Independent Pharmacy News

The Pharmacy category is for all Pharmacy related posts.

A Primer on Pharmacy Financing: Expansion Financing

By |April 19th, 2014|

Banks are actively seeking good projects to fund and that includes independent pharmacies.

Increasingly, entrepreneurial pharmacists are becoming multiple pharmacy owners. The 2013 NCPA Digest, sponsored by Cardinal Health, shows that 25 percent of community pharmacy owners have ownership in two or more pharmacies. The average number of pharmacies in which each owner has ownership is 1.79, and that number is rising. Financing a second pharmacy (or third, or fourth, etc.), whether it is an acquisition or a startup, is easier than financing the first.

First, an owner usually won’t need to draw a salary from a second location, so all of the excess cash flow can be devoted to debt service. Second, a banker may be able to consider cash flow from all of the owner’s businesses, or the global cash flow, when evaluating financing an additional pharmacy. Strong cash flows from the owner’s existing pharmacies can support the acquisition or startup. For owners with a fair amount of equity in their existing pharmacy, a bank can often offer 100 percent financing for the expansion.

Read the full article here: A Primer on Pharmacy Financing

A Primer on Pharmacy Financing: Acquisition Loans

By |April 16th, 2014|

Banks are actively seeking good projects to fund and that includes independent pharmacies.

With more than 1,000 independent pharmacies trading annually, and many banks now recognizing the value of an independent pharmacy as a customer, pharmacy acquisition loans through banks have become more common. A typical pharmacy acquisition exceeds $1 million, but is within the reach of many pharmacists as long as they meet the criteria of the 5Cs. The first step when evaluating an acquisition project is to develop a loan budget with a banker.

It is important that the lender fully understand the project to ensure that the budget is sufficient to acquire the business, transition the business, and run the business. Underfunding an acquisition project is a major reason for failure in pharmacy acquisitions. After developing a sufficient budget, a lender will utilize the previous owner’s tax returns to determine if there is sufficient cash flow to provide the new owner with a salary, have monies left to service the debt as well as additional funds provide a return to the business. When reviewing a pharmacy’s tax returns and financial statements, it is important to remember that they are likely to be prepared to be tax-efficient and may need to normalized and adjusted.

Bankers will often ask about add-backs or expenses that will not continue with new ownership. There are often many expenses that may need to be added-back such as rent, family salaries, and personal expenses. Only documented expenses will be added back by a lender. SBA-guaranteed loans are common in pharmacy acquisitions. As goodwill is often the greatest use of proceeds in a pharmacy acquisition project, (typically exceeding $1 million), there is generally insufficient collateral brought by the borrowers or associated with the project to secure a conventional loan, thus, making an SBA loan a good fit.

Read the full article here: A Primer on Pharmacy Financing

By |April 8th, 2014|

  • Pharmacy Financing

    A Primer on Pharmacy Financing: What Compromises A Credit Analysis?

A Primer on Pharmacy Financing: What Compromises A Credit Analysis?

By |April 4th, 2014|

Banks are actively seeking good projects to fund and that includes independent pharmacies.

Credit analysis by a lender is determined by the “5Cs”:
credit, character, capacity, collateral, and condition.

• Credit: As history is the best predictor of the future, a lender will examine the personal credit of all borrowers and guarantors. Good personal credit is a must. Any problems must be thoroughly explained.
• Character: Lenders need to know the borrower and guarantors are honest and have integrity. Additionally, the lender needs to be confident the applicant has the background, education, experience, and industry knowledge to successfully run the business.
• Capacity (cash flow): The business should have sufficient cash flow to support its business expenses and debts comfortably while providing the principals salaries that will support personal expenses and debts.
• Collateral: A lender will consider the value of the business’ assets and the personal assets of the guarantors securing the loan as a secondary source of repayment if the loan cannot be repaid. Collateral is an important
consideration for a conventional loan, but not as imperative with an SBA loan.
• Condition: The lender will need to understand the condition of the business, the industry, and the economy. Are current conditions likely to change, deteriorate, or improve?

