Debt-to-collections ratio

Debt-to-collections ratio compares the total debt taken on to buy a practice against that practice's annual collections, giving a quick check on whether the financing is proportionate to what the practice can realistically support. A practice purchase financed at a debt level meaningfully out of proportion to its collections leaves very little room for a slow year, an unexpected repair, or a rocky transition period before debt service becomes a genuine strain on cash flow.

This ratio is one of the numbers a lender will scrutinize closely during underwriting, but it is worth calculating independently as a buyer too, rather than assuming that loan approval alone means the debt load is sound: a bank approving a loan is assessing its own risk of repayment, not necessarily whether the buyer will have a comfortable cash flow cushion left over for salary, working capital and reinvestment.

Run this number alongside a realistic debt-service coverage projection using the practice's actual historical collections, not a hoped-for growth scenario, before finalizing how much debt to take on for any acquisition.