Pharmacy Franchise Financing in Iowa

By Brad MacLiver
Authorship and Profile at Google

An Iowa (IA) pharmacy franchise is a contractual relationship between two parties. One, the 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 Iowa 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.

There are a number of options for financing a pharmacy franchise business. All Iowa 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 can be used to finance pharmacy franchise in Iowa when the pharmacy franchise has the track record and some pharmacy name recognition. Many banks show interest in a funding opportunity of this type. However, after the bank reviews the loan documents, many of these banks reject the funding request because they don’t understand the security provided for the pharmacy loan. Community drug stores typically have very little traditional assets to offer as security. Lenders for the pharmacy in Iowa 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.

IOWA Pharmacy Franchise Funding Tips:

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

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

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

4. New Iowa pharmacy owners need to make sure their funding request is enough to get the pharmacy running and profitable. Less than ample funding for the initial stages may put the drug store in a position of needing additional funding. Smaller working capital loans that would be in a subordinated position will be more difficult to obtain at a later date.

********************

When pharmacy owners have questions and need information regarding pharmacy franchise business loans, other types of funding for community drug stores and pharmacies, or require a pharmacy valuation they should contact a pharmacy industry specialist who understands both the national and Iowa pharmacy markets and can therefore provide quality answers and sound advice.

When you contact www.PharmacyValuations.com you can receive a free pharmacy valuation plus discuss the options available to you without any cost or obligation.

Receive up-to-date pharmacy information when you follow us at:

Facebook    Twitter    LinkedIn    YouTube

Topics include:

Selling a Pharmacy, Buying a Pharmacy, Financing a Pharmacy, Board of Pharmacies, Consulting and Advisory Services, FAQs, Pharmacy Market Conditions,  Marketing, Medicare’s effect on Pharmacies, U.S. Pharmacy Associations, Pharmacy Business Valuations, Referral Fees, Tax Advantages and Tax Strategies for Pharmacy Owners who are considering selling their business.

 

 

The Types of Pharmacy Financing Available in Iowa

By Brad MacLiver
Authorship and profile at Google


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

SBA Financing for Iowa Pharmacy Business Loans

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 in Iowa. 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 Iowa 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 IA 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 Iowa pharmacy financing.

Patriot Express Business Loan Program

This is another SBA loan program that can be used for Iowa 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 Pharmacists Who Are Veterans in IA

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

Iowa 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 in Iowa 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 IA 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 IA 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 IA Pharmacy Finance

Retirement Plans can be self-directed and used to invest into an Iowa 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 in Iowa 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).

Pharmacy Franchise Agreement Buyout Funding

Be aware that situations in the Pharmacy Industry are changing.  Economic conditions are concerning, the mail-order pharmacy is starting to thrive, and market shares are shifting around.  All of these factors contribute to a negative impact on the cash flow of pharmacy franchises. Pharmacy owners paying franchise royalty payments may not survive tightening profit ratios.  Therefore, these pharmacy franchises have to resort to bankruptcy or buying out the franchise agreement when possible.

Buying out the franchisor allows the pharmacy to remove the franchisor from the equation. This in turn allows the Iowa pharmacy owner more flexibility in their business decisions. The pharmacy franchisor sold the drug store franchise with expectations of earning income from the cash flow their pharmacy franchisees. Due to their long term plan, Franchisors may not be willing to allow the pharmacy franchisee to remove itself from the franchisor. However if a Franchise Agreement Buyout can be negotiated, the buy-out transaction can also be financed.

Unfortunately many banks don’t understand the dynamics of the pharmacy industry in IA. This lack of pharmacy knowledge results in the banks looking at the funding request and all they see is a business that has very little collateral compared to amount of financing the pharmacy is requesting. To assist the successful funding process a pharmacy owner is advised to use a pharmacy industry specialist to capitalize on the funding opportunities that are available.

********************

Iowa Purchase & Sale Agreements for Pharmacies

By Brad MacLiver
Authorship and profile at Google


A Pharmacy Listing Agreement is the contract that provides a pharmacy broker the business seller’s permission to sell their drug store in Iowa. During the process of presenting the business being sold to qualified drug store buyers there are negotiations and preliminary offers.

Once the preliminary stages have been negotiated it is time to put forth the details of the potential Iowa pharmacy transaction in contract form. This contract is usually called the Purchase and Sale Agreement, but it may also be referred to as an Asset Purchase and Sale Agreement, Pharmacy Asset Purchase Agreement, Asset Purchase Agreement, or variations of these contract titles. Whatever the title is on the contract, this document should be considered the “blueprint” for transferring the pharmacy business to the new owner.  

The Pharmacy Purchase and Sale Agreement details how much the buyer agrees to pay and what assets the seller is conveying to the buyer. When the agreement is put in writing, describes the transaction in some detail, and is accepted and signed by both parties, this contract becomes a legally binding agreement. Therefore, during the negotiated development of the Pharmacy Purchase and Sale Agreement, one should take proper diligence.

Because of liability issues, it is not often that a Iowa pharmacy’s corporate stock is purchased. Therefore, these transactions are almost always "asset only" purchases.

The elements in a Pharmacy Purchase and Sale Agreement include but not limited to: the assets being purchased, the assets being excluded, any aspects of counting and purchasing inventory, both hard and electronic copies of pharmacy customer files, any liabilities, the purchase price, the closing date, transferring title of the assets that are being purchased, pharmacy customer file conversion, the representations and warranties, non-compete clauses, any restrictive covenants, the transferring of the phone, notifying customers, signs, Board of Pharmacy notification, accounts receivables, employment of business seller and pharmacy employees, confidentiality, counting the Iowa pharmacy’s inventory, costs associated with the closing, lien searches, actions to be taken before the date of closing, along with the pharmacy’s computers, office equipment, and any automated filling machines.

Although it covers many aspects of transferring the business assets from the pharmacy seller in Iowa to the new owner, it should be understood that the Purchase & Sale Agreement does not provide tax and legal guidance for the seller. Those issues do not pertain to the buyer of the assets. Therefore, the pharmacy seller should be well advised by a knowledgeable pharmacy broker, accountant, or attorney regarding tax consequences, restrictive covenants, and the structure of the deal. These aspects of the deal may not have any impact from the buyer’s point of view, but if not considered carefully may have affects to the seller’s financial position after the transaction is closed.

Pharmacy owners in Iowa who are considering selling will benefit when working with a specialist who operates exclusively in the Iowa pharmacy industry and can provide expert guidance in bringing about a transaction that provides the most benefits regarding the seller’s tax consequences, family and estate planning. Proper planning and a blueprint that structures the transaction appropriately will increase the net amount of money the seller receives for the pharmacy’s assets.

************************