Bridge Loans and Pharmacy Acquisitions in Utah

By Brad MacLiver
Authorship and profile at Google


With the changes in the UT pharmacy industry independent drug store owners, small and regional pharmacy chains, and pharmacy equity investment groups are acquiring Utah pharmacies to obtain a larger competitive footprint in a geographic area. During the acquisition phase of the business expansion there may be opportunities that require action, which is faster than the traditional funding process.

Bridge Loans are a short-term financing option and are used while waiting for permanent financing, or the next stage of financing to be obtained. Bridge loans provide funding to "bridge" the gap between a company’s current needs and their long term financing requirements.  Permanent financing is generally used to "take out," or pay back, the bridge loan.

One of the characteristics of a bridge loan is that they can close quickly, which in turn allows a company to capitalize on a timely business opportunity, or acquisition. The quick access to money can also allow a business the chance to avoid penalties, bankruptcy, or other temporary problems. If longer term issues need to be dealt with, this “transitional financing” provides the company time until longer term financing can be secured.

Another characteristic of bridge loans is that the process usually requires less documentation than conventional financing. Bridge loan lenders don’t usually have the same government regulations to adhere to, so they tend to have more flexibility in their lending criteria and the documentation they require. However, less documentation does not mean they won’t perform due diligence to have a comfort level with the transaction before they fund.

Examples of using Bridge Loans in Pharmacy Transactions in Utah:

1. An independent pharmacy owner in Utah learns of health issues and decides to quickly sell the family owned pharmacy to an employee or local competitor. Traditional financing for the pharmacy buyer may require a time line that is not acceptable when considering the circumstances. A bridge loan can be used to quickly accomplish the transaction.

2. A small Utah pharmacy chain needs $1 million to expand their business. They have 3 new equity investors who will be investing in the firm over the next 6 months, but at different intervals. However, the business has opportunities which require action sooner than 6 months. The quick closing bridge loan allows the UT pharmacy chain access to the needed funds so they can complete their expansion and increase profits. Money from the 3 new equity investors will pay off the bridge loan.

3. A pharmacy owner in a leased location has an opportunity to quickly acquire a commercial property that would be a great pharmacy location, but the property is in disrepair. A bridge loan provides the needed funds to acquire and rehab of the property and once that is complete conventional long term financing can be obtained.

4. A Utah pharmacy group developing new pharmacy locations can receive bridge loan funding to get through the permitting process of a project when conventional financing isn’t available at this early stage due to there is still too much risk. A bridge loan allows the project to move into the construction phase and then qualify for other forms of financing.

5. When a pharmacy in UT is owned by two or more partners and one of the partners is ready to exit the business, a bridge loan can help ensure the cash flow and uninterrupted operation of the business during the partner buyout.

6. Equipment or real estate bought at auction may have a tight window for closing the deal and timing of traditional financing would keep the buyer from proceeding with the opportunity. The benefits of a bridge loan permit the Utah pharmacy owner to quickly respond to the opportunity.

Bridge loans can be an essential financial tool when there are business opportunities, opportunities to buy or sell Utah pharmacies, short deadlines, old loans maturing before new loans can be put in place, funding requirements during the permit, planning, or evaluating stages, etc.

Additional tips related to pharmacy bridge loans in Utah:

1. Although bridge loans are quick to obtain, they are quick to expire.

2. Bridge loans are similar to hard money loans and the terms are often used interchangeably in conversation. Both loans are short-term, non-standard, high interest rate loans.  However, in some circles, hard money refers to the source of lending while a bridge loan refers to the duration of the loan.

3. Because a bridge loan usually comes with higher interest rate than traditionally financing a larger down payment, there is a lower Loan to Value (LTV) and a lower level of risk which provides an opportunity for lower interest rates.

4. With the shorter time period of bridge loans borrowers will need to be aware that fees for valuations, legal, dues diligence, etc., will be amortized over a shorter period than traditional financing transactions.

