Vermont Pharmacy Acquisition Finance

By Brad MacLiver
Authorship and profile at Google


When a Vermont (VT) pharmacy or drug store is being sold, seldom does the buyer pay “out of pocket” cash for the acquisition. Even when cash is available, pharmacy acquisition strategies usually involve financing the transaction.

Typical acquisitions take 6-9 months to complete, so the Vermont pharmacy seller will need the buyer to provide some proof up front about their ability to close the transaction. Acquisitions will involve many hours of due diligence and negotiation, so the process should involve qualified parties.

Along with the buyer and seller the acquisition will involve attorneys, accountants, lenders, valuation companies, industry specialists, along with others. No one wants to pursue 6-9 months of work involving a variety of highly paid professionals without having some confidence of the Vermont pharmacy buyer’s ability to close the deal.

The process will begin with determining the value of the business. There are many companies that offer valuation services. However, pharmacies in Vermont are not ice cream stores. There are many aspects of valuing a pharmacy that are unique to the industry, so generic valuations or simple accounting formulas should not be used. An industry specialist should be used for valuing the pharmacies instead of a valuation company that has a broader spectrum.

In order to complete a valuation the selling company needs to provide up-to-date data. Lenders will not accept old data, or a sellers “gut feeling.” Lenders need to make a decision to finance based on sound and verifiable information.                

Structuring the transaction is extremely important. The seller of course wants as much money as possible and wants cash. The buyer needs to spread out the debt service and wants to have as little cash as possible invested in the acquisition.

Pharmacies and drug stores are in an industry where it is more difficult to obtain business loan due to the majority of the value in a pharmacy in Vermont is the customer files and not hard assets. Therefore, for the acquisition to be financed a lender will need a strong understanding of the industry and what, beyond the collateralized assets, the company offers to reduce the perceived risk.

Pharmacies in VT have typically been known for generating profits and to be stable businesses. However, they are usually in leased locations, and their furniture, fixtures, and computers will only provide $15-20,000 of collateral for a buyer possibly requesting a million dollar loan. A lot of money is tied up in inventory, but the small pills are considered by a lender to easy to move out the door in the event of default. Due to these circumstances many lenders will not loan money to these traditional money making businesses. A successful transaction takes a lender that understands the pharmacy industry.

Tips regarding pharmacy in VT acquisitions and finance:

1. Attorneys and CPAs who have been representing the pharmacy seller for many years may see the transaction as putting themselves in a position of losing a client when the business is sold. Make sure they are not only working diligently on the transaction but not slowing or undermining the process.

2. Since pharmacy acquisitions in Vermont take 6 to 9 months worth of work to finalize, all participating parties need to be aware of time tables. Items of importance will much too often end up sitting on the desk of someone who is outside of the control of the buyer or seller.

3. It is essential that all financial information be current. Over the lengthy process, the data supplied to both the buyer and the lender needs to be updated on a regular basis. Several factors can change drastically during a nine month period and the Vermont pharmacy seller will need to continually prove the financial condition of the company.

For the best chance of success when pursuing “pharmacy acquisition finance,” make sure the valuation company and the lender you are consulting have expertise in that industry. Make sure the company that has the pharmacy experience and expertise, and that they are a direct correspondent with lenders who understand VT pharmacy.

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Current Vermont Pharmacy Industry Market Conditions

By Brad MacLiver
Authorship and profile at Google


Currently there are a number of factors that are impacting the current market conditions of the U.S. pharmacy industry in VT. These factors are affecting the pharmacy business valuations of pharmacies and drug stores all across the U.S.

Local Demographics:

The valuation process also includes local market conditions and local demographics. Smaller communities have less growth potential and with the declining profits a buyer will need to purchase at a lower value because they will have to service the debt from a business loan and still try to make a living. The same is true for communities that have lost population due to economic conditions, or have a high rate of unemployment. Fewer people, or fewer customers with the ability to purchase, will mean fewer sales and less chance of any substantial improvement in the near term. This results in a lower Vermont pharmacy business value.

Vermont Pharmacists Shortage:

Pharmacies in Vermont and across the country have had difficulties in finding pharmacists.  This shortage of pharmacists not only affects employee opportunities it also affects the number of potential independent buyers. 

Fewer Buyers:

There are also fewer corporate buyers. Some of the largest pharmacy chains have been purchased and consolidated in the pharmacy industry roll up. Many smaller chains have run into financial difficulties and have stopped their expansion. It is more difficult to drive a price higher when there are fewer willing, or capable, to purchase.

Current Market Conditions Requires Industry Roll-up:

The consolidation of the pharmacy industry is required to get more traffic into a single store.  Due to simple economics, when any business has a reduction in profits they are less attractive to a buyer and pharmacy business values drop. There are many factors contributing to the downward pressure of Vermont pharmacy values and there is not any expectation of a turn around. Pharmacy owners should not be fooled by inexperienced Brokers claiming grand outcomes and over stating pharmacy business values not based on realistic market conditions.

With the consolidation of the pharmacy industry in VT that has been happening for several years, many new brokers have entered the market to broker pharmacy acquisitions. Most brokers do not have pharmacy related experience, nor do they use current market conditions when they value a pharmacy. Most are using simple accounting formulas that hold no sound reasoning for the value when faced with current pharmacy market conditions. Brokers are valuing pharmacies 2 to 3 times more than what the market is realistically willing to pay because of this. Anybody can quote a high value to capture a listing regardless of experience, and an overinflated asking price does not guarantee that the business will sell for that price.

Mail Order Pharmacies in VT:

Some insurance companies have decided to designate a noticeable amount of pharmacy patients as “long-term medications” and it is required that they only purchase the medications from mail order pharmacy companies who provide products at lower prices. This results in local pharmacies both missing out on prescription sales and suffering a decline in front-end sales because customers are not entering the store. Pharmacy mail order sales have now surpassed sales from independent retail Vermont pharmacies.

Choose a firm that provides pharmacy business valuations in Vermont based on real market conditions and does not use a simple formula for calculating the value of a pharmacy. Complex methods are most suitable to derive the value of a pharmacy.

 

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