Pharmacy Acquisitions and Bridge Loans in Arizona

By Brad MacLiver
Authorship and profile at Google


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

Bridge Loans are an options for short-term financing that are used while waiting for either permanent financing or the next stage of financing to be obtained. Bridge loans also provide funding to "bridge" the gap between a company’s current needs and their long term requirements for financing.  Permanent financing is generally used to take out (or pay back) the bridge loan.

One characteristic of bridge loans is that they can close quickly which, in turn, allows a company to capitalize on a timely business opportunity or acquisition. This quick access to money also allows a business the chance to avoid penalties, bankruptcy, or various other temporary problems. If longer term issues must be dealt with, this “transitional financing” provides the company the necessary time until longer term financing can be secured.

Another property of bridge loans is that the whole process usually requires less documentation than conventional financing. Bridge loan lenders don’t typically have the same government regulations to adhere to, which means they tend to have more flexibility in their lending criteria and the documentation they require. Less documentation, however, does not necessarily mean they won’t perform due diligence to have a comfort level with the transaction before they fund.

Examples of using Bridge Loans in AZ Pharmacy Transactions:

1. An independent pharmacy owner learns of health issues and decides to quickly sell the family owned Arizona 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 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 Arizona 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 Arizona 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 in AZ 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 Arizona 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 AZ 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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Pharmacy Acquisition Finance in Arizona

By Brad MacLiver
Authorship and profile at Google


When an AZ pharmacy or drug store is being sold, a buyer will seldom pay “out of pocket” cash for the acquisition. Even in the event that cash is available, Arizona pharmacy acquisition strategies usually involve financing the transaction.

Because acquisitions typically take 6-9 months to complete, the pharmacy seller in Arizona will need the buyer to provide some proof up front about their ability to close the transaction. Acquisitions involve many hours of negotiation and due diligence, which means the process should involve qualified parties.

The acquisition will involve attorneys, accountants, lenders, valuation companies, industry specialists, and others in addition to the buyer and seller. No one wants to pursue 6-9 months of work with this many highly paid professionals without having some confidence of the AZ pharmacy buyer’s ability to close the deal.

The process begins with determining the business' value. Although there are many companies that offer valuation services, pharmacies are a special kind business. There are several aspects to valuing a pharmacy 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 Arizona 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 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 in Arizona 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.

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 Arizona pharmacy industry.

Tips regarding pharmacy acquisitions and finance:

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

When pursuing “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 AZ pharmacy.

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Arizona Pharmacy Industry: 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 AZ. These factors are affecting the Arizona pharmacy business valuations of pharmacies and drug stores all across the U.S.

Local demographics:

The valuation process includes local market conditions and local demographics. Smaller communities have less potential for growth and with declining profits a buyer will need to purchase at a lower value because they will have to service their debt from a business loan and still be able to make a living. This is also true for communities that have lost population due to economic conditions, or communities with a high rate of unemployment. Less people and less customers with the ability to purchase means fewer sales and less chance of any substantial improvement in the near term. The result of this is a lower pharmacy business value.

Arizona Pharmacists Shortage:

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

Fewer Buyers:

There are also fewer corporate buyers. Some of the largest pharmacy chains in Arizona 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 pharmacy values and there is not any expectation of a turn around. Pharmacy owners in Arizona 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 AZ 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 in Arizona 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 pharmacy business valuations based on real market conditions and does not use a simple formula for calculating the value of an Arizona 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 AZ 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 in Pharmacy Business Valuations in Arizona

By Brad MacLiver
Authorship and profile at Google


Anyone that has purchased a residence will be familiar with real estate appraisals. With an AZ pharmacy business, there are times when both the business itself and real estate needs to be appraised. This pharmacy business appraisal will not include the real estate and is more commonly called a Pharmacy Business Valuation.

Arizona Pharmacy Business Valuations are part of the due diligence that will be conducted when there is a possible acquisition of the AZ pharmacy business, or a form of pharmacy financing is needed. Pharmacy Business Valuations place a suitable market value on the drug store after thought and consideration have been given to factors such as (but not limited to): the pharmacy's assets, financial statements, tax returns, goodwill, customer lists, licensing, competitive advantages, regulatory concerns, management team, industry comparisons, and inventories.

There are a variety of methods for valuing a retail drug store business. Each method has its own issues and the business owner should have a decent understanding of the method being used.

One of the simpler methods is to use “multipliers.”  This is when the net profit, gross sales, or some other figure from the financial statements is multiplied by 3, 5, 8 times or whatever the case may necessitate.  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 Arizona 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 Arizona 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 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 pharmacy business owner in AZ, or pharmacy buyer was seeking.

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