Understand the types of deals that require a bridge loan may be considered speculative in nature, or have higher risk factors. Due to this many banks do not offer bridge loans. Banks must meet government regulations and need to justify their lending practices. Riskier bridge loans do not usually fall within the lending parameters of many banks. Therefore a majority of the bridge loans will come from private investment firms.  It is best to consult a company that has access to a number of funding sources who provide bridge loans.

************************
 

Acceleration Clauses in Pharmacy Business Loans and Commercial Leases in Utah

By Brad MacLiver
Authorship and profile at Google


A provision of many UT pharmacy business loans and commercial leases is an acceleration clause. The acceleration clause in the loan/lease agreements allows the lender to accelerate their collection of payments contingent on an event occurring. These events may include lack of payment by the borrower, failure to keep the property adequately insured, failing to pay tax assessments, not maintaining the property, selling the property/asset, etc.

Lenders view the acceleration clause as an important tool in their business loan and commercial lease programs. Loan and lease documents might not specifically address the foreclosure of a property, or repossession of an asset, but this is where the acceleration clause comes into effect. Without the clause the lender would only be able to foreclose on one missed payment at a time. With the acceleration clause, despite whatever event kicks the clause into gear, the lender can demand immediate and full payment of all remaining balances and fees.

The Utah pharmacy business loan or lease documents provided to the pharmacy owner will describe the rights, conditions, and obligations relevant to the acceleration clause. When the pharmacy owner in Utah (the borrower) doesn’t meet their obligations then the loan or lease goes into default. A payment that is even one day late can cause a default. Due to this, pharmacy business loans and commercial lease documents should be thoroughly read and understood before signing.

A Few Tips:
1. Should a pharmacy’s slowing cash flow cause a business loan to default, they may be able to negotiate with the lender by offering additional collateral if the pharmacy owner has additional unencumbered assets.

2. If a Utah pharmacy is able to catch up on their payments they can reinstate the business loan before the acceleration starts.

3. States have different rules which regulate the notification of an acceleration clause being exercised. Utah Pharmacy owners should understand the laws in the state where they operate because lack of knowledge is not an acceptable excuse.
                                 
4. When an acceleration clauses are exercised on commercial leases, the possibility exists that the landlord is unable to collect rent from both the defaulting tenant and a new tenant at the same time. In order to save themselves some money, pharmacy owners in Utah should help the process by assisting the landlord re-lease the property. However, please note, should the pharmacy be in the process of being sold and the files and inventory moved to a competitor’s location, the UT pharmacy buyer will require restrictions in the Purchase and Sale Agreement  that the new tenant cannot be another pharmacy.

5. Lenders prefer not to have to go through the foreclosure process, so if your pharmacy is headed in that direction start talking with the lender about finding a solution. Communication with the lender is a good thing.

6. Some Utah pharmacy business loans and commercial leases require a “personal” guarantee from the business owner. This means that the business owner’s personal assets and credit will become involved in the event of a default. The “corporate” status of the business will not keep the lender from seizing the personal assets.

When considering financing a pharmacy for acquisition, or expansion, due diligence and understanding of all aspects of the transaction should be considered. Using the services of a Utah pharmacy industry expert to guide a pharmacy owner through the maze of details will benefit the pharmacy owner in UT in making the best business decision.

************************
 

Utah Pharmacy Acquisition Finance

By Brad MacLiver
Authorship and profile at Google


When a UT pharmacy or drug store is being sold, seldom does the buyer pay “out of pocket” cash for the acquisition. Even when cash is available, Utah pharmacy acquisition strategies usually involve financing the transaction.

Typical acquisitions take 6-9 months to complete, so the pharmacy seller in Utah will need 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, so the process should involve qualified parties.

Along with the buyer and seller the acquisition will involve attorneys, accountants, lenders, valuation companies, industry specialists, along with others. No one wants to pursue 6-9 months of work involving a variety of highly paid professionals without having some confidence of the Utah pharmacy buyer’s ability to close the deal.

