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Connecticut Pharmacy Franchise Financing

By Brad MacLiver
Authorship and profile at Google


Connecticut (CT) pharmacy franchises are contractual relationships arranged between two parties: the Pharmacy Franchisor and the Franchisee.  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 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 in Connecticut.

There are a number of options for financing a pharmacy franchise business. All funding sources for pharmacy franchises or drug stores prefer to lend to a pharmacy franchisee who will be working with a nationally recognized name that has long track records. Newer CT pharmacy franchise models won’t possess these two traits and will be considered more risky.

Traditional Bank Financing used in funding a pharmacy franchise in Connecticut 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. 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 California pharmacy business loan.

Pharmacy Franchise Funding Tips:

1. Because there are many pharmacy franchise financing options available in California, 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 pharmacy consulting services and franchise associations who can help guide a prospective Connecticut pharmacy franchisee or borrower or a drug store loan.

4. New 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 Connecticut pharmacy owners have questions and need information regarding pharmacy franchise business loans, or any types of funding for community drug stores and pharmacies, they should contact a CA pharmacy industry specialist who can provide quality answers and sound advice.

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Types of Pharmacy Financing Available in Connecticut

By Brad MacLiver
Authorship and profile at Google


There are several different options available for funding CT pharmacy franchises, specialty pharmacies, and more traditional community drug stores.  Here are a few of them:

SBA Financing for Connecticut Pharmacy Business Loans

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

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

The terms of the loan can range from 5 to 20 years and, within SBA standards, interest rates may be fixed or adjustable.  They will be negotiated by the lender dependent on the financial strength of the Connecticut (CT) 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 CT 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

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

Connecticut 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 CT Pharmacy Finance

Not all prospective pharmacy franchise owners in Connecticut 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 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).

Pharmacy Franchise Agreement Buyout Funding

Understand that pharmacy situations in CT are changing, economic factors are a concern, mail order pharmacy is growing, and market shares are shifting. All of these can have a negative impact on the cash flow of a pharmacy franchise. Drug store owners paying franchise royalty payments may not survive the tightening profit ratios. Due to this, these pharmacy franchises may only have the options of bankruptcy, or buying out the franchise agreement when allowable.

Buying out the franchisor allows the Connecticut pharmacy to remove the franchisor from the equation. This in turn allows the 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. 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 Connecticut pharmacy owner is advised to use a pharmacy industry specialist to capitalize on the funding opportunities that are available.

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Purchase & Sale Agreements in Connecticut

By Brad MacLiver
Authorship and profile at Google


Pharmacy Listing Agreements are contracts that provide a pharmacy broker with the business seller’s permission to sell their Connecticut drug store. During the process of presenting the business that is being sold to drug store buyers, there will be negotiations and preliminary offers.

     
After the preliminary stages have been negotiated, it is then time to put forth details of the potential pharmacy transaction in the form of a contract. This contract is typically known as the Purchase and Sale Agreement, but it can also be referred as an Asset Purchase and Sale Agreement, a Pharmacy Asset Purchase Agreement, an Asset Purchase Agreement, or other variations of these contract titles. Whatever the title of the contract, you should consider the document as the “blueprint” for transferring the pharmacy business in Connecticut to the new owner.  

Pharmacy Purchase and Sale Agreements detail how much the buyer will agree to pay and what assets the seller will convey to the buyer.  When that agreement is put in writing, it describes the transaction in detail, and it is both accepted and signed by each party, this contract will become a legally binding agreement. Therefore, during the period of negotiated development of the Pharmacy Purchase and Sale Agreement, proper diligence should be taken.

Due to liability issues it is seldom that a Connecticut pharmacy’s corporate stock will be purchased. Therefore, these transactions almost always are only asset purchases.

Elements of the Pharmacy Purchase and Sale Agreement include, but are not limited to: assets being purchase, assets being excluded, aspects of counting and purchasing the inventory, both electronic and hard copies of pharmacy customer files, liabilities, purchase price, closing date, transferring title of the assets being purchased, pharmacy customer file conversion, representations and warranties, non compete, restrictive covenants, transferring the phone, notifying customers, signs, Board of Pharmacy notification, accounts receivables, employment of business seller and pharmacy employees, confidentiality, counting the 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 Connecticut 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 Connecticut who are considering selling will benefit when working with a specialist who operates exclusively in the Connecticut 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.

