Many pharmacy owners, sellers and sales managers attempt to start the ownership-transfer process with financing. This is a guaranteed recipe for disappointment. As has been pointed out repeatedly, there are myriad decisions that must be considered and made before considering financing. Financing should only be approached once the succession planning has been completed.
There are many different types of financing available today. Most people think first of traditional lenders such as banks and organizations such as the Small Business Administration (SBA) when they think of financing. Others think of suppliers and wholesalers providing dating of product as a form of financing. In addition to these, financing can come from a current owner “taking back a note.” Loans from parents and relatives also are common forms of financing.
Rarely is just one type of financing used in the sale/purchase of a pharmacy. For this reason, it is important to understand the breadth of financing options available.
Traditional types of financing for sellers
Traditionally, financing is classified as short term or long term:
Short-term financing is defined as financing with a term of less than one year in duration. Typically short-term financing takes the form of dating (extended payment terms) and short-term notes.
Short-term financing may be needed for the following reasons:
- Opening orders
- Expansion of inventory within an existing store
These types of financing may require a credit review, depending on the customer’s total credit exposure. In most cases, short-term financing requires security and a personal guaranty.
Long-term financing is defined as financing that will be in effect for more than a year. It is typically only appropriate for sellers looking to rapidly grow/expand their pharmacies prior to selling.
Long-term financing for independent pharmacists usually takes the form of a promissory note with equal amortization of the principal amount.
Accessing the sources of financing for your sale
There are many sources of financing for pharmacies. Some are institutions such as the Small Business Administration and banks, while others are individuals such as family or existing owners.
Traditional lenders — banks and financial institutions — underwrite each loan to assess the creditworthiness of the borrower. These institutions require specific data and information about the pharmacy in order to perform an analysis of the potential loan to ensure that they are lending to a borrower who will be able to repay the loan.
Regardless of the source chosen to finance an independent pharmacy during ownership transfer, the same rigorous data gathering and analysis is typically conducted. While the financing source may have some of the financial and credit data in-house based on a past relationship with the owner, current information is almost always required.