Pharmacy Finance Basics

When a pharmacy is being purchased the buyer’s purchasing strategy usually involves some sort of financing to complete the transaction. Even larger companies buying pharmacies tend to use a financing vehicle even though the seller may not be aware of the financing taking place.

Typical acquisitions take 6-9 months to complete, so Washburn & Associates requires the buyer to provide some proof, up front, about their ability to close the transaction.

Acquisitions will involve many hours of due diligence and negotiation.  Along with the buyer and seller the acquisition will involve attorneys, accountants, lenders, and a Detailed Analysis Business Valuation of the seller’s business. No one wants to pursue 6-9 months of work involving a variety of highly paid professionals without having some confidence of the buyer’s ability to close the deal.

The process begins with determining the value of the business. In order to complete a valuation the selling company needs to provide up-to-date data. Lenders will not accept a sellers “gut feeling” or a value based on a simple accounting formula. Lenders need to make a decision to finance based on sound and verifiable information.

There are a number of methods to finance a business acquisition. Each can be customized or included with other forms of financing to provide the buyer with the best financing package and the greatest chance for the businesses financial success.

SBA Loans are offered by many lenders for financing an acquisition and these loans are a major source of funding a business acquisition.

Senior Debts which are loans that may or may not be SBA guaranteed will be in first position in the event of default.

Subordinated Debts are loans that will be in a position behind the Senior Debt.

Private Finance, or more commonly called Business Notes, can assist the purchase when the seller is willing to carry some of the financing and risk themselves.

Equipment Finance can include Sale Leaseback of the current equipment, or equipment leasing if the new owner will be adding capabilities.

Vendor Finance is commonly used when a larger financially stable vendor wants to ensure they keep the company as a customer. The vendor understands the industry and will have a comfort level with the company’s past inventory turns.

Franchise Financing is often offered by the franchiser.

Asset based loans can include typical assets such as equipment and real estate, but script files are also an asset some lenders will consider.

Cash Flow Finance, or more commonly known as Factoring, can be obtained when a finance company bases their financing decision on the strength of the company’s accounts receivables.

Personal Loans from the pharmacy buyer’s family, or friends maybe needed to offset some of the lenders risk. It is not unusual for a business buyer to use home equity, family jewelry, cash value of life insurance, or other assets to help collateralize the loan.

Structuring the transaction is extremely important. The seller of course wants as much money as possible and wants cash. The buyer needs to spread out the debt service, and wants to have as little cash as possible invested in the acquisition.

Some industries are in a market where it is more difficult to obtain funding. For the acquisition to be financed a lender will need a strong understanding of the industry and what, beyond the collateralized assets, the company offers to reduce the perceived risk. Pharmacies are in such an Industry.

Pharmacies have typically been known for generating profits and to be stable businesses. However, they are usually in leased locations, and their furniture, fixtures, and computers may only provide $15-20,000 of collateral for a buyer requesting a million dollar loan. A lot of money is tied up in inventory, but the small pills are considered by a lender to easy to move out the door in the event of default. Due to these circumstances many lenders will not loan money to these traditional money making businesses. However, lenders that understand the pharmacy market will provide funds for a financially sound pharmacy transaction.

When pursuing financing for a pharmacy acquisition, for the best chance of success, make sure you work with a credible pharmacy valuation specialist such as Washburn & Associates. As a company working exclusively in the pharmacy industry we also have a number of different sources of pharmacy finance.

Tips:

1. Attorneys and CPAs who have been representing the pharmacy seller for many years may see the transaction as putting themselves in a position of losing a client when the business is sold. Make sure they are working diligently on the transaction and are not slowing or undermining the process.

2. Since acquisitions involve 6-9 months and sometimes a couple years, all parties involved need to be aware of time tables. Much to often, items of importance end up sitting on the desk of someone that is outside of the control of the buyer or seller 

3. All financial information needs to be current. Over the lengthy process the data supplied to both the buyer and the lender will need to be updated on a continuous basis. Things can change drastically during a nine month period and the seller will need to continually prove the financial condition of the company.

When you have questions regarding financing a pharmacy or pharmacy acquisitions contact:

Brad MacLiver
www.WashburnAndAssociates.com   
bradpharmacy@msn.com