Financing Pharmacy Franchises in Idaho

By Brad MacLiver
Authorship and profile at Google


An Idaho (ID) pharmacy franchise is a contractual relationship between two parties. The first party, Pharmacy Franchisor, is the party that developed their drug store business model, branded the pharmacy related products, and produced the system the pharmacy franchisees will operate under. The second party, the Pharmacy Franchisee, purchases a franchise license from the Pharmacy Franchisor, and usually pays an ongoing pharmacy franchise fee, or royalty fees, to use the name, products, systems, trade secrets, etc., created by the Pharmacy Franchisor.

When financing a pharmacy franchise business in Idaho, there are a number of options available. All Idaho pharmacy franchise funding sources, for drug stores, prefer lending to a pharmacy franchisee who will be working with a nationally recognized name and long track records. Newer pharmacy franchise models won’t possess these two traits and will be considered more risky.

Traditional Bank Financing used in funding a pharmacy franchise is available when a pharmacy franchise has the track record and pharmacy name recognition. Many of the banks will show interest in this type of funding opportunity. Unfortunately once the bank reviews the loan documents, many of these banks decline the funding request because they don’t understand the security provided for the pharmacy loan in Idaho. Community drug stores typically have very little traditional assets to offer as security. Lenders for pharmacy will use traditional methods for analyzing the cash flow available to service to the debt, and they will also need to understand the nontraditional collateral that will secure the loan.

As a borrower, even when incorporated, the independent drug store owner’s personal credit rating will be a factor, along with personal tax returns, and financial statements. The amount of actual cash on hand and the verification of the source of the down payment will be critical factor in qualifying for a pharmacy business loan.

IDAHO Pharmacy Franchise Funding Tips:

1. Because there are many pharmacy franchise financing options available, pharmacy owners should perform proper due diligence then obtain the pharmacy funding that best suits their situation.

2. It is recommended to have either an accountant or attorney familiar with Idaho pharmacy franchise financing to review the pharmacy business loan documents.

3. Pharmacy consulting services and franchise associations are available who can help guide a prospective pharmacy franchisee or borrower with a drug store loan.

4. New pharmacy owners should ensure that their funding request is enough to get the pharmacy in Idaho profitable and running. Less than necessary funding for the initial stages potentially puts the drug store in a position of requiring additional funding. Smaller working capital loans that would be in a subordinated position will prove more difficult to obtain at a later date.

When ID pharmacy owners have questions or need information regarding pharmacy franchise business loans, pharmacy valuations, or any other type of funding for community drug stores and pharmacies, it is recommended they contact a pharmacy industry specialist who can provide sound advice and quality answers.

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Available Idaho Pharmacy Financing Types

By Brad MacLiver
Authorship and profile at Google


There are a number of different options available for funding Idaho pharmacy franchises, specialty pharmacies, and traditional community drug stores.

SBA Financing for Pharmacy Business Loans in Idaho

The U.S. Small Business Administration (SBA) partially guarantees loans for pharmacy franchise lenders reducing the risk exposure for the lender. A loan program called 7(a) is a standard for funding pharmacy franchises. These loans can provide funds for pharmacy franchise entry fees, real estate where the pharmacy will be located, property improvements, working capital, and pharmacy related equipment.

Borrowers for the Idaho pharmacy franchise must be creditworthy, without any bankruptcies, have ample down payment, but there are variations here, and the business must be able to repay the loan from the cash flow of the pharmacy.

Terms can range from 5 to 20 years. Within SBA standards interest rates may be adjustable or fixed and will be negotiated by the lender dependent on the financial strength of the pharmacy transaction.

There are SBA fees for guaranteeing pharmacy business loans. These fees, which are paid to the government and not kept by the bank, can be rolled into the pharmacy financing.

Patriot Express Business Loan Program

This is another SBA loan program that can be used for ID pharmacy franchise business loans and is reserved for military veterans, active service members, their spouses, and survivors. The Department of Veterans Affairs would be involved in the pharmacy loan process.

Pharmacy funding from the Patriot Express program can furnish relatively fast approval times, may accept a smaller down payment from the borrower than traditional business loans, and lower credit scores may also be accepted. Patriot Express business loans provide opportunities for lower interest rate pharmacy business loans.

Funding for Idaho Pharmacists Who Are Veterans

There are specific franchise loan programs available for honorably discharged veterans and these Vet programs can be considered for pharmacy franchise loans.

Pharmacy Financing From the Franchisor

Financing a pharmacy franchisee is a usual topic in discussions with a pharmacy franchisor. Franchisors should be able to direct potential drug store franchisees toward funding programs that have previously been successful for their other pharmacy franchisees. Preferred lenders will already be familiar with the pharmacy franchisor and their systems.

Pharmacy franchisors may also provide some funding internally. Lower collateral will be offset by higher interest rates. This may help with qualifying for a pharmacy acquisition of a franchise, but may hurt the franchisee’s long term cash flow. Due diligence of pharmacy franchisor funding should be completed before any final decisions are made.

Personal Assets Used in Pharmacy Finance

Not all prospective pharmacy franchise owners in Idaho have enough cash on hand. Part of the drug store business financing may require the borrower to liquidate personal stocks, provide personal assets as collateral, refinance their home, or use their 401k to assist the lenders security for making the pharmacy business loan.

If the borrower still does not have enough personal assets then a family member or a friend may be required as a partner in the pharmacy. Since the pharmacy partner’s cash and assets will also be at risk of loss, these partners may require some controlling interest in the drug store.

