In Rhode Island, Is it Worth Selling Pharmacy Notes at a Discount?

By Brad MacLiver
Authorship and profile at Google


When a RI pharmacy acquisition has been accomplished by using the private financing method of a pharmacy business note, the holder of the pharmacy note has the option of selling the pharmacy business note for a lump sum of cash instead of waiting for the monthly payments and taking the risk those payments will always be made. Pharmacy business notes can be sold by using a discounting method. Instead of buying a pharmacy note at its face value, the Rhode Island pharmacy note will be discounted. Meaning the Investor will pay less than face value due to the risk being transferred from the Pharmacy Note Holder (the note seller) to the Pharmacy Note Investor (the note buyer).

Most Rhode Island pharmacy business note sellers only look at the discount rate and quickly calculate in their head that they are giving up too much money to make the selling of the pharmacy note an attractive proposition. However, further analysis needs to be completed before a final decision is made by weighing the discounted amount with the benefits of a lump sum of cash.

1. What is the motivation for selling the RI pharmacy note? What are the desired goals? Is reducing the exposure to risk a consideration? Is there a financial decision to pay off debt? Is capital required for a new venture? Are there dreams of exotic vacations or world travel that could be accomplished with a lump sum of cash? How important is it to accomplish these goals? What are the opportunity costs if you don’t have the lump sum of cash to achieve your goals, or invest in something that pays a higher return? Determine investment and family priorities.

2. What is the Current Fair Market Value of the pharmacy business? This is what someone is really willing to pay for the business, and not just an “earnings times x” formula. Real aspects of what is happening in the pharmacy industry must be considered and it is advantageous to have a pharmacy industry specialist in Rhode Island calculate the pharmacy business valuation.

3. How much cash is immediately required by the holder of the pharmacy note?

4. A pharmacy note in Rhode Island that is seasoned has more value than a “green” note that doesn’t have a payment history. Are you willing to hold the note for a certain amount of time to allow the business buyer time to prove to an Note Investor the capability of the payor making the payments?

5. Are you willing to sell only a portion of the Note (this is called a “Partial Sell”)? The discount rate can be a more attractive proposition when only a portion of the note is sold and the Pharmacy Note Investor is not holding all the risk.

Understanding the Risk for the Note Buyer:

1. Pharmacy Buyer Competency - There is the risk that the pharmacy buyer in Rhode Island may not run the business as efficiently as you have. The pharmacy business buyer may be unable to meet payment obligations, or sales could drop. Incompetency potentially leads to late payments, missed payments, or bankruptcy.

2. Changes in the Pharmacy Industry - Changes that are caused by influences either within the industry or by regulations governing the industry may make it increasingly difficult for the Rhode Island pharmacy business buyer to meet the contractual financial obligations.

3. Future Competition - Sales or income of the store might be affected by unforeseen RI pharmacy competition either building in the neighborhood or through mail order.

4. Loan to Value - When a pharmacy business note is originated, you may be creating a financing situation with a “negative loan to value.” Example: the pharmacy business note in RI is for $650,000, but there is only $250,000 of tangible assets for collateral.

5. Title Insurance – Rhode Island pharmacy business notes don’t have title insurance that will make good a loss arising through defects of titles, or liens.     

6. Time Value of Money - When a dollar received today has more value than a dollar received in the future.

7. Opportunity Costs - When the selection of holding the RI pharmacy business note ties up capital and prevents potential financial gains from other investments.

It is a good idea to discuss all available options and potential origination of a pharmacy note with Pharmacy Business Note Investor before the Purchase and Sale Agreement is finalized for the acquisition of the pharmacy. This provides the Rhode Island pharmacy business seller, and future note seller, valuable insight into structuring the pharmacy business note so it can be successfully purchased.

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Using Business Notes for Financing a Rhode Island Pharmacy Acquisition

By Brad MacLiver
Authorship and profile at Google


When acquiring or selling a Rhode Island (RI) pharmacy or drug store, one alternative is to have the seller originate the financing and carry back a business note.

 

At first glance many pharmacy owners will not want to take this approach. They want their cash and their exit. When a pharmacy owner in Rhode Island is considering selling their drug store, looking at the benefits of originating a business note and not just the perceived costs, they may find that offering "Private Finance" in the form of a Pharmacy "Business Note" will provide them an alternative course of action.

