Financing the Acquisition of a Pharmacy
The issues that surround the financing of the acquisition of a pharmacy, while often very complex, can be distilled down to two core premises:
- Sellers want to be sure that they will receive all the proceeds of any sale that is made, and
- Buyers, particularly first time buyers, rarely if ever have the money required to pay for their proposed acquisition in cash.
There are three more or less "traditional" sources of this financing, including:
- Banks and other financial/lending institutions, often with Small Business Administration (SBA) guarantees,
- Suppliers, most often wholesalers, and
- The seller of the business.
There are a variety of combinations of these three methods which can make up the financing package for the acquisition of a pharmacy. Regardless of which method(s) are employed, there are certain constants in the equation. These include:
- A "reasonable" equity contribution by the buyer. Depending upon the method of financing, required buyer equity can range from ten to twenty five percent of the total deal. If there is real estate involved in the transaction, whereby the buyer is also purchasing the building from the seller, this may lower the equity contribution required and have a positive effect on the terms of payment, possibly lengthening the amortization period of the loan, particularly if SBA-guaranteed bank financing is involved.
- A professional evaluation of the business, to support the value and price being paid. Complete financial documentation from both the buyer and the seller. If SBA guarantees are involved or required, there are certain additional paperwork requirements that lenders will require.
- The possible posting of additional collateral other than the assets of the business, often in the form of a lien on the buyer's home, assuming he or she owns one, particularly with SBA-guaranteed transactions or those where the equity contribution is lower than average.
- The personal guarantee(s) of the purchaser(s).
There are many ramifications to the various methods of financing a transaction, all of which should/must be explored by both buyers and sellers prior to negotiating and closing the deal. It is important to seek the advice of qualified professionals who are familiar with these types of transactions: attorneys, accountants, financial counselors and others who can explore the various financing methods and help guide both buyers and sellers in the proper direction. Our long experience in this arena enables us to assist buyers and sellers, to help insure that a transaction is completed successfully.
Click the button below to read a helpful article by Angelo Medici, entitled "New Rules: What Recent SBA Changes Mean For Prospective Pharmacy Buyers".