Colorado Pharmacy Acquisitions and Bridge Loans

By Brad MacLiver
Authorship and profile at Google


With the changes in the CO pharmacy industry independent drug store owners, small and regional pharmacy chains in Colorado, and pharmacy equity investment groups are acquiring 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.

Here are some examples of using bridge loans in Colorado pharmacy transactions:

1. An independent pharmacy owner learns about health issues and makes a decision to quickly sell the family owned CO pharmacy to an employee or local competitor. More traditional financing for the pharmacy buyer might require a time line that is not acceptable when considering the circumstances. A bridge loan can be taken out to quickly accomplish the transaction.

2. A small pharmacy chain requires $1 million to expand their business. They have three new equity investors who will be investing into the firm over the next six months, but at different intervals. However, the business has opportunities which necessitate action sooner than 6 months. The quick closing bridge loan allows the pharmacy chain in Colorado access to the needed funds so they can complete their expansion and increase profits. Money from the three new equity investors will be able to 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 Colorado pharmacy location, but the property is then in disrepair. Bridge loans provide the needed funds to acquire and rehabilitate the property and once that is complete conventional long term financing can be obtained.

4. A pharmacy group developing new CO 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 permits the project to move into the construction phase and then qualify for various other forms of financing.

5. When a Colorado pharmacy is owned by two or more partners and one of the partners is ready to exit the business, a bridge loan can help to ensure both cash flow and uninterrupted operation of the business during the partner buyout.

6. Real estate or equipment bought at auction may have a tight window for closing the deal and timing of traditional financing would keep buyers from proceeding with the opportunity. The benefits of a bridge loan permit the pharmacy owner to quickly respond to the opportunity.

When there are opportunities for business, pharmacies being bought or sold, 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 invaluable financial tool.

Some more tips regarding pharmacy bridge loans:                        

1. Although bridge loans are quick to obtain, they are quick to expire.

2. Hard money loans are similar to bridge loans 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.

Understand the types of deals that require a bridge loan may be considered speculative in nature, or have higher risk factors. Due to this many banks do not offer bridge loans. Banks must meet government regulations and need to justify their lending practices. Riskier bridge loans do not usually fall within the lending parameters of many banks. Therefore a majority of the bridge loans will come from private investment firms.  It is best to consult a company that has access to a number of funding sources who provide bridge loans.

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

Colorado Pharmacy Acquisition Finance

By Brad MacLiver
Authorship and profile at Google


When a CO 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 Colorado 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 Colorado 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, CO pharmacies are not ice cream stores. There are many aspects of valuing a pharmacy that are unique to the industry, so simple accounting formulas or generic methods cannot be used. Industry specialists should be used when valuing the pharmacies instead of a valuation company that has a broader spectrum.

In order to complete a valuation the selling company must provide current data. Lenders will refuse old data or a sellers “gut feeling.” Lenders need to make their decision to finance based on sound, verifiable information.                

Structuring the transaction is very important. The seller will naturally want as much money as possible, and they want cash. Also, the buyer will need to spread out the debt service with as little cash as possible invested in the acquisition.

Pharmacies and drug stores belong to an industry where it is more difficult to obtain business loan due to the majority of the value in a pharmacy in Colorado is the customer files and not hard assets. The acquisition must therefore be financed a lender with a strong understanding of the industry and what, beyond the collateralized assets, the company offers to reduce the perceived risk.

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 Colorado pharmacy industry.

Tips regarding CO pharmacy acquisitions and finance:

1. Attorneys and CPAs who have been representing the 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 Colorado 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 pharmacy seller will need to continually prove the financial condition of the company.

When pursuing “CO 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 pharmacy.

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


 

Pharmacy Industry in Colorado: Current Market Conditions

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 in CO. These factors are affecting the pharmacy business valuations of Colorado pharmacies 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.

Colorado Pharmacists Shortage:

Pharmacies in Colorado 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 due to some of the largest pharmacy chains being purchased and consolidated in the pharmacy industry roll up. Many smaller chains have run into financial difficulties and have thus stopped expanding. When there are fewer willing or capable to purchase, it is more difficult to drive prices higher.

Current Market Conditions Requires Industry Roll-up:

The consolidation of the Colorado pharmacy industry is required to get more traffic into a single store.  Simple economics dictates that 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 pharmacy values and there is no expectation of a turn around, so pharmacy owners should not be fooled by inexperienced Brokers who claim grand outcomes and overstate pharmacy business values that aren't based on realistic market conditions.

With the consolidation of the pharmacy industry in Colorado 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.

Pharmacies Providing Mail Order:

Some insurance companies are designating a noticeable amount of CO 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.

Choose a firm that provides Colorado 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 and has extensive and current industry data.  Choose CO 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.

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