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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EBITDA and Rhode Island Pharmacy Acquisitions

By Brad MacLiver
Authorship and profile at Google


EBITDA means: earnings before interest, taxes, depreciation and amortization. This is often used to measure the value of some businesses including both pharmacy chains and independently owned drug stores. It can also be used in the comparison of similar companies.
      
Generally, EBITDA makes it easier to evaluate various companies and to compare them against industry averages by removing the non-core and irregular operating costs, such as interest, which can vary depending on the management’s choice of financing, taxes which can fluctuate depending on acquisitions or losses from prior years, and arbitrary factors of depreciation and amortization.

The EBITDA formula can be used as a guideline when valuing larger companies, or when comparing the profitability of large similar companies in the same industry.

For the effective use of EBITDA, these larger companies should possess significant assets, have heavy amortization schedules, or bear substantial amounts of debt. Considering independent pharmacies in Rhode Island don’t meet that criteria, this formula is not a useful measure as the sole means for valuing pharmacies for acquisition purposes.

To Calculate EBITDA:
#1. Calculate net income by obtaining total income and subtract total expenses.
#2. Determine the total amount of taxes paid to federal, state, and local governments.
#3. Compute interest fees paid to companies or individuals for the use of credit, or capital.
#4. Establish the cost of depreciation (the expense recorded to allocate a tangible asset's cost over its useful life).
#5. Determine the cost of amortization (the expense for consumption of the value of intangible assets, such as goodwill, patents, and copyrights, over a specific period of time, or the asset's expected life.
#6. Add #1 through #5.

EBITDA calculation example:
#1. Net Income             900
#2. + Taxes paid           280
#3. + Interest Expenses    190
#4. + Depreciation         105
#5. + Amortization          45
#6. = EBITDA             1,520

Hindurances when using EBITDA:
#1. Can be misleading number when it is confused with cash flow.
#2. Can make even completely unprofitable firms appear to be financially healthy.
#3. Numbers are easy to manipulate.
#4. Can overlook cash requirements for growth in accounts receivable.
#5. Can miss cash requirements for growth in inventories.
#6. Not factual when valuing small companies.
#7. Not effective for companies with few assets, small amounts of debt, or low depreciation or amortization schedules.

EBITDA was being used as a proxy for cash flow during the 1980's in leveraged buyouts to calculate whether companies could service their debt. By factoring out variables like interest, taxes, depreciation, and amortization, unprofitable business can appear financially healthy. This method of valuation was used frequently during the dotcom era in order to value unprofitable businesses with little assets and few earnings.  The results from that method caused many to go bust -- a blaring example of misapplying EBITDA.

Knowledgeable pharmacy specialists in RI performing pharmacy business valuations will use EBITDA in RI pharmacy valuations, but only as part of a larger formula when computing values for specialty pharmacies especially those who have a niche in HIV, disease management, long term care, etc. However, EBITDA is usually not needed in the valuation formula method for standard retail pharmacy valuations.

The EBITDA number for a specific existing pharmacy is important, for the most part, when the existing ownership is establishing their store value for the purpose of a line of credit, borrowing, creating a Trust, stock values, etc., but EBITDA does not have the same importance when selling a Rhode Island pharmacy. This is due to the fact the buyer will not have the same expenses as the seller.

Buyers may not have the same tax base, interest expense, or the same depreciation schedule, thus it is important that the buyer calculate an estimated EBITDA that is specific to their operating model, business systems, buying power, cost of operations, etc., not the sellers. It should also be noted that EBITDA assumes that the buyer will acquire all of the assets, working capital, accounts receivable, and liabilities. Those assumptions do not hold true regarding an acquisition of a Rhode Island pharmacy. Instead of the EBITDA number, pharmacy buyers should be focusing on sales, gross profit, cash flow, and customer mix.

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The Rhode Island Pharmacy Industry Roll-Up

By Brad MacLiver
Authorship and profile at Google


RI Industry Roll-Ups are where an industry’s many players are consolidated into smaller groups for economic benefits. Recessions, new government regulations, or other aspects of the industry that may be stifling profits end up providing incentives to consolidate
              
A principal reason for an industry roll-up is to achieve economies of scale in purchasing, marketing, information systems, logistics, distribution, and top management. Consolidated businesses also have less risk from the impact of an unsatisfied customer and have the reward of being able to recruit, or keep, key employees.

