How to get finance for the purchase of a pharmacy business
This is a topic that goes hand in hand with the issues surrounding how to buy a pharmacy, and is the starting point for the purchasing process. This has been touched on previously in the article covering how to buy a pharmacy business, but deserves much more elaboration.Before you can go about looking for finance for a pharmacy you need to know a ballpark figure of what you will be paying for. You will need to cover (on top of the sale price of the pharmacy) solicitors’ and accountant’s fees, loan repayments (for any source of pharmacy finance), the cost of the stock, cash flow for the first few months and possibly stamp duty and property lease costs depending on the circumstances of the premises you are looking at buying. When these costs have been added up you can seek funding for the purchase of the pharmacy.
It is also a good idea, if possible, to know how much you can afford to borrow before you start looking for a pharmacy to buy. With the figure of how much you can afford to borrow and the total figure you are looking at spending you can determine whether you are pitching at a realistic level. If there is a shortfall between what you can afford to borrow plus your own capital, and the total cost of the pharmacy you want to buy then you will need to revise your prospects down, and start looking for a cheaper pharmacy. Your solicitor and accountant may also be able to suggest sources of funding with which they have worked in the past.There are two common methods of financing the purchase of a pharmacy, which are explained below.
Bank loans
High street banks are generally unwilling to lend substantial sums of money for goodwill valuations (especially unsecured loans for goodwill), and are typically known for undervaluing pharmacy businesses because of this. However, in recent years some high street banks have developed healthcare divisions and, seeing that the risk associated with pharmacy business is less substantial than with some other types of business, they have started to develop specialist divisions to help with financing pharmacy purchases through business loans.
Banks will typically provide 80 per cent of the value of the business, working on their own valuation of the pharmacy. If the bank you approach is one which does not recognise the true value and potential of a pharmacy business you should consider going elsewhere for the loan, even if you have a long standing relationship with that bank.
Ask a selection of banks for a loan to buy a pharmacy and see which ones are more willing to lend to you, then always go for the one which is most willing and which seems to understand the pharmacy purchase market.
The advantage with a bank loan is that the repayment terms are often favourable, giving you over ten years to repay the loan. Business start up loans often have more attractive terms as well. The disadvantages are that you may find the business is undervalued by the bank, and that you will need to inject your own capital, possibly meaning re-mortgaging your property and using savings to make up the difference between the loan amount and the amount you need.
Pharmacy Finance Schemes
PFSs (Pharmacy Finance Schemes) were introduced to make it easier for pharmacy buyers to enter the market. Around 90 per cent of first time pharmacy buyers make their purchase with the help of a Pharmacy Finance Scheme.Also known as a wholesaler loan guarantor scheme, they work by having a large pharmaceutical wholesale company acting as guarantor for a bank loan, thereby allowing the bank to lend more due to the security provided by the guarantor. Some pharmaceutical wholesalers have special agreements with banks affording them a lower rate of interest, which also makes this route more attractive to a person wanting to buy a pharmacy. However, the repayment terms are often short, meaning the whole loan must be repayed within ten years. While a PFS may offer repayment holidays (useful when cash flow is tight) it does mean that overall, the monthly repayments are higher than with a bank loan (despite the lower rate of interest). Your agent can advise whether a PFS is a good way to secure funding depending on the type and size of pharmacy you are looking at buying.
The advantages of a PFS are obvious; there is more money available, less capital is needed from you initially, a bigger pharmacy can be purchased, and the interest rates are lower in general as most wholesalers have a relationship with a bank that allows them to borrow at a reduced rate. Wholesalers understand the pharmacy business and can provide support and help along the way. However, there are disadvantages, such as the shorter repayment time as well as the clause that accompanies all PFS loans.
It may seem too good to be true that a pharmacy wholesaler would be willing to act as guarantor for vast sums of money to first time pharmacy buyers, but they are getting great benefits from providing this support. Buyers using a PFS to finance their purchase are tied into purchasing at least 70 per cent of their supplies from the wholesaler who financed them for the duration of the loan term. This means the wholesaler is guaranteed to make money from the very pharmacy they have helped generate finance for. For the pharmacy owner this means they have to be careful about using other suppliers for discounted products and not paying over the odds for certain products because they are tied into doing so. However, for some buyers a PFS is the only way they can safely afford to purchase the pharmacy business they want.
Other funding ideas
There are some other ways of financing a pharmacy purchase and getting around the issue of loans and PFSs. Someone with enough money can buy a pharmacy business outright without having to get involved in loans and finance schemes.
You can also consider re-mortgaging your home and liquidating other assets to provide your own financing but this is not ideal as your home may be at risk if the business does not work out; at least with a PFS if you cannot pay the money back they are there as a guarantor.
It is also possible to initially purchase via a PFS, allow the business to grow for a few years and then re-finance the business through a standard bank loan. It will be easier to get a loan at this stage as the sum you are looking for will be less and you will be able to demonstrate that the business is successful. Once you have paid off the PFS loan you will not longer be tied into purchasing the bulk of your products from that one supplier, and you will probably have longer to pay off the bank loan than you would have had with the PFS.
The right source of finance for purchasing a pharmacy does depend on the individual circumstances of the buyer, so it is a good idea to discuss the issue of funding with a financial advisor and with your purchasing agent, who will be able to help you reach a decision.
