Pharmacy Acquisitions and Bridge Loans in South Dakota

By Brad MacLiver
Authorship and profile at Google


With the changes in the SD pharmacy industry independent drug store owners, small and regional pharmacy chains, and pharmacy equity investment groups are acquiring South Dakota 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 SD Pharmacy Transactions:

1. An independent South Dakota pharmacy owner learns of health issues and decides to quickly sell the family owned pharmacy to an employee or local competitor. Traditional finance methods for the pharmacy buyer may involve a time line that is not acceptable when considering the circumstances. A bridge loan can be utilized to quickly accomplish the transaction in this situation.

2. A small pharmacy chain requires $1 million so they can expand their business. They have 3 new equity investors that will be investing in the firm over a period of 6 months, but each at different intervals. However, the business has some opportunities that require action sooner than 6 months. A bridge loan that closes quickly allows the South Dakota pharmacy chain access to the needed funds so they can complete their expansion and increase profits. The money recieved 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 SD 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 pharmacy group in South Dakota 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 SD 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 purchased at auction may have a narrow window for closing the deal. The timing of traditional financing would keep the buyer from proceeding with the opportunity, and the benefits of a bridge loan will permit the pharmacy owner to quickly respond to the opportunity.

When there are business opportunities, buying pharmacies, selling pharmacies, quick deadlines, an old loan maturing before a new loan can be put in place, funding needs during the permit, planning, or evaluating stages, etc., bridge loans can be an essential financial tool.

Tips regarding pharmacy bridge loans in South Dakota:

1. Bridge loans are quick to obtain but they expire quickly.

2. A bridge loan is similar to a hard money loan and the terms are often used interchangeably in conversations. Both are short-term, higher interest rate, non-standard loans, but in some circles hard money refers to the lending source and a bridge loan refers to the duration of the loan.

3. Because bridge loans usually come with higher interest rates than traditional financing a larger down payment, meaning a lower Loan to Value (LTV) and a lower level of risk and 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.

It is necessary to understand that the types of deals that require a bridge loan may be considered speculative or high-risk in nature. Many banks will not offer bridge loans because of this. Banks are required to meet government regulations and they also need to justify their lending practices. High-risk bridge loans do not usually fall within the lending parameters of many banks. The result of this is that a majority of the bridge loans will come from private investment firms.  It is best to consult a company that has access to a several sources of funding who provide bridge loans.

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Acceleration Clauses for South Dakota Commercial Leases and Pharmacy Business Loans

By Brad MacLiver
Authorship and profile at Google


A provision of many SD 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 pharmacy business loan or lease documents that are provided to the South Dakota pharmacy owner will describe the rights, the obligations, and the conditions related to the acceleration clause. When the borrow, the pharmacy owner in this case, doesn’t meet their obligations, the loan or lease will then go into default. A default can be caused by a payment that is even one day late. Pharmacy business loans and commercial lease documents should be thoroughly read and understood before signing because of this.

More Tips:
1. If a pharmacy’s slowing cash flow is likely to cause a business loan default, they may be able to negotiate with the lender by offering additional collateral should the pharmacy owner in South Dakota have any additional unencumbered assets.

2. If a pharmacy in SD can catch up on their payments they can reinstate the business loan before the acceleration starts.

3. Different states have different rules requiring notification of an acceleration clause being exercised. Pharmacy owners should understand the laws in the state where they operate. Lack of knowledge is not an excuse.
                                 
4. When an acceleration clause is exercised on a commercial lease, there is the possibility the landlord cannot collect rent from both the defaulting tenant and a new tenant at the same time. To save themselves some money, pharmacy owners 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 South Dakota pharmacy buyer will require restrictions in the Purchase and Sale Agreement  that the new tenant cannot be another SD 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 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 South Dakota pharmacy for acquisition, or expansion, due diligence and understanding of all aspects of the transaction should be considered. Using the services of a SD pharmacy industry expert to guide a pharmacy owner through the maze of details will benefit the pharmacy owner in making the best business decision.

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South Dakota Pharmacy Industry: Current Market Conditions

By Brad MacLiver
Authorship and profile at Google


There are currently several factors that are having an impact the current market conditions of the U.S. pharmacy industry. These factors are affecting the pharmacy business valuations of pharmacies in SD and drug stores all across the U.S.

Local demographics:

The valuation process also uses local market conditions and local demographics.  Smaller communities, which have less growth potential, and declining profits mean a buyer will need to purchase at a lower value because they will have to service the debt from a business loan and try to make a living at the same time.  This is also true for any community that has lost population due to economic conditions or has a high rate of unemployment. Fewer people and fewer customers that have the ability to purchase will mean reduced sales and less chance of any substantial improvement in the near term. The end result of this are lower pharmacy business values.

South Dakota Pharmacists Shortage:

Pharmacies in South Dakota 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 SD pharmacy industry roll up. Many smaller chains have run into financial difficulties and have stopped their expansion. It is more difficult to drive a price higher when there are fewer willing, or capable, to purchase.

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 pharmacy business values drop. There are many factors contributing to the downward pressure of South Dakota pharmacy values and there is not any expectation of a turn around. Pharmacy owners should not be fooled by inexperienced Brokers claiming grand outcomes and over stating pharmacy business values not based 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 pharmacies in South Dakota 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.  However, that does not mean the over inflated asking price is what the business will actually sell for.

Mail Order:

Some insurance companies are designating a noticeable amount of pharmacy patients in SD as “long-term medications” and require they only purchase the medications from mail order pharmacy companies who provide products at lower prices. This results in local pharmacies not only missing out on prescription sales, but front-end sales will also decline since the customer is not entering the store. Pharmacy mail order sales have now surpassed sales from independent retail pharmacies.

Choose a firm that provides South Dakota 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 used to derive the value of a pharmacy.

It is best to use a company that specializes in pharmacy in South Dakota and has extensive and current industry data.  Choose pharmacy specialists who have 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.  The largest financial institutions, national chain pharmacies, regional pharmacy chains, independently owned drug stores, and pharmacy equity investment groups use the services of companies fitting this description.

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Using Multiples with Pharmacy Business Valuations in South Dakota

By Brad MacLiver
Authorship and profile at Google


People who have purchased a residence are familiar with real estate appraisals. With a SD pharmacy business there are times when both the real estate the business itself needs to be appraised. The pharmacy business appraisal does not include the real estate and is more commonly called a Pharmacy Business Valuation.

South Dakota Pharmacy Business Valuations are part of the due diligence that will be conducted when there is a possible acquisition of the South Dakota pharmacy business, or SD pharmacy financing is needed. Pharmacy Business Valuations 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 South Dakota 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.

The population is aging and sales are increasing as the older generations are purchasing more prescriptions.  At the same time, government and insurance reimbursements are drastically being cut back, causing a major drop in nets profits for the pharmacy industry in SD. Reduced profits means it is more difficult for the business to service debt, which in turn means that it is harder for funding to be obtained.  When there is funding available, it will be in lower amounts. Somebody that is not a pharmacy specialist who used a gross sales multiplier would be very inaccurate in their calculation when compared to other pharmacy valuations. Any banker who sees valuations not within realistic industry comparisons is not going to fund the deal and any fees paid for the business valuation will have been wasted.

When you require a South Dakota pharmacy business valuation to be completed, it is highly recommended to pay more for a specialist who provides a banker realistic and current information. Don’t try to save a few bucks by cutting corners, which ends up wasting time, money, and possibly even ruin chances to obtain funding that either the SD pharmacy business owner, or pharmacy buyer was seeking.

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