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Using Tax Strategies When Selling Connecticut Pharmacies

By Brad MacLiver
Authorship and profile at Google


Industry Roll-Ups are where an industry’s many players are consolidated into smaller groups for economic benefits. CT pharmacy buyers participate in the Connecticut pharmacy industry roll-up to achieve economies of scale in purchasing, marketing, information systems, logistics, distribution, and top management. Pharmacy sellers both independent owners and drug store chains must consider their current market value, recognize the narrowing of profit margins, and realize what their tax consequences will be if they sell.

When Connecticut pharmacy owners sell their pharmacy it is considered a capital asset. The difference between the amounts it is sold for and the amount spent to either purchase or start the CT pharmacy is a capital gain, or a capital loss. In the U.S., all capital gains must be reported and the appropriate tax paid.

Specific tax strategies can be used to help offset the tax liabilities when selling a pharmacy or a drug store. Unless a professional is handling a large number of CT pharmacy acquisitions, they usually do not know these federal regulations that allow for reducing the tax liability for the pharmacy owner in Connecticut.

Many Business Brokers, CPA’s, attorneys, and other professional advisors inform their clients that selling a pharmacy will result in tax consequences. However, most of these professionals do not handle the buying and selling of Connecticut pharmacies on a daily basis and may not realize the different aspects of structuring a pharmacy transaction allowing the reduction of the tax burden to the pharmacy owner in Connecticut.

There are some capital gain tax strategies that must be implemented before any obligation to sell the CT pharmacy. When a drug store owner is considering selling their pharmacy either now, or in the next few years, it is urgent the best course of action be considered now instead of later.

Estate planning when selling a pharmacy should also be a consideration. Specific federal regulations allow an asset to be converted to an income stream, provide a tax deduction, increase asset diversification, and provide risk reduction, along with offering effective retirement and estate planning. If the pharmacy seller is nearing a retirement age, or will be working as a pharmacist in Connecticut for another company, instead of being an owner, then estate planning should also be considered.

As more reimbursements are cut and more regulations are applied, and Connecticut pharmacy profits continue to slip, more independent pharmacy owners along with small and regional pharmacy chains in CT will be considering selling their pharmacies and drug stores. Tax considerations should be a primary part of your decision process.

Connecticut pharmacy owners should consult with a pharmacy industry expert for advice on structuring the sale of their pharmacy. Someone with extensive experience in CT pharmacy and drug store acquisitions will have the knowledge and expertise to structure the transaction for tax considerations. Like all tax planning issues, waiting until the end of the year is not always the best strategy. Following this advice can place larger sums of money in the bank of pharmacy owners when a pharmacy is sold in CT.

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Bridge Loans and Connecticut Pharmacy Acquisitions

By Brad MacLiver
Authorship and profile at Google


With the changes in the CT pharmacy industry independent drug store owners, small and regional pharmacy chains in Connecticut, and pharmacy equity investment groups are acquiring more pharmacies in order to obtain a larger competitive footprint in a geographic area. During this acquisition phase of business expansion, there may be new opportunities that require action which must be faster than the traditional funding process.

Bridge Loans are a form of short-term financing that can be used while waiting for either permanent financing or the next stage of financing to be obtained. Bridge loans provide funding that "bridges" the gap between a company’s current needs and their long term financing requirements.  Permanent financing is generally used to pay back or "take out" the bridge loan.

One of the characteristics of a bridge loan its ability to close quickly, which, in turn, gives a company the ability to capitalize on a timely business opportunity or acquisition. This quick access to cash gives a business the chance to avoid problems like penalties or bankruptcy. If longer term issues need to be reconciled, this “transitional financing” provides the company time until more long-term financing can be secured.

One more characteristic of bridge loans is that the process usually requires less documentation than conventional financing. Bridge loan lenders don’t usually have the same government regulations to adhere to, so they tend to have more flexibility in their lending criteria and the documentation they require. However, less documentation does not mean they won’t perform due diligence to have a comfort level with the transaction before they fund.

Examples of using Bridge Loans in Connecticut Pharmacy Transactions:

1. An independent pharmacy owner learns of health issues and decides to quickly sell the family owned CT pharmacy to an employee or local competitor. Traditional financing for the pharmacy buyer may require a time line that is not acceptable when considering the circumstances. A bridge loan can be used to quickly accomplish the transaction.

