Rhode Island Pharmacy Acquisitions and Bridge Loans

By Brad MacLiver
Authorship and profile at Google


With the changes in the Rhode Island (RI) pharmacy industry independent drug store owners, small and regional Rhode Island pharmacy chains, 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. They are used while waiting for permanent financing or the next stage of financing to be obtained. These loans provide a business owner with funding to "bridge" the gap between a company’s current needs and their long term financing requirements.  Generally, permanent financing is used to "take out," or pay back the bridge loan taken out.

One characteristic of a bridge loan is that they are able to close quickly.  This in turn allows a company to capitalize on a timely business opportunity or acquisition. The quick access to money can enable a business the chance to avoid some penalties, temporary problems, or even bankruptcy. If there are some longer term issues that need to be dealt with, this form of transitional financing provides the company time until longer term financing can be secured.

Another characteristic of bridge loans is that the process will typically require less documentation than more 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 RI:
1. An independent Rhode Island 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 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 in Rhode Island 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 Rhode Island pharmacy owner in a leased location has an opportunity to quickly acquire a commercial property that would be a great RI 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 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 Rhode Island 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 RI, 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 Rhode Island 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.

Keep in mind that the types of deals that require a bridge loan may be considered either speculative in nature or to have higher risk factors. Banks will often not offer bridge loans due to this. Banks must adhere to government regulations and are required to justify their lending practices, so riskier bridge loans do not typically fall within the lending parameters of many banks. All this means that a majority of the bridge loans will come from private investment firms.  It is best to consult with a company that has access to many funding sources who can provide bridge loans.

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Pharmacy Acquisition Finance in Rhode Island

By Brad MacLiver
Authorship and profile at Google


When a Rhode Island (RI) 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 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.

More parties will be involved during the acquisition process in addition to the buyer and seller, including attorneys, accountants, lenders, valuation companies, industry specialists, and others. Nobody wants to engage in 6-9 months worth of work involving so many highly paid professionals without having some confidence of the Rhode Island pharmacy buyer’s ability to close the deal.

The process will first begin with determining the business' value. There several companies that provide valuation services. However, pharmacies in Rhode Island are not ice cream stores. There are many industry-specific aspects of valuing a pharmacy so generic valuations or simple accounting formulas should not be used. Instead of a valuation company, which has a broader spectrum, industry specialist should be used for valuing the pharmacies.

The selling company must to provide up-to-date data to perform the valuation because lenders will not accept old data or a sellers “gut feeling.”  They need to make their decisions 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 in RI 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.

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.

Tips regarding Rhode Island 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 Rhode Island 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 pharmacy seller in Rhode Island will need to continually prove the financial condition of the company.

When pursuing Rhode Island “pharmacy acquisition finance,” for the best chance of success, make sure to work with a company that has expertise in that industry and is a direct correspondent with lenders who understand pharmacy.

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Current Pharmacy Industry Market Conditions in Rhode Island

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 and independent drug stores in the state of Rhode Island (RI). These factors are affecting the amount a pharmacy owner can receive when seeking a business loan due to these factors driving down the business value of pharmacies all across the U.S.

Local demographics:

The valuation process will include 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 Rhode Island:

Pharmacies in Rhode Island 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. Some of the largest pharmacy chains 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 Rhode Island pharmacy business values drop. There are many factors which contribute toward 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 who claim grand outcomes while overstating pharmacy business values, which are not based on realistic market conditions.

With the pharmacy industry consolidation that has been happening for several years, several new brokers are entering the market to broker pharmacy acquisitions. Most brokers don't have any pharmacy-related experience and they do not rely on current market conditions when they value a pharmacy. Most of them use simple accounting formulas that have no sound basis for the value when faced with current pharmacy market conditions. Due to this many brokers are valuing Rhode Island 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 Requirements:

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 RI 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.