Read the full article here: A Primer on Pharmacy Financing

  • Pharmacy Financing

    A Primer on Pharmacy Financing: SBA Versus Conventional Loans

A Primer on Pharmacy Financing: SBA Versus Conventional Loans

By |March 31st, 2014|

Banks are actively seeking good projects to fund and that includes independent pharmacies.

Most pharmacy owners are eligible for SBA-guaranteed loans that may offer some advantages to a borrower. In an SBA loan, the bank makes the loan, but the debt is partially guaranteed by the SBA. This allows the bank to provide credit for a borrower who may otherwise have difficulty obtaining a loan with favorable terms. SBA loans tend to be borrower friendly, flexible to equity and collateral requirements, and do not have loan covenants. SBA loans have longer terms with no balloons. For example, a conventional loan may have a 10-year amortization with a balloon in 3-5 years, while an SBA loan will have an amortization and term of 10 years. The SBA acts like an insurance company, allowing the bank to extend its conventional credit reach.

Not surprisingly, SBA lending requires numerous documents and can be tedious for borrowers when the lender is not a specialist. When considering an SBA loan, it is helpful to seek out a lender who is part of SBA’s Preferred Lender Program. A PLP lender will know how to determine eligibility and properly structure the loan. PLP status allows the bank to approve the loan without waiting for the SBA’s approval; the bank acts on behalf of the SBA.

When banks are reviewing and analyzing a loan request, a lender will generally request the following: three years of tax returns for the pharmacy and the borrower, a yearto- date financial statement for the pharmacy, a personal financial statement of the borrower, as well as a business plan complete with three years of financial projections. This information will help the lender understand the owner and the business, and determine creditworthiness.

Read the full article here: A Primer on Pharmacy Financing

A Primer on Pharmacy Financing: Intro

By |March 14th, 2014|

Banks are actively seeking good projects to fund and that includes independent pharmacies.

Independent community pharmacy is an evolving yet thriving industry, with many opportunities as well as some challenges. Among the challenges pharmacy owners often face is financing. As a pharmacist and former pharmacy owner, and a banker since 2009, I regularly hear pharmacy owners exclaim: “Banks don’t understand pharmacies, they just don’t get it!” Many times during my 20 years as a pharmacy owner, I felt the same frustration.

Independent pharmacies are often an enigma to bankers. Bankers are generally younger, healthier, and wealthier than the service-seeking demographic frequenting most independent pharmacies. There is often a fundamental disconnect with the industry. Those bankers don’t understand why patients would seek out an independent pharmacy instead of a local chain, grocery store pharmacy or even mail order. These bankers consider an independent pharmacy as a quaint anachronism rather than the $4 million local health care provider. It is often frustrating, but pharmacy owners need to do a better job explaining their businesses, their opportunities, and their prospective financing projects to bankers. Bankers want to lend money to good businesses; independent pharmacies are good businesses. Of industries tracked by the Small Business
Administration (SBA), pharmacies rank among the lowest in default rate. Banks have a number of financing products, including long-term loans (both conventional and SBA-guaranteed loans), and short-term loans such as lines of credit. Pharmacy owners seeking to fund a specific project such as a business acquisition, expansion, real estate acquisition, remodeling, or large equipment purchases should utilize long-term financing or a term loan. Financing a project over the proper term is important. A project should be accretive, or create additional value to the business, while providing sufficient cash flow to service the debt incurred and an additional return to the owner. Short-term financing (such as lines of credit) should be reserved to shore up working capital and pay expenses during irregular cash flow [...]

Construction Spotlight: Island Drug Pharmacy

By |February 7th, 2014|

Pharmacy Construction Spotlight

Island Drug owner, Aaron, had a vision of expanding his pharmacy to allow a better customer experience. His concept of having a northwest theme made the design process unique. The Live Oak Bank construction team helped Aaron fund this project and bring his Pharmacy vision to life.

