Excerpt from Brian Keen's "Guide To Buying A Pharmacy"
Finance
The simple fact is that no matter what experience you've accumulated in the finance area, it is yet another one that is critical; and you will virtually always benefit from receiving independent advice - because it is a dynamic field and it is one where your return on the investment of your time can be rewarded hugely; so, whether this is your first business purchase or you're a multiple pharmacy owner, there are a lot of things to consider. How you approach the financing of your purchase can determine whether or not you are able to proceed and how much you stand to gain. Tip: Before continuing, I recommend you re-read the closing paragraphs that relate to finance brokers in the chapter 'What Is Involved In Owning And Running A Pharmacy.'
Let's consider some of the issues you will need to address in the finance area:
1. The lenders
• Do they understand pharmacy? - if not then they could be wasting
your time and lose you the opportunity
• Are they the best for you right now? - the banks' lending parameters
and the funds they have available fluctuates individually, so make no assumptions
• Are they the best lender for the type of pharmacy you're looking
at? - 'horses for courses'
• No matter who you talk to, each individual and company are in the business
of sales and stand to make a significant fee from your business, so retain
objectivity
2. The loan
• We're assuming that you are taking a bank loan, but there are different
types of finance available as referred to shortly
• Should I be considering consolidating any other business, home or investment loans at the same time?
• How much is required? - have you covered all your costs - signage;
fit-out; stamp duty; legals, group membership fees; training fees for you
and the pharmacy's team; etc. - don't strangle your cash flow
• Term - how many years?
• What is the best structure for you? - for the interest component, is it interest only/principle & interest/combination of the two and, for the term is it a variable term/fixed term? and, for repayments is it fixed repayments/variable repayments?
• What is their Loan to Valuation Ratio (LVR)? - as a rule this may range from 70-80% (LVR is the percentage of the purchase price, excluding fees, etc., that they will lend you based on the security of the business)
• Are there any penalties if you payout the loan early? - avoid these if you can
• What interest rate will you be paying? - there are choices according to period and flexibility - fixed rate, variable or a combination of the two
• Do you also want an overdraft or redraw facility?
• What other banking services are available - you may be able to get
preferential rates for other accounts, credit cards or EFTPOS, etc.
• You will need to identify what are the most important options for you, because it is a rare example where you get the best of everything... and don't forget that a small difference on settlement day may prove to be a very good deal or a dreadful mistake when reviewed in the fullness of time
Only after you've canvassed the lenders can you choose one to go with tentatively, and so know how much you can spend...
In order to know how much you can spend, I suggest you first calculate your 'gross funds' by totalling how much cash and other 'bank acceptable' accessible equity you have available - figure a) ; then add up all the likely costs of the purchase and initial operating capital (include such items as stamp duty; legal and accounting fees; loan and application fees; working capital; etc.) - figure b); then deduct b) from a) and you arrive at figure c) - and you have the balance of the purchase price above the bank loan; it is a simple calculation from there to determine exactly how much you can spend on purchasing a pharmacy... this task is a good example of where a good finance broker can help you and earn their keep!
A tip here is not to expect the banks to play fairy-godmother - accept this figure pragmatically and don't steam ahead looking at pharmacies that are more expensive because you seriously risk losing your credibility... and so along with that all the support of the networking channels you've worked so hard establishing.
Next time - Creating Your Personal Business Plan01.08.07
