Veterinary Clinics: 6 Decisions When Selling a Practice With MCA Debt

Can you legally sell a veterinary clinic with MCA debt? Yes. But that does not mean the debt goes away. It does not, nor does it move to the buyer. Typically, an MCA lien has been recorded against the clinic’s assets. That should be satisfied at or before closing, if not sooner. Make no mistake: the personal guarantee survives a sale. There are six decisions to make if you are selling a practice with MCA debt.

Paying Off the MCA Debt

The first decision is timing. Paying off the MCA debt before listing the clinic is expensive, but that gives you a clean title. Another option is to pay it off at closing. Just like a car sale, MCAs need the seller’s payoff before recording a lien release. A buyer’s bank also runs a lien search to see whether anything will attach to the purchase price. If you wait to pay the MCA at the closing table, the purchase might not happen until you do. The practice’s buyer usually does not have to pay back the MCA. Yet they expect the purchase to be free and clear of debt.

The buyer’s attorney checks to see whether they are buying anything free and clear. If they find the debt is still attached to the equipment that comes with the practice, they might ask to reduce their offer to cover it. UCC 9-315(a) says the funder’s lien stays on the equipment, unless the funder agreed otherwise, and also attaches to the buyer’s purchase price.

Imagine a clinic owner with two MCAs. Each funder has a lien on the equipment the veterinarian wants to sell. To prove the debt was satisfied, each funder needs to sign a lien release after receiving their payment. Then, the buyer must submit those lien releases to their bank.

The second decision is the paperwork. Your buyer’s bank needs a release before funding them. Once nothing is owed, demand a termination statement in writing and the lender must file or send it within 20 days.

Third, decide about your guarantee. MCA debt follows you, not the practice. When you leave the business, the personal guarantee does not vanish. Unless you get written release or payoff from the funder before the closing, you owe the debt even after the clinic sells. But the funder might not be eager to let you out. Make a clean break at the closing table.

Fourth, decide whether to tell the funder. Since MCAs are tied to that clinic’s revenue, they often go bad when ownership changes. MCAs are not transferrable without agreement. A sales clause often defines the options they have and whether seller must tell them. The funder can demand full payment of the debt at closing or negotiate a settlement.

Fifth, decide whether to challenge the balance. New York courts try to decide whether the MCA is really a loan. A reconciliation clause, a finite repayment term, and whether they can still come after you if your business goes bankrupt are the factors they weigh. An illegal interest rate of more than 25% a year can mean a criminal usury defense, if the MCA is a loan. Contesting the validity or amount, and asking for a lien release, are good leverage for negotiating with the funder. Getting out of an MCA is not simple, cheap, or free of consequences.

Sixth, decide how the buyer pays. Under SBA SOP 50 10 8, MCA refinancings are not an approved use of the loan proceeds. The buyer also needs 10% equity in the purchase. If the buyer does not get at least that 10% equity, the SBA might not approve the loan. To count toward that equity, SBA requires a seller note to be on full standby for the life of the loan and no more than half of the required equity.

Assets are usually sold together, in one lot. On a sale like that, both you and the buyer need to split the price between 7 asset classes on Form 8594, using the residual method.

The longer the process, the more stress you will feel. Unless you are under severe time pressure, deal with the MCA debt before listing your practice for sale. On your own time and without a buyer’s bank watching you, you have more freedom to make the decisions you want.