A Guide to Financing a Pharmacy

Date: February 02, 2018

Purchasing a pharmacy can be quite a task. In this guide, you will learn the key phases of acquiring financing for a pharmacy and suggested actions for each phase.

Before beginning any stages, you should build a team of experts. These may include: an Attorney, a Banker, a Broker, an Accountant, an Insurance Agent, a Pharmacy Consultant, and a General Contractor.

Phase 1: Find and Confirm the Deal and Location

This is an important step. The loan application process cannot move forward until these items are confirmed.

  1. You will need to find a store to purchase, identify a need to refinance, or locate a site for a start-up. You will then be ready to negotiate a deal.
  2. Likely, a letter of intent to the seller will be needed.
  3. Assistance of a broker, attorney, accountant and a pharmacy consultant may be needed to help with the process.
  4. Due diligence is critical to the success of your new or ongoing business.

Phase 2: Identify Financing Need

Now that you have a deal in place or under review, it is time to determine the amount of money you will need to borrow to close the deal.

  1. Calculate three-year projections of the business
  2. Evaluate cash flow
  3. Review your business plan
  4. Identify the funds you have available for an equity injection (down payment)
  5. Determine your financing need

Phase 3: Identify Your Lender

Finding a lender who knows and understands the pharmacy business is very important. Having a good relationship with your lender is essential. Many pharmacy loan applicants find it difficult to qualify for a commercial loan due to the lack of tangible assets being purchased. For these transactions, a Small Business Administration (SBA) loan may be an option.

  1. Determine what type of loan you qualify for: whether a “traditional” commercial loan or an SBA loan.
  2. Interview loan officers of banks that specialize in pharmacy loans, to find the one that is the best fit for you and your business.
    1. Industry and wholesaler trade shows, and the National Community Pharmacists Association’s (NCPA) annual meeting are good places to meet and converse with various lenders.
    2. If opting for an SBA loan, when interviewing lenders, ask if the lending institution is an SBA Preferred Lending Partner (PLP). This is a designation given by the SBA to banks that have the expertise to underwrite SBA loans “in-house”.
    3. Ask if the loan officer will be your point of contact throughout the entire process, or if you will you be handed off to others in the bank during the closing process. Usually, it is much easier to communicate with one bank contact than with a host of people.
  3. Determine the required equity injection.
    1. SBA requires an equity injection of at least 10% of the total project cost.
    2. In the case of an acquisition, the borrower may not require the 10% injection. For example, a $1 million deal would require $100,000 for the equity injection. In this case, the seller can carry a stand-by note for the difference. This is a note for which no payments are made for the term of the SBA loan, but does accrue interest.
  4. Make a decision.

*All SBA loans are essentially the same. The interest rate may vary slightly, but this makes a marginal difference in the monthly payment. The important factor to consider is your relationship with your loan officer and with the bank.

Phase 4: Apply for the Loan

To apply for a loan, you will need to complete and submit various documents. Once this information is collected, the loan officer typically presents the request to the bank’s loan committee for approval within 1-2 weeks. If approved, the loan officer sends out an approval letter that outlines the terms and conditions of the loan. If the borrower accepts and signs, the loan officer then sends out a checklist on items that will be needed for closing (see Phase 5). Some of these documents may include:

Acquisition or refinance

  • SBA form 1919 (Application)
  • SBA form 413 (Personal Financial Statement)
  • Pharmacy Questionnaire
  • Last three years’ tax returns and most recent income statement and balance sheet for pharmacy to be acquired
  • Last three years’ personal tax returns
  • Resume

Start-up

  • SBA form 1919 (Application)
  • SBA form 413 (Personal Financial Statement)
  • Detailed business plan with three years’ monthly projections
  • Last three years’ personal tax returns
  • Resume
  • Review and sign the approval letter

Phase 5: Begin Loan Closing Process

The closing process usually takes 45 to 60 days to complete. Once all documents are completed, it goes to the bank’s SBA underwriter to obtain an SBA authorization. As stated before, PLP lenders do this in-house. Their underwriters are well-versed in the details of the SBA’s requirements. Below is an example of the documents and processes that are necessary to complete the package.

  • SBA form 4506T – to be signed by the seller.
    • Authorizes the bank to get the business entity’s tax transcripts from the I.R.S., in the case of a refinance or acquisition.
    • Address form for both the business and the borrower.
  • Lessor Agreement - signed by the landlord
    • This gives the bank permission to enter the premises to inspect and secure collateral in the event of a default.
  • A copy of the executed purchase agreement and seller note - signed by all parties.
  • A signed copy of the lease
    • The lease term needs to have an option to renew for the term of the loan.  
  • Articles of Organization/Incorporation and Operating Agreement/By-Laws for borrowing entity(ies).  
  • EIN number
    • Provided by your state.
  • Signed tax returns
  • Copy of all purchasers’ driver’s licenses
  • Income Statement and Balance Sheet for the pharmacy being acquired
    • These must be signed by the seller and dated within 120 days of closing.
  • Insurance for the business
    • The bank is to be named as the lender/ loss payee on business and personal property coverage.  
  • Life Insurance
    • This should be in the amount of the loan and assigned to the bank.
  • The bank will order the business valuation, appraisal, and title insurance on the collateral.
  • Equity Injection
    • Three months of bank statements that show the cash injection has been in the account for the entire three months.
    • It is important the account balance not drop below the required cash injection amount at any time.
  • Franchise docs
    • If operating as a franchise, you will need to provide the executed franchise agreement and SBA franchise addendum.  

After these items are collected, your loan officer will send them to the underwriter for SBA loan authorization

Phase 6: Close the Loan

Once the loan has been authorized and reviewed, the closing process begins.

  1. Set a time and date for the closing with escrow, attorney, or other closing agent.
  2. Perform inventory inspection to determine the inventory value.
  3. Provide equity injection.
  4. Sign the closing documents.

Congratulations you are now an owner!