of this type of approach are obvious and it was possible that the practice would not be able to make payments to the retiring partner in years two and three. This could then result in the retiring partner taking legal action against the practice. All in all, an unsatisfactory position and not one that seemed to be in the customer’s best interests.
I suggested that the best way forward was to arrange a facility that allowed immediate and full payment to the retiring partner. The remaining partners would have certainty and this approach meant they could negotiate a better deal
Even though the risk profile of veterinary practices had not changed, the banks became reticent to lend and in some cases, closed their doors altogether
(for them) in terms of how much they paid out.
Knowing the likely players in the banking sector meant I could approach those banks that I knew would play ball. One bank was extremely keen to assist and was quite prepared to refinance the existing partnership debt as well as provide 100 percent finance to pay the retiring partner. The existing “personal” loans were left with the original bank. The bank could not amend the terms as no breaches had been made on these loans and the partners were therefore able to continue to enjoy the attractive terms the loans were agreed on.
The new bank also agreed to continue with the existing overdraft facility and no onerous covenants were included in the lending agreements. In total, facilities of over £1 million were provided and the deal was completed within four months of my first meeting with the partners.
Buying into a practice
The second case study is, in some ways, even more frustrating. This was another long-established and profitable mixed practice in a rural area with limited, if any, competition. The directors, in recognising the issues of recruitment, had wisely decided to offer one of their associate vets the opportunity to buy into the business. The practice’s own bank was approached to assist. The practice had a very low level of borrowing, which was fully secured against various properties. However, the response to the loan application was, at best, lukewarm.
We were approached by the prospective new director to assist. One of our panel of lenders was very interested but wanted the practice banking as well. One of our other lenders will lend on a stand-alone basis, but didn’t like the idea of lending to an individual to buy shares in a limited company. The practice’s bank was approached once again and initially agreed, but then changed their minds. We managed to negotiate a loan with a promise from the directors that they would move their business to the new funder.
Another hiccup occurred in that the funder wanted a second charge from the new director to secure their loan. The first mortgagee proved extremely unhelpful and we stepped in to negotiate the highest level of unsecured loan for the new director. The practice funded the small shortfall and the loan was finalised in short order.
The result of all this was that the practice now has a new young director to help with succession planning. The practice also has a bank that is very keen on the veterinary sector and is prepared to lend over sensible periods of time. This is as opposed to the ridiculously short period the original bank had reluctantly indicated they would lend over.
In both cases, a clean break to an enthusiastic and knowledgeable new lender has allowed the practices to move forward and concentrate on running the practices for the benefit of the partners/directors, staff and clients and not for the bank. Raising finance is something you do infrequently – we have 30 years’ experience of doing it every day.