How Much Is It Worth?

By |October 29th, 2013|

Determining a pharmacy’s value from a lender’s perspective

With the average pharmacy owner about 60 years old, it is expected in the coming decade more than 60 percent of independent pharmacies, or same 1,000 annually, will trade or change ownership. While some of these pharmacies will be bought by chains as prescription file buys, an increasing number of young entrepreneurial pharmacists are seeking to acquire established pharmacies.

It’s easy to understand why a pharmacist would choose to acquire an existing pharmacy instead of starting from scratch. A successful startup pharmacy will generally take two years to reach break even, with the owner often having to take a reduced salary or no salary at all as business develops. As the average established independent pharmacy generates approximately $4 million in gross revenues, generally, there is ample cash
flow after all expenses, to service debt and compensate the owner comfortably. The key of course, is finding a fair valuation for the buyer and the seller to make the transaction feasible for each.

A pharmacy’s value is made up of tangible and intangible assets. Tangible assets include inventory, furniture, fixtures, and equipment (FFE), accounts receivable (A/R), and sometimes real estate, which includes the land and building. The intangible assets, or those which cannot be seen, touched or measured, include prescription files, customer lists, and goodwill. The pharmacy’s value is the sum of the tangible and intangible assets less any liabilities.

Tangible Assets

The tangible assets are valued by a physical count. A physical count is usually taken just prior to closing of the sale to determine an accurate value for the pharmacy’s inventory. In an established pharmacy, the FFE is generally fully depreciated and given minimal value unless there is something new and significant, such as robots or clean rooms. In that case, the FFE may be valued separately. A pharmacy’s A/R is generally
retained by the seller of the pharmacy, requiring the buyer to bring sufficient [...]

  • Ed Webman

    Funding a Pharmacy Acquisition is Probably within your Grasp

Funding a Pharmacy Acquisition is Probably within your Grasp

By |March 28th, 2013|

You have chosen to become a pharmacy owner, and decided to acquire an existing practice. However, still unanswered, is the $1 million question: How do I get the million to buy a pharmacy? Surprisingly, funding a pharmacy acquisition is achievable and within the grasp of many pharmacists.

First, consider the ownership opportunity. The 2012 NCPA Digest, sponsored by Cardinal Health, explains that there are approximately 23,000 independently owned pharmacies nationwide. With the average pharmacy owner about 60 years old, it’s expected that more than 1,000 pharmacies will be acquired annually over the next decade. Further, as the Digest states, the average gross revenues of an independent
pharmacy are $3.83 million. Most importantly, the Digest shows that most pharmacies have sufficient cash flow or net operating income (NOI) to provide the owner a pharmacist salary and have monies left over to service debt and provide a return to the business. The opportunity is ripe; a prospective owner just needs to be shown how to get the money.

Changing Times

Historically, pharmacy acquisition financing was primarily provided through seller financing, drug wholesalers, and less often, bank financing. Times have changed. Some banks have begun to recognize the value of an independent pharmacy as a borrower and customer. Pharmacy acquisition loans are usually more than $1 million, and pharmacies enjoy a low default rate. In fact, of the hundreds of major industries tracked by the Small Business Administration (SBA), pharmacies rank as the eighth lowest in default rate. With deposits from the average pharmacy nearing $4 million, and considering the variety of financial services required by pharmacies: merchant services, short-term loans for autos and equipment, as well as the personal financial services that pharmacy owners may utilize, independently owned pharmacies are good bank customers. When considering a pharmacy acquisition loan, the lender and buyer first need to structure an acquisition loan budget to sufficiently fund the project. At the outset of the budgeting process, the lender [...]

Compounding Pharmacy – Willie & Kate

By |February 21st, 2013|

Compounding Pharmacy Customer Spotlight

Willie and Kate share their personal experience about working with Live Oak Bank, who has a team that understands the industry.