The process will begin with determining the value of the business. There are many companies that offer valuation services. However, pharmacies are not ice cream stores. There are many aspects of valuing a pharmacy that are unique to the industry, so generic valuations or simple accounting formulas should not be used. An industry specialist should be used for valuing the Utah pharmacies instead of a valuation company that has a broader spectrum.

In order to complete a valuation the selling company needs to provide up-to-date data. Lenders will not accept old data, or a sellers “gut feeling.” Lenders need to make a decision to finance based on sound and verifiable information.                

It is very important to structure the transaction.  Obviously, the seller will want as much money as possible, in cash.  Likewise, the buyer needs to spread out the debt service and they want to have as little cash as necessary invested in the acquisition.

Pharmacies and drug stores are involved in an industry where business loans are more difficult to obtain due to the majority of the value in a pharmacy in Utah is the customer files instead of hard assets. This means that in order for the acquisition to be financed, you need a lender with a strong understanding of the industry and what the company offers to reduce the perceived risk beyond the collateralized assets.

Utah 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 will only provide $15-20,000 of collateral for a buyer possibly 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. Because of these circumstances, many lenders refuse loan money to these traditional money making businesses. A successful transaction will involve a lender who understands the Utah pharmacy industry.

Tips regarding UT pharmacy acquisitions and finance:

1. Attorneys and CPAs who have been representing the Utah 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 pharmacy acquisitions in Utah involve 6-9 months of work to complete , all parties involved need to be aware of time tables. Much too 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 Utah pharmacy seller will need to continually prove the financial condition of the company.

When pursuing “pharmacy acquisition finance,” for the best chance of success, make sure the valuation company and the lender have expertise in that industry. Choose a company that has the pharmacy experience and expertise, and is a direct correspondent with lenders who understand UT pharmacy.

************************



 

Pharmacy Industry: Current Market Conditions in Utah

By Brad MacLiver
Authorship and profile at Google


Currently there are a number of factors that are impacting the current market conditions of the U.S. pharmacy industry in Utah (UT). These factors are affecting the pharmacy business valuations of pharmacies, Utah drug stores, and pharmacies all across the U.S.

Local demographics:

The valuation process includes local market conditions and local demographics. Smaller communities have less growth potential and with the declining profits a buyer will need to purchase at a lower value because they will have to service the debt from a business loan and still try to make a living. The same is true for communities that have lost population due to economic conditions, or have a high rate of unemployment. Fewer people, or fewer customers with the ability to purchase, will mean fewer sales and less chance of any substantial improvement in the near term. This results is a lower pharmacy business value for your UT drug store.

Utah Pharmacists Shortage:

Pharmacies in Utah and across the country have had difficulties in finding pharmacists.  This shortage of pharmacists not only affects employee opportunities it also affects the number of potential independent buyers. 

Fewer Buyers:

There are also fewer corporate buyers. Some of the largest pharmacy chains have been purchased and consolidated in the Utah pharmacy industry roll up. Many smaller chains have run into financial difficulties and have stopped their expansion or themselves have been acquired by the larger chains. It is more difficult to drive a business price higher when there are fewer willing, or capable, to purchase the pharmacy.

Current Market Conditions Requires Industry Roll-up:

The consolidation of the pharmacy industry is required to get more traffic into a single store.  Due to simple economics, when any business has a reduction in profits they are less attractive to a buyer and Utah pharmacy business values drop. There are many factors contributing to the downward pressure of pharmacy values and there is not any expectation of a turn around.  Pharmacy owners should not be tricked by inexperienced brokers that are claiming grand outcomes with overstated pharmacy business values not grounded on realistic market conditions.

With the consolidation of the pharmacy industry that has been happening for several years, many new brokers have entered the market to broker pharmacy acquisitions. Most brokers do not have pharmacy related experience, nor do they use current market conditions when they value a pharmacy. Most are using simple accounting formulas that hold no sound reasoning for the value when faced with current pharmacy market conditions. Due to this many brokers are valuing Utah pharmacies 2 to 3 times more than what the market is really willing to pay. Any inexperienced person can quote a high value to capture a listing. So beware... an over inflated asking price is NOT what the business will actually sell for.

