Pharmacy Acquisitions and Wyoming Bridge Loans

By Brad MacLiver
Authorship and profile at Google


With the changes in the WY pharmacy industry independent drug store owners, regional or small pharmacy chains and pharmacy equity investment groups are acquiring Wyoming pharmacies to obtain a larger competitive footprint in a geographic area. During the acquisition phase of the business expansion, opportunities may exist which require quick action that is faster than the traditional funding process.

Bridge Loans are a type of short-term financing  used while waiting for either permanent financing or the next stage of financing to be obtained.  These loans provide funding necessary to "bridge" the gap between a company’s current needs and their long term financing requirements.  Permanent financing is utilized used to "take out," or pay back, the bridge loan.

One particular characteristic of bridge loans is that they can close quickly, which in turn permits companies to capitalize on a timely business opportunities or acquisitions. This fast access to money can also allow a business the chance to avoid penalties, bankruptcy, or other problems that are temporary. If there are more longterm issues to be dealt with, this form of “transitional financing” provides the company time until longer term financing can be secured.

Another characteristic of a bridge loan is that the process usually doesn't require as much documentation as conventional financing. Typically, bridge loan lenders also don’t have the same government regulations to adhere to.  This allows them to have more flexibility in their lending criteria and the documentation they require. However, reduced 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 WY:

1. An independent pharmacy owner learns of health issues and decides to quickly sell the family owned Wyoming 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 WY pharmacy chain 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 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 Wyoming 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 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 to quickly respond to the opportunity.

When there are business opportunities, buying pharmacies in Wyoming, selling pharmacies in WY, 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 Wyoming 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. 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.

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Acceleration Clauses in Commercial Leases and Wyoming Pharmacy Business Loans

By Brad MacLiver
Authorship and profile at Google


A provision of many WY 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 Wyoming pharmacy business loan or lease documents provided to the pharmacy owner 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, WY pharmacy business loans and commercial lease documents should be thoroughly read and understood before signing.

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

2. If a WY 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. Pharmacy owners should fully comprehend the laws in the state where they operate because a lack of knowledge will not be an excuse.
                                 
4. When an acceleration clause is applied to a commercial lease, the possibility exists that the landlord cannot collect rent from both the defaulting tenant and a new tenant at the same time. In order to save themselves some cash, pharmacy owners in Wyoming should help the process by assisting the landlord with releasing the property. However, should the 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 prevent the new tenant from being another pharmacy.

5. Lenders prefer not to have to go through with the foreclosure process, so should your pharmacy in Wyoming be headed in that direction, start talking with the lender about coming up with a solution because communication with the lender is a good thing.

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

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

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Pharmacy Industry in Wyoming: 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. These factors are affecting the pharmacy business valuations of pharmacies in WY 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.

Pharmacists Shortage in Wyoming:

Pharmacies across the United States are having difficulties in finding pharmacists.  This shortage of pharmacists in Wyoming not only affects employee opportunities it also affects the number of potential independent buyers. 

Fewer Buyers:

There are also fewer corporate buyers. Some of the largest pharmacy chains in Wyoming have been purchased and consolidated in the pharmacy industry roll up. Many smaller chains have run into financial difficulties and have stopped their expansion. It is more difficult to drive a price higher when there are fewer willing, or capable, to purchase.

Current Market Conditions Requires Industry Roll-up:

The consolidation of the pharmacy industry is required to get more traffic into a single store.  Due to simple economics, 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 Wyoming 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 pharmacy business values not based on realistic market conditions.

With the consolidation of the 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 WY 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 Medication:

Some insurance companies are designating a significant amount of pharmacy patients in WY as “long-term medications.”  They require that they purchase their medications only from mail order pharmacy companies who provide products at lower prices. This has the result of local pharmacies not only missing out on prescription sales, but also suffering a decline in front-end sales since the customer is not entering the store. Pharmacy mail order sales have surpassed sales from independent retail pharmacies at this point.

Use a firm that provides Wyoming pharmacy business valuations based on real market conditions and does not use simple formulas when calculating the value of a pharmacy. Experienced companies use complex methods to derive the value of a pharmacy.

It is best to use a company with a specialty in pharmacy and has current and extensive industry data.  Choose pharmacy specialists who have worked in the pharmacy industry for enough time to have extensive Wyoming pharmacy experience and an excellent reputation.  Companies that have good credentials possess a large amount 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 with Wyoming Pharmacy Business Valuations

By Brad MacLiver
Authorship and profile at Google


If you have purchased a residence, you should be familiar with real estate appraisals. With a WY pharmacy business there are times an appraisal of both the real estate the business itself is needed. The pharmacy business appraisal, which does not include the real estate, is more commonly called a Pharmacy Business Valuation.

Pharmacy Business Valuations in Wyoming are part of the due diligence that will be conducted when there is a possible acquisition of the pharmacy business, or pharmacy financing is needed. Wyoming Pharmacy Business Valuations place a reasonable market value on the drug store various factors have been examined.  These factors include, but aren't limited to: assets, financial statements, tax returns, goodwill, customer lists, licensing, competitive advantages, regulatory concerns, management team, inventories, and industry comparisons.

There are many acceptable methods for valuing a retail drug store business. Each of these methods has its own perspective and the business owner should have a clear understanding of the method they are using.

One of these methods is to use “multipliers”, which involves someone taking the net profit, gross sales, or some other figure from financial statements and then multiplying that number by 3, 5, 8, or however many times is necessary. However, when using simple methods such as multipliers you need 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 Wyoming pharmacy valuation 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 pharmacy industry in Wyoming. 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 pharmacy specialist and used a gross sales multiplier would be way off in their calculation compared to other WY 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 Wyoming pharmacy business owner, or pharmacy buyer was seeking.

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