Common Terms Used In Pharmacy Lending
Add-backs – These are expenses that are assigned to cash flow to normalize a profit and loss statement. Normal add-backs include interest, taxes, depreciation, amortization, one-time expenses, personal expenses, and owner’s benefits in excess of market such as compensation or rent.
Balloon – Term used when a loan which does not fully amortize over its term. Since it is not fully amortized, a large single payment is required at the end of the term to repay the remaining principle balance of the loan. For example, for a loan with a 10-year amortization and a five-year term, the loan will balloon in five years, requiring the remaining five years of principle to be repaid at the end of the term.
Debt Service Coverage Ratio (DSCR) – The ratio of the cash available to service debt (NOI) and the total debt service for all interest, principle, and lease payments. (NOI/total debt service). For example, a DSCR of 1.5 indicates there is 50% more income than is required to repay all debt. Conversely, a DSCR of less than .90 would indicate there is only 90% of the income to repay all debt, thus negative cash flow.
EBITDA – Earnings Before Interest Taxes Depreciation Amortization
Loan Amortization – This is the period of time over which the loan payments are calculated. A loan’s payments may be calculated over a longer (such as 20 years) time, while the loan term may be shorter (such as five years).
Loan Term – Period of time over which the loan is to be repaid.
NOI – Net Operating Income is often called cash flow. This includes EBITDA + add-backs + owner’s compensation.
NOM – Net Operating Margin is a measurement of profitability (NOI/Net Operating Revenues). A typical NOM for a well-performing pharmacy will be 7-12%. This is dependent upon many variables, particularly the specialty of the pharmacy (such as retail, compounding, or long-term care, for example).