Financing a Pharmacy Purchase
Financing a Pharmacy Purchase
Whether you are a first-time buyer or you own forty pharmacies, it’s usually required to finance a pharmacy purchase. The good news is that there are more lenders now than ever before who are willing to help you finance a pharmacy purchase. It’s important to understand the types of financing available and what the best structure is for your unique situation.
As a seller or a buyer, you should consider the following regarding financing:
- Term Length – the longer the term length (i.e., how long it will take to pay back the loan), the more cash flow there will be in the short term, but the interest paid over the life of the loan will be higher.
- Interest Rate – loans can either have either have fixed or variable interest rates associated with them. A fixed rate does not changed over the life of the loan. A variable rate changes as the Federal Reserve or another index’s rates change. Depending on the situation and when the loan is financed, it’s important to determine which type of interest rate makes sense for your loan and which one will save you money in the long-term.
- Real Estate – purchasing the real estate associated with the pharmacy may give you flexibility when it comes to loan financing options. The lender may be more willing to offer a loan with a longer term length, lower interest rate, or other options.
- Seller Financing – it’s common as a part of a pharmacy sale for the seller to finance part of the transaction (i.e., a loan is established between the buyer and the seller), this helps ensure that there is protection against audits, legal issues, etc. A loan between the buyer and the seller also helps lower the bank’s risk and reduces the tax burden of the seller.
- Fees – certain loans come with fees, in particular, SBA loans, while other loans have little or no fees associated with them. Lower fees don’t always equate to a better deal, so it’s important to understand the entire acquisition budget and not simply choose a loan because of the fees associated with it.
- Cash Injection – most SBA loans will have a lower cash injection requirement, while other types of loans typically require a larger initial injection of cash to be provided as part of the purchase. It’s important to understand what the up-front cash obligations will be and how that will impact your pharmacy’s cash flow.
- Loan Covenants – when getting a loan financed, be sure to discuss with your lending partner on what covenants, if any, are required for the loan. A loan covenant is conditional language within the loan agreement that either requires the borrower to fulfill certain conditions or prohibits them from undertaking certain actions. An example of a loan covenant could be meeting certain revenue projections or achieving certain financial ratios. If the borrower fails to meet these conditions then the loan can be called for immediate repayment or a penalty can be assessed.
Independent Rx has been involved in over 200 pharmacy transactions. This experience is a major differentiator because are able to educate our sellers on why you, the buyer, may prefer a certain financing structure over another or require certain documents be provided. Allowing us to work with all parties involved ensures that the transaction is structured and executed in a way that makes the most sense for everyone.