Retirement Accounts Used in Idaho Pharmacy Finance

Retirement Plans can be self-directed and used to invest into a pharmacy franchise. The retirement plan can purchase stock in the pharmacy franchise. This is similar to how the retirement plan currently may be investing in publicly traded stocks and mutual funds. Lower debt service and higher profit potential may result when incorporating this option that uses less external financing in funding the franchise.

The downside is, if the pharmacy crashes, so does the retirement fund. The method of providing less expensive financing for the pharmacy needs to be weighed against the risk of failure.

Because of the factors involved such as deferred taxes, early or improper distributions, and IRS involvement, funding a pharmacy transaction with a retirement account should be handled by a company who has expertise in this arena. Pharmacists and investors interested in using this financing structure should research the Employee Retirement Income Security Act of 1974 (ERISA).

Idaho Pharmacy Franchise Agreement Buyout Funding

You must understand that the pharmacy situation is changing. Economic factors are an issue, mail order pharmacies are growing, and the market shares are shifting. All of these factors can have a negative impact on the cash flow of pharmacy franchises. Drug store owners paying franchise royalty payments may not survive the tightening profit ratios. Because of to this, these ID pharmacy franchises might only have the options of choosing bankruptcy or buying out the franchise agreement when allowable.

Buying out the franchisor will allow the Idaho pharmacy to remove the franchisor from the equation. This in turn will allow the ID pharmacy owner additional flexibility in their business decisions. The pharmacy franchisor then sells the drug store franchise with the expectation of earning income from the cash flow of their pharmacy franchisees. Because of their long term plan, Franchisors may be unwilling to allow the pharmacy franchisee to remove themselves from the franchisor. However, if it is possible to negotiate a Franchise Agreement Buyout agreement, the buy-out transaction is also financeable.

It is unfortunate that many banks don’t understand the dynamics of the pharmacy industry in Idaho. This lack of industry knowledge results in the banks viewing funding requests and seeing nothing but a business that has very little collateral compared to amount of financing the pharmacy requests. In order to assist the successful funding process, pharmacy owners are advised to use a pharmacy industry specialist to capitalize on any funding opportunities that are available.

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Pharmacy Cash Flow Instruments and Financial Discount Rates in Idaho

By Brad MacLiver
Authorship and profile at Google


When an Idaho (ID) pharmacy is considering selling a cash flow instrument such as the pharmacy’s receivables, or a pharmacy business note, the price the Idaho pharmacy owner receives will reflect how much time is involved before the Buyer/Investor/Funder of the cash flow instrument will recoup his principal investment and the desired rate of return the Investor needs to make it desirable to take the risk of buying the pharmacies cash flow instrument.
                     
To entice an Investor to shift the risk of holding the cash flow instrument from the pharmacy owner in Idaho to the Investor, there is typically a financial incentive for the Investor. The incentive is the rate of return, which is required to compensate for the Investors perceived risk. The risk is based on the credit of the cash flow instrument’s Payor, previous payment history, seasoning, interest rate, and other variables. Discount rates may change depending on the circumstances of the cash flow instrument, the economy, etc.

If the pharmacy owner in ID or an investor could take the cash flow instrument to the bank and cash it in at face value, the asset would hold more value. However, since this can’t happen the risk of holding the cash flow instrument makes it worth less than face value.

Time Value of Money:
The concept of cash being more valuable to have a dollar today instead of tomorrow is based on the Time Value of Money (TVM). Most business people are aware of the TVM and how it is fundamental to both personal and corporate decision making, but to make sure we are on the same page, we will cover the basics of TVM.

TVM assumes that money earns interest over time. Therefore, as the cliché says time is money, and because of this we can compare money at different points in time that have different values and call them equal.

An example: If $5.00 today earns 10% interest, it will be worth $5.50 at the same time next year. Therefore, $5.00 today = $5.50 next year = $12.97 ten years from now.

The same reasoning is true in reverse. Investors won't pay $5.00 today for a dollar that will not be collected until next year or 10 years from now. This means that today’s dollar is discounted to reflect the risk, inflation, strength of the economy, etc.

Along with interest rates and principal amounts, a cash flow instruments such as Idaho Pharmacy Business Notes, are originated with a certain time period. The TVM can be looked at, as if it were on a sliding scale. The earlier in time the Note is paid off, the smaller the amount becomes. When the Note is paid early, you don’t get to collect the compounded interest amount, which would have accumulated if you had waited the full time period. The Note has already been written and the terms set. Unlike a loan where the rate of return needed to cover the risk is added to the loan amount. An investor cannot go back to the buyer of your business and change the terms of the note. Therefore, the investor looks at the portion of the note, which is going to be purchased and subtracts the rate of return needed to justify the risk. This is called Discounting. The amount of the discount is contingent on the risk.

Example:
If you sell something for a $5.00 with 8% interest, equal payments received over a 20 year period, you would expect to receive $23.30. However, should the note be paid in full in 10 years you will only have collected $10.79. You are not collecting the other $12.51 because you are no longer risking anything (you are not earning it). If you want an investor to advance you the $23.30, you will no longer have any risk because you have transferred it to the Investor. To compensate the Investor for accepting the risk of holding the note, the Investor will discount the note, and pay you an amount equivalent to the time and risk involved.

The price you receive when selling your note will be the discounted rate according to the basic TVM principals minus the amount that allows an investor to justify the risk.                               

If a note is a length of 3, or more years, it may be beneficial for you to sell only a portion of the note. Because the payments from a month in the 5th year will hold less value than payments collected this year, it is beneficial to you to only sell the number of months that you need to obtain the cash that meets your current financial needs. You can always sell more payments at a later date if you need additional funds. Determine what cash you really need and we will calculate the number of months we will purchase to meet your needs.

Although it involves a much shorter period of time, understanding discount rates is the same when selling an Idaho pharmacy’s accounts receivables.


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