2. A small pharmacy chain in Connecticut needs $1 million to expand their business. They have 3 new equity investors who will be investing in the firm over the next 6 months, but at different intervals. However, the business has opportunities which require action sooner than 6 months. The quick closing bridge loan allows the pharmacy chain access to the needed funds so they can complete their expansion and increase profits. Money from the 3 new equity investors will pay off the bridge loan.

3. A pharmacy owner in a leased location has an opportunity to quickly acquire a commercial property that would be a great Connecticut pharmacy location, but the property is in disrepair. A bridge loan provides the needed funds to acquire and rehab of the property and once that is complete conventional long term financing can be obtained.

4. A pharmacy group developing new pharmacy locations in Connecticut can receive bridge loan funding to get through the permitting process of a project when conventional financing isn’t available at this early stage due to there is still too much risk. A bridge loan allows the project to move into the construction phase and then qualify for other forms of financing.

5. When a pharmacy is owned by two or more partners and one of the partners is ready to exit the business, a bridge loan can help ensure the cash flow and uninterrupted operation of the business during the partner buyout.

6. Real estate, or equipment bought at auction may have a narrow window for closing the deal and timing of traditional financing would keep the buyer from proceeding with the opportunity. Benefits of a bridge loan will permit the Connecticut pharmacy owner to quickly respond to the opportunity.

When there are business opportunities, buying CT pharmacies, selling pharmacies, quick deadlines, an old loan maturing before a new loan can be put in place, funding needs during the permit, planning, or evaluating stages, etc., bridge loans can be an essential financial tool.

Tips regarding Connecticut pharmacy bridge loans:                        

1. Bridge loans are quick to obtain, but quick to expire.

2. A bridge loan is similar to a hard money loan and the terms are often used interchangeably in conversations. Both are short-term, higher interest rate, non-standard loans, but in some circles hard money refers to the lending source and a bridge loan refers to the duration of the loan.

3. Because bridge loans usually come with higher interest rates than traditional financing a larger down payment, meaning a lower Loan to Value (LTV) and a lower level of risk and provides an opportunity for lower interest rates.

4. With the shorter time period of bridge loans borrowers will need to be aware that fees for valuations, legal, dues diligence, etc., will be amortized over a shorter period than traditional financing transactions.

Understand the types of deals that require a bridge loan may be considered speculative in nature, or have higher risk factors. Due to this many banks do not offer bridge loans. Banks must meet government regulations and need to justify their lending practices. Riskier bridge loans do not usually fall within the lending parameters of many banks. Therefore a majority of the bridge loans will come from private investment firms.  It is best to consult a company that has access to a number of funding sources who provide bridge loans.

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Acceleration Clauses in Connecticut Pharmacy Business Loans and Commercial Leases

By Brad MacLiver
Authorship and profile at Google


A provision of many CT pharmacy business loans and commercial leases is an acceleration clause. The acceleration clause in the loan/lease agreements permits the lender to accelerate their payments contingent on an event occurring. These events include but are not limited to: lack of payment from the borrower, a failure to keep the property adequately insured, failure to pay tax assessments, failure to maintain the property, and the selling of the property/asset.

Lenders look at the acceleration clause as an important tool in both their business loan and commercial lease programs. Loan and lease documents may 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 Connecticut pharmacy business loan or lease documents provided to the pharmacy owner will describe the rights, conditions, and obligations relevant to the acceleration clause. When the pharmacy owner (the borrower) doesn’t meet their obligations then the loan or lease goes into default. A payment that is even one day late can cause a default. Due to this, pharmacy business loans and commercial lease documents should be thoroughly read and understood before signing.

Tips:
1. If a pharmacy’s slowing cash flow is going to cause a business loan default, but the pharmacy owner in Connecticut has additional unencumbered assets they may be able to negotiate with the lender by offering additional collateral.

2. If a pharmacy can catch up on their payments they can reinstate the business loan before the acceleration starts.

3. States have different rules requiring notification of an acceleration clause being exercised. Connecticut Pharmacy owners should understand the laws in the state where they operate. 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, pharmacy owners should help the process by assisting the landlord re-lease the property. However, please note, should the CT 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 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 Connecticut 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 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 pharmacy owner in Connecticut in making the best business decision.

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