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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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In Idaho, Is it Worth Selling a Pharmacy Note at a Discount?

By Brad MacLiver
Authorship and profile at Google


When a ID 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. Idaho pharmacy business notes can be sold by using a discounting method. Instead of buying a pharmacy note at its face value, the 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 Idaho 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 pharmacy note in Idaho? 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 your investment and family priorities wisely.

2. Do you know the Current Fair Market Value of the pharmacy business? This is what someone is actually willing to pay for the business.  This is not just an “earnings times x” formula because real aspects of what is happening in the pharmacy industry must be considered.  It is advantageous to have a pharmacy industry specialist calculate the Idaho pharmacy business valuation.

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

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

5. Are you willing to perform a "partial sell" by selling only a portion of the Note? The discount rate can be a more attractive proposition when only a portion of the note is sold and the Pharmacy Note Investor in Idaho is not holding all the risk.

Understanding the Risk for the Note Buyer:
1. ID Pharmacy Buyer Competency - There is the risk that the pharmacy buyer may not run the business as efficiently as you have, sales drop, and the pharmacy business buyer cannot meet the payment obligations. Incompetency could lead to late payments, missed payments, or bankruptcy.

2. ID Pharmacy Industry Changes - Changes caused by influences either within the industry, or regulations governing the industry, can make it increasingly difficult for the pharmacy business buyer to meet the contractual financial obligations.

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

4. Loan to Value - When originating a pharmacy business note in Idaho, you may be creating financing where there is a “negative loan to value.” Example: the pharmacy business note is for $300,000, but there is only $100,000 of tangible assets for collateral.

5. Title Insurance – ID 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 - Where a dollar received today is more valuable than a dollar received in the future.

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

It is beneficial to discuss the 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 ID 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 Pharmacy Acquisitions in Idaho

By Brad MacLiver
Authorship and profile at Google


When acquiring or selling an Idaho 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 an Idaho pharmacy owner 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 an ID 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 Idaho 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, an Idaho pharmacy business owner 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 ID 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 ID, frees up capital that can be used for new ventures, or paying off old debt.

5. When an Idaho 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 pharmacy business note the terms and interest rate are set and agreed upon between the seller and buyer of the business. A pharmacy valuation performed by a valuation company that has expertise in pharmacy valuations will assist negotiating the purchase price. The seller of the business accepts the promissory note, which is secured by the business including any inventory and equipment that belongs to the business. The Idaho pharmacy business seller then sells the note to an Investor who is willing to hold the pharmacy note in exchange for compensation. Since Investor can’t go back to the ID pharmacy business buyer and change the terms of his purchase agreement, the seller of the note 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 pharmacy business note.

Additional Tips for Business Notes:
1. Business notes that have been poorly structured. may prevent their sale. Seek professional guidance before originating a financial instrument that can’t be sold.

2. The sellers of business notes must fully understand the risks of Investors in order to successful sell the business note.

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

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Acceleration Clauses in Idaho Pharmacy Business Loans and Commercial Leases

By Brad MacLiver
Authorship and profile at Google


A provision of many ID 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 view the acceleration clause as an important tool in their business loan and commercial lease programs. Loan and lease documents might not specifically address the foreclosure of a property, or repossession of an asset, but this is where the acceleration clause comes into effect. Without the clause the lender would only be able to foreclose on one missed payment at a time. With the acceleration clause, despite whatever event kicks the clause into gear, the lender can demand immediate and full payment of all remaining balances and fees.

The Idaho pharmacy business loan or lease documents provided to the independent drug store owner will describe the rights, conditions, and obligations relevant to the acceleration clause. In the event that pharmacy owner in Idaho (the borrower) cannot meet their obligations, the loan or lease goes into default. A default can be caused by a payment that is even one day late, which means commercial and pharmacy business loans lease documents should be read and thoroughly understood before signing.

Tips Regarding Acceleration Clauses: 1. If slowing cash flow of a pharmacy is going to cause a business loan default but the Idaho pharmacy owner has additional unencumbered assets, they might be able to negotiate with the lender by offering additional collateral.

2. If its possible for the ID pharmacy to catch up on their payments, they can reinstate the business loan before the acceleration starts.

3. Different states have different rules requiring notification of an acceleration clause being exercised. Pharmacy owners should be aware of the laws in their state where they operate because 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, Idaho pharmacy owners should help the process by assisting the landlord re-lease the property. However, please note, should the ID 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 pharmacy.

5. Lenders prefer not to have to go through the foreclosure process, so if your ID 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 pharmacy in ID 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 pharmacy owner through the maze of details will benefit the Idaho pharmacy owner in making the best business decision.

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