An example of an industry roll-up can be seen with the Rhode Island pharmacy industry. It is a well established industry and is still experiencing sales growth. However, pharmacies and drug stores have seen a steady decline in their profit margins due mainly to government regulations, even as sales increase. There has also been a shortage of pharmacists in RI - a required key employee.

Industry roll-ups are often initiated by investors seeking investment opportunities. However, in the case of Rhode Island pharmacies, the roll-up is a necessity due to declining net profits ratios. Companies that are acquired in a roll-up are usually small independently-owned businesses whose owners believe in the economic benefits of combining forces with a larger organization, or simply need an exit strategy. In the pharmacy industry roll-up, independents have been a majority of the acquisitions, but there has also been a consolidation of a number of the larger pharmacy chains in Rhode Island.

During the RI pharmacy industry roll-up, pharmacies that have better financial wherewithal are acquiring their local competition and combining two or more stores into a single location. The result of this is increased customer traffic through a single location and reduces the expenses that come with multiple locations. This can drive up total sales dramatically while, in turn, driving down the administrative and overhead costs per customer.

To help fund Rhode Island pharmacy acquisitions during the roll-up, specific funding programs have seen development. These pharmacy chain funding programs are backed by major financial institutions that provide the funding for pharmacy acquisitions. These pharmacy funding programs allow an individual pharmacy business, or an investment group, the capital to acquire and combine Rhode Island pharmacies in geographic areas.

Funders are willing to provide the capital for the RI pharmacy roll-up because they recognize that combining the individual pharmacy businesses provides a greater total business value than if each individual pharmacy value were added together. This synergistic value reduces the risk of funding the individual acquisition.

When considering the buying, selling, or financing a pharmacy, whether an independent drug store, or multiple pharmacy locations,  due diligence and understanding of all aspects of the transaction should be considered. Using the services of a pharmacy industry expert to guide a pharmacy owner through the maze of details will benefit the pharmacy owner in Rhode Island in making the best business decision.

All transactions involved in the pharmacy roll-up need to have the business valued at the current market value. Business valuations for the pharmacy industry should be calculated by a company that has in-depth knowledge of the Rhode Island pharmacy. Simple accounting formulas used by many to estimate a value do not provide an accurate picture because the simple formulas do not take into account the aspects that are causing the pharmacy industry roll-up.

The aspects of the market which are stimulating the roll-up are also having downward pressure on the pharmacy business valuations. Pharmacy owners have been watching what has been occurring in the pharmacy industry in Rhode Island. While profit margins slip, new regulations are being imposed, and as reimbursements are pared down there is wide expectation that the business values in the pharmacy industry will continue to slide to lower levels, and thus the RI pharmacy industry roll-up will continue.

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Acceleration Clauses in Commercial Leases and Rhode Island Pharmacy Business Loans

By Brad MacLiver
Authorship and profile at Google


A provision of many RI 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 see the acceleration clause as a vital tool in their business loan and commercial lease programs. Lease and loan documents may not specifically address the foreclosure of a property or the repossession of an asset and this is where the acceleration clause takes effect. Without this clause, the lender would only be capable of foreclosing on one missed payment at a time. With the acceleration clause in place, despite whatever event kicks it into gear, the lender can demand immediate, full payment of all remaining fees and balances.

The pharmacy business loan or lease documents provided to the Rhode Island 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, pharmacy business loans in Rhode Island and commercial lease documents should be thoroughly read and understood before signing.

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

2. If a RI 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 understand the laws in the state where they operate. Lack of knowledge is not an excuse.
                                 
4. When an acceleration clause is exercised on a commercial lease, there is the possibility the landlord cannot collect rent from both the defaulting tenant and a new tenant at the same time. To save themselves some money, pharmacy owners in Rhode Island should help the process by assisting the landlord re-lease the property. However, please note, 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 require restrictions in the Purchase and Sale Agreement  that the new tenant cannot be another RI pharmacy.

5. Lenders prefer not to have to go through the foreclosure process, so if your pharmacy is headed in that direction start talking with the lender about finding a solution. Communication with the lender is a good thing.

6. Some 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 Rhode Island pharmacy for acquisition, or expansion, due diligence and understanding of all aspects of the transaction should be considered. Using the services of a pharmacy industry expert to guide a RI pharmacy owner through the maze of details will benefit the pharmacy owner in making the best business decision.

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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.