Pharmacy Acquisitions and Maryland Bridge Loans

By Brad MacLiver
Authorship and profile at Google


With the changes in the MD pharmacy industry independent drug store owners, small and regional pharmacy chains, and Maryland pharmacy equity investment groups are acquiring pharmacies to obtain a larger competitive footprint in a geographic area. During the business expansion's acquisition phase, opportunities that require action faster than the traditional funding process may present themselves.

Bridge Loans are an option for short-term financing which can be used while waiting for permanent financing, or used while the next stage of financing to be obtained. Bridge loans provide funding that "bridges" the gap between a company’s current financial needs and their long term 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 Maryland:

1. An independent MD pharmacy owner 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 pharmacy chain in Maryland 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 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 MD 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 developing new Maryland 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 Maryland pharmacy 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. Real estate, or equipment bought at auction may have a narrow window for closing the deal and timing of traditional financing would keep the buyer from proceeding with the opportunity. Benefits of a bridge loan will permit the pharmacy owner in Maryland to quickly respond to the opportunity.

When there are business opportunities, buying MD 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 Maryland pharmacy bridge loans:                        

1. Bridge loans are quick to obtain, but quick to expire.

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. Due to the shorter time period of bridge loans, borrowers should keep in mind that fees for valuations, legal, dues diligence, etc., will be amortized over a shorter period of time when compared to traditional financing transactions.

Take note that the types of deals that require a bridge loan may be considered speculative or high-risk in nature. This in turns means that many banks do not offer bridge loans. Banks are required to meet government regulations as well as justify their lending practices. Bridge loans, which are riskier, usually do not fall within the lending parameters of many banks, so a majority of the bridge loans will originate from private investment firms. It is best to consult with a company who has access to a number of funding sources who provide bridge loans.

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Acceleration Clauses for Pharmacy Business Loans and Commercial Leases in Maryland

By Brad MacLiver
Authorship and profile at Google


A provision of many MD 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 provided to the pharmacy owner in Maryland will describe the rights, conditions, and obligations relevant to the acceleration clause. When the pharmacy owner (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, Maryland pharmacy business loans and commercial lease documents should be thoroughly read and understood before signing.

Tips:
1. If a MD pharmacy’s slowing cash flow is going to cause a business loan default, but the pharmacy owner has additional unencumbered assets they may be able to negotiate with the lender by offering additional collateral.

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

3. States have different rules requiring notification of an acceleration clause being exercised. Maryland 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, take note that should the MD pharmacy be in the process of being sold and the files and inventory moved to a competitor’s location, the pharmacy buyer will then require restrictions in the Purchase and Sale Agreement that states the new tenant cannot be another pharmacy in Maryland.

5. Lenders tend to prefer not to have to go through the foreclosure process, so if it looks like your pharmacy is headed in that direction, start talking with the lender to find a solution. Communication with the lender is always positive.

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

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

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Maryland Pharmacy Acquisition Finance

By Brad MacLiver
Authorship and profile at Google


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

Typical acquisitions take 6-9 months to complete, so the Maryland 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 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 in MD 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 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.                

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 MD and drug stores are in an industry where it is more difficult to obtain business loan due to the majority of the value in a pharmacy is the customer files and not hard assets. Therefore, for the acquisition to be financed a lender will need a strong understanding of the industry and what, beyond the collateralized assets, the company offers to reduce the perceived risk.

Maryland 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 pharmacy industry.

Advice regarding MD pharmacy acquisitions and finance:

1. Attorneys and CPAs who have been representing the Maryland pharmacy seller for many years may see the transaction as potentially losing their client when the business is sold. Check to see if they are working diligently on the transaction instead of slowing, at worst, or undermining the process

2. Since pharmacy acquisitions in MD take roughly 6-9 months of work to complete, each party involved should follow a time table because items of importance will much too often end up sitting on the desk of someone that is outside of the control of the buyer or seller.

3. It is essential that all financial information be current. Data supplied to both the buyer and the lender will need to be updated on a continuous basis over the lengthy process. In the course of a nine month period, things can change drastically, which means the Maryland pharmacy seller will need to continually prove the financial condition of the company.

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

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Current Market Conditions: Maryland Pharmacy Industry

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. These factors are affecting the pharmacy business valuations of pharmacies in MD and drug stores all across the U.S.

Local demographics:

The valuation process also 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 in a lower pharmacy business value.

Maryland Pharmacists Shortage:

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

Reduced Buyers:

There is also a reduced number of corporate buyers. Some of the largest pharmacy chains in Maryland have been both purchased and consolidated into the pharmacy industry roll-up, and many smaller chains have run into financial difficulties and have thus stopped their expansion. It is much harder to drive a pharmacy price higher when there are fewer willing, or capable, to purchase.

Current Market Conditions Necessitate Industry Roll-up:

The consolidation of the pharmacy industry is necessary in order to get additional traffic into a single store.  Simple economics states that whenever any business has a reduction in profits, they are less attractive to a buyer.  Pharmacy business values will then 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 fooled by inexperienced Brokers claiming grand outcomes and over stating Maryland pharmacy business values not based on realistic market conditions.

With the consolidation of the MD 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 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 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 in Maryland.

Choose a firm that provides pharmacy business valuations based on real market conditions and does not use a simple formula for calculating the value of a Maryland pharmacy. Complex methods are used to 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 pharmacy specialists who have been working in the MD 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 for Pharmacy Business Valuations in Maryland

By Brad MacLiver
Authorship and profile at Google


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

MD Pharmacy Business Valuations are part of the due diligence that will be conducted when there is a possible acquisition of the pharmacy business, or it is necessary to have pharmacy financing. Pharmacy Business Valuations set a reasonable market value on the drug store after various factors have been considered, 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 acceptable methods when valuing a retail drug store business and each method has its own advantages.  The business owner should have a decent understanding of the method being used.

One simple method involves using “multipliers”. This is when net profit, gross sales, or some other figure from the financial statements are multiplied that number by 3, 5, 7 times or whatever the case may necessitate. However, if using such simple methods such as multipliers it is important 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 in Maryland 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 Maryland pharmacy industry. Lower profits means it is harder for the business to service debt. That in turn means it is harder to obtain funding, and when there is funding it will be in lower amounts. Someone who is not a MD pharmacy specialist and used a gross sales multiplier would be way off in their calculation compared to other pharmacy valuations. A banker that sees valuations that are not within realistic industry comparisons is not going to fund the deal and fees paid for the business valuation will have been wasted.

When it is necessary to have a pharmacy business valuation completed, it is strongly advised to pay more for a specialist that can provide a banker realistic and current information. Don’t try and save a few bucks by cutting corners, and then end up wasting time, money, and possibly even ruin a chance of obtaining funding that either the Maryland pharmacy business owner, or pharmacy buyer was seeking.

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