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

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