Pharmacy Franchise Financing in South Dakota

By Brad MacLiver
Authorship and profile at Google


SD pharmacy franchises are contractual relationship between two parties known as the Franchisor and Franchisee.  The Pharmacy Franchisor is the party who has developed their drug store business model, branded all pharmacy-related products, and produced the system in which their pharmacy franchisees operate. The second party, the Pharmacy Franchisee, purchases a franchise license from the South Dakota Pharmacy Franchisor, and usually pays an ongoing pharmacy franchise fee, or royalty fees, to use the name, products, systems, trade secrets, etc., created by the Pharmacy Franchisor.

Quite a bit of options for financing a pharmacy franchise business are available. All pharmacy franchise funding sources, for drug stores, prefer lending to a pharmacy franchisee who will be working with a nationally recognized name and long track records. Newer South Dakota pharmacy franchise models won’t possess these two traits and will be considered more risky.

Traditional Bank Financing used to fund a pharmacy franchise will be available when a pharmacy franchise has both a long track record and pharmacy name recognition. Many of the banks will show interest in this type of funding opportunity. Unfortunately once the bank reviews the loan documents, many of these banks decline the funding request because they don’t understand the security provided for the pharmacy loan. Community drug stores typically have very little traditional assets to offer as security. Lenders for pharmacy will use traditional methods for analyzing the cash flow available to service to the debt, and they will also need to understand the nontraditional collateral that will secure the loan.

As a borrower, even when incorporated, the independent drug store owner’s personal credit rating will be a factor, along with personal tax returns, and financial statements. The amount of actual cash on hand and the verification of the source of the down payment will be critical factor in qualifying for a pharmacy business loan in South Dakota.

SD Pharmacy Franchise Funding Tips:

1. Because there are many pharmacy franchise financing options available, pharmacy owners should perform proper due diligence then obtain the pharmacy funding that best suits their situation.

2. It is advisable to have an accountant or attorney that is familiar with South Dakota pharmacy franchise financing to review the pharmacy business loan documents.

3. There are pharmacy consulting services and franchise associations who can help guide a prospective pharmacy franchisee or borrower or a drug store loan.

4. New pharmacy owners need to make sure their funding request is enough to get the SD pharmacy running and profitable. Less than ample funding for the initial stages may put the drug store in a position of needing additional funding. Smaller working capital loans that would be in a subordinated position will be more difficult to obtain at a later date.

When pharmacy owners have questions and need information regarding pharmacy franchise business loans, or any types of funding for community drug stores and pharmacies, they should contact a South Dakota pharmacy industry specialist who can provide quality answers and sound advice.

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

 

South Dakota Pharmacy Acquisition Finance

By Brad MacLiver
Authorship and profile at Google


When a SD pharmacy or drug store is being sold, seldom does the buyer pay “out of pocket” cash for the acquisition. Even when cash is available, South Dakota pharmacy acquisition strategies usually involve financing the transaction.
       
Typical acquisitions take 6-9 months to complete, so the pharmacy seller 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 South Dakota 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 in SD 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 South Dakota pharmacies instead of a valuation company that has a broader spectrum.

The selling company should provide current, up-to-date data to complete a valuation. Old data is not accepted by lenders, and neither is a sellers “gut feeling.”  Lenders to make their decisions to finance based on sound, verifiable data.

Structuring the transaction is extremely important. The seller of course wants as much money as possible and wants cash. The buyer needs to spread out the debt service and wants to have as little cash as possible invested in the acquisition.

Pharmacies in SD and drug stores are in an industry where it is tougher to obtain business loan due to most of the value in a pharmacy being in customer files and not hard assets. For the acquisition to be properly financed, a lender will therefore need a solid understanding of the industry and what, in addition to its collateralized assets, the company has to offer to reduce the perceived risks.

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. Due to these circumstances many lenders will not loan money to these traditional money making businesses. A successful transaction takes a lender that understands the South Dakota pharmacy industry.

Tips regarding pharmacy acquisitions and finance:

1. Attorneys and CPAs who have been representing the South Dakota 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 SD 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 SD 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 South Dakota pharmacy.

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