Financing the Acquisition of a Pharmacy
There are several important factors to consider when buying a pharmacy, such as the future growth potential of that pharmacy, the selling price and the financing terms. If these priorities are not in line with your own lifestyle, the business can fail. For example, many buyers jump at an attractive purchase price instead of scrutinizing the company's business strategy and short and long term sales forecast. Arranging the whole financial package can be a discouraging venture into the deep waters of banking and tax law. Don't hesitate to get expert assistance or even just an informal talk with Aventine Group if you feel out of your depth.
When buying a pharmacy, the buyer is expected to bring a certain down payment to the table. The seller often holds a percentage in seller financing. This leaves a balance to be covered by a lending institution in a combination of conventional, depending on the collateral you have available. The financial package could include several sources of capital - standard bank loans, as well as mezzanine financing and private equity. There are also credit corporations who specialize in financing pharmacy acquisitions. Which sources and structure to use depends on the type of business being bought, the market value of the assets and cash flow, growth plans and the perception of market risk. Each acquisition is unique in terms of how it's evaluated, sales prognosis, cost of capital offered, deal terms and covenants.
What steps should you take, financially?
Look at your finances and see how much capital you can invest as a down payment. Keep money aside for legal fees and other start-up costs. Many lending institutions finance up to 80% of the purchase price or value. Are you willing to take out a second mortgage on your home? Or are there people in your environment willing and able to invest in you, like your parents? Some wholesalers have loan guarantee schemes. In exchange, they ask that you purchase the majority of your goods from them. Certain states foster entrepreneurship with special subsidies. Investigate all your options to get to a ballpark figure.
Do you want to own your independent pharmacy outright or in partnership with a classmate, a friend or perhaps the current owner? If the current owner intends to retire within five years, he might welcome a (junior) partner. This is often an easy foot in the door requiring less financing and less hassle like transferring licences. It also gives you the opportunity to learn pharmacy management techniques from an experienced owner.
Have you thought about relocation? Independent pharmacies in (semi-) rural areas are often the only pharmacy serving a community, which makes for great business opportunities. Often, their sales prices are a lot less than anything similar in a city.
What critical factors should you consider when choosing a pharmacy to buy?
Pharmacy size, asking price (is it negotiable?), market value, market conditions, potential profits, debt repayment terms and your own starting salary... Why are they selling? Ask around to see if there are factors you have not considered, like small doctors' offices consolidating and moving away. If the pharmacy had line of sight on a doctor's office which closes, they will lose the "leapfrog" traffic. Perhaps the local factory is downsizing or even closing. What are the economics of the region and what impact does that have on the pharmacy? A new highway may bring more traffic to an area or less because it's easier for people to pass by.
How is the pharmacy doing?
Thoroughly investigate the pharmacy's finances before making any decisions. Examine financial reports for the previous three to five years, including operating costs and business growth. Compare to others in the region, if possible. Hire an accountant with experience in the pharmaceutical industry and the related government regulations to assist in long term planning.
What growth opportunities exist in that specific market?
According to the NACDS (National Association of Chain Drug Stores), sales of specialized pharmaceutical products is expected to grow more than 12% through 2014, while the overall market share of drugs is expected to decline. Also consider internet orders, delivery services, durable medical goods, compounding, medication therapy management, immunizations and travel vaccinations, workshops for patients with diabetes, asthma or other chronic conditions, stopping smoking courses, front-end products, disposal programs, etc.
Consult a pharmacy broker, like Aventine Group.
We can help you with every step of the way, from finding a pharmacy and financing it, to business management and eventual expansion. Many entrepreneurs believe they can't get financing even if they tried. So they don't try. As you can see from the above, there are many different options open to you. Build relationships to your benefit: with your broker, your accountant and your bank.