Mail Order:

Some insurance companies are classifying a noticeable amount of pharmacy patients as “long-term” and these patients are required to only purchase their medications from mail order pharmacy companies who provide products at lower prices. The result of this in local Utah pharmacies is that they are not only missing out on prescription sales, but front-end sales will also decline because customers are not entering the store. Pharmacy mail order sales have currently surpassed the sales from independent retail pharmacies.

Choose a firm that provides Utah pharmacy business valuations based on real market conditions and does not use a simple formula for calculating the value of a pharmacy. Complex methods are necessary to accurately derive the value of a pharmacy.

It is best to use a company that specializes in pharmacy and has extensive and current industry data. Choose a pharmacy specialists who has been working in the pharmacy industry long enough to have extensive pharmacy experience and an excellent reputation. A company with good credentials possesses large amounts of national data and it is this data that can support the valuation's conclusions.

************************

When you are considering buying, selling, or financing a pharmacy business, discover more topics and find the tips and resources you need to make a decision at www.BuyingAndSellingPharmacies.com.
Receive a free pharmacy business valuation at www.PharmacyValuations.com.
Follow us on Facebook.
View our videos at YouTube.
 

 

Using Multiples for Pharmacy Business Valuations in Utah

By Brad MacLiver
Authorship and profile at Google


Anybody who has purchased a home should be familiar with real estate appraisals. With a UT pharmacy business there are times when both the real estate and the business itself needs to be appraised. The pharmacy business appraisal, which does not include the real estate, is more commonly called a Pharmacy Business Valuation.

Pharmacy Business Valuations in Utah are part of the due diligence that will be conducted when there is a possible acquisition of the pharmacy business, or pharmacy financing is needed. Pharmacy Business Valuations in Utah place a reasonable market value on the drug store after consideration has been given to factors such as, but not limited to: assets, financial statements, tax returns, goodwill, customer lists, licensing, competitive advantages, regulatory concerns, management team, inventories, and industry comparisons.

There are a number of accepted methods for valuing a retail drug store business. Each method has its own perspective and the business owner should have a reasonable understanding of the method being used.

One simple method is to use “multipliers” This is when someone takes the net profit, gross sales, or some other figure from the financial statements and then multiplies that number by 3, 5, 8 times (whatever the case may be). However, when using simple methods such as multipliers you need to understand a few points:

1. Financial statements are typically prepared to justify the lowest possible taxes.

2. Stated profits are not usually the actual cash flow of the company.

3. Due to tax reasons company assets probably have a different value than what is on the books.

Understanding the above points, you can understand that a simple pharmacy valuation based on multiples may not reflect the true market value of the drug store.

When financing is involved simple multiplier methods will not be acceptable. Banks and finance companies will require a third party unbiased pharmacy valuation completed using advanced calculations, knowledge of the industry, and sound financial reasoning.

When a company specializes in a specific industry, that company will be able to offer a more precise and credible valuation. Specialists usually have more industry data than someone who does not normally value businesses in that industry. The results of not having the proper industry data will result in a more ambiguous valuation.

Due to the aging population sales are increasing as the older generations are purchasing more prescriptions. However at the same time, government and insurance reimbursements have been drastically reduced causing a major decline in nets profits for the Utah pharmacy industry. Reduced profits means it will be harder for businesses to service debt.  That means it will be harder to obtain funding, and whatever funding is available will be in lower amounts. Someone who is not a specialist in the pharmacy industry and uses a gross sales multiplier would get a calculation that would be way off when compared to other UT pharmacy valuations. A banker who sees a valuation that is not within realistic comparisons in the industry will not fund the deal.  Any fees paid for the business valuation will have been pointless.

When it is necessary to have a pharmacy business valuation completed in Utah, it is strongly recommended to pay the extra amount for a specialist who can provide a banker with realistic and current information. Don’t try to save a few pennies by cutting corners, which will only end up wasting your time, your money, and possibly even ruin chances to obtain funding that either the pharmacy business owner or pharmacy could put to use.

 

************************