             Advantages of Creating and Selling a Rhode Island    

                                   Pharmacy Business Note
1.  The process of selling a pharmacy or drug store to an individual can be easier and less time consuming when the Rhode Island pharmacy seller agrees to carry a business note, than a buyer pursuing traditional financing.

2. By offering Seller Carryback Financing, often referred to as Private Finance, a pharmacy business owner in RI can greatly increase the number of potential buyers for their business, and most likely sell the business at a higher price.

3. When a pharmacy business note is created there are the options of keeping it for monthly income, selling the entire Rhode Island pharmacy note for a large lump sum, or selling part of the pharmacy business note to meet current financial needs and keeping the remainder for future income.

4. Selling either a portion, or the entire pharmacy business note in Rhode Island, frees up capital that can be used for new ventures, or paying off old debt.

5. When a RI pharmacy business note is created and sold, with the proper professional guidance, a transaction can be structured that allows the pharmacy business seller the biggest advantage in achieving the seller’s goals.

When originating a Rhode Island pharmacy business, note the interest rate and terms are set and agreed upon between both the seller and buyer of the business. The business seller accepts the promissory note, which is secured by the business and includes any inventory and equipment that belongs to the business. The seller of the pharmacy business then sells the note to an Investor who is willing to hold onto the pharmacy note in exchange for compensation. Because an Investor is unable to go back to the pharmacy business buyer and retroactively change the terms of his purchase agreement, the note seller must discount the note. The Investor is compensated from the difference of what the note was originated for and the discounted price paid for the Rhode Island pharmacy business note.

Business Note Tips:

1. Poorly structured business notes may prevent their sale, so seek professional advice before originating a financial instrument that can’t be sold.

2. Sellers of business notes need to fully understand the Investors risk in order to successful sell the business note.

3. Private Finance, in the form of a Business Note, is an alternative that should be looked at as a business financing option.

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Rhode Island Pharmacy Acquisition Finance

By Brad MacLiver
Authorship and profile at Google


When a RI pharmacy is being sold, seldom does the pharmacy buyer pay cash for the acquisition. Even when cash is available, pharmacy buyer strategies in Rhode Island 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. Along with the buyer and seller the acquisition will involve attorneys, accountants, lenders, valuation companies, pharmacy industry specialists, Rhode Island pharmacy brokers, 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 pharmacy buyer’s ability to close the deal.

The process will begin with determining the value of the drug store. There are many companies that offer valuation services. However, due to the changing circumstances of the pharmacy industry a pharmacy industry specialist should be used for valuing the company 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 funding RI pharmacy transactions will not accept a sellers “gut feeling” or a value based on a simple accounting formula. Lenders need to make a decision to finance a pharmacy based on sound and verifiable information.

There are a number of methods to finance a Rhode Island pharmacy acquisition. Each can be customized or included with other forms of financing to provide the buyer with the best financing package and the greatest chance for the businesses financial success.

Structuring the transaction is extremely important. The drug store seller of course wants as much money as possible and wants cash. However, the pharmacy buyer in Rhode Island desires to spread out the debt service, wants to have as little cash as possible invested in the acquisition.

The pharmacy industry is in a market where it is more difficult to obtain funding. For the acquisition to be financed a lender will need a strong understanding of the RI pharmacy industry and what, beyond the collateralized assets, the company offers to reduce the perceived risk.

One easily understandable example of this is the Pharmacy Industry. Rhode Island pharmacies have typically been known for generating profits and to be stable businesses, but they are usually located in leased spaces.  Their furniture, their fixtures, and their computers will typically provide only $15-20,000 of collateral for a buyer requesting a million dollar loan. Quite a bit of money is tied up in inventory, but the pharmacy's small pills are usually considered as easy to move by a lender out the door in the event of default. These circumstances mean that many lenders will not loan money to these traditional money making businesses.

When pursuing Pharmacy Acquisition Finance, for the best chance of success, make sure the Rhode Island pharmacy valuation company and the lender have expertise in the pharmacy industry.

Tips:

1. Attorneys and CPAs who have been representing the pharmacy or drug store 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 pharmacy transaction in RI and are not slowing or undermining the process.

2. Since Rhode Island pharmacy acquisitions involve 6-9 months and sometimes a couple years, 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 of the pharmacy’s 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 Rhode Island pharmacy seller will need to continually prove the financial condition of the company.


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