Is it Worth Selling a California Pharmacy Note at a Discount?

By Brad MacLiver
Authorship and profile at Google


When a CA pharmacy acquisition has been accomplished by using the private financing method of a pharmacy business note, the holder of the California pharmacy note has the option of selling the pharmacy business note for a lump sum of cash instead of waiting for the monthly payments and taking the risk those payments will always be made. Pharmacy business notes can be sold by using a discounting method. Instead of buying a pharmacy note at its face value, the pharmacy note will be discounted. Meaning the Investor will pay less than face value due to the risk being transferred from the Pharmacy Note Holder (the note seller) to the California Pharmacy Note Investor (the note buyer).

Most pharmacy business note sellers only look at the discount rate and quickly calculate in their head that they are giving up too much money to make the selling of the California pharmacy note an attractive proposition. However, further analysis needs to be completed before a final decision is made by weighing the discounted amount with the benefits of a lump sum of cash.

1. What motivations are there for selling the pharmacy note in California and what are the desired goals? Is reducing any exposure to risk something worth considering? Is there financial incentive to pay off debt? Do you need to free up capital for a new venture? Do you have dreams of exotic vacations or world travel that could be accomplished with a lump sum of cash? Is it important to accomplish these goals? If you don’t have the lump sum of cash to achieve your goals, what are the opportunity costs?  Do you want to invest in something that pays a higher return? Determine investment and family priorities.

2. What is the Current Fair Market Value of the pharmacy business? This is what someone is really willing to pay for the business, and not just an “earnings times x” formula. Real aspects of what is happening in the CA independent drug store industry must be considered and it is advantageous to have a pharmacy industry specialist calculate the pharmacy business valuation.

3. How much cash is immediately required by the holder of the pharmacy note in California?

4. A pharmacy note that is seasoned has more value than a “green” note that doesn’t have a payment history. Are you willing to hold the note for a certain amount of time to allow the business buyer time to prove to an Note Investor the capability of the payor making the payments?

5. Are you willing to sell only a portion of the Note (this is called a “Partial Sell”)? The discount rate can be a more attractive proposition when only a portion of the note is sold and the Pharmacy Note Investor is not holding all the risk.

Understanding the Risk for the Note Buyer:

1. Pharmacy Buyer Competency - There is the risk that the California pharmacy buyer may not run the business as efficiently as you have, sales drop, and the pharmacy business buyer cannot meet the payment obligations. Incompetency could lead to late payments, missed payments, or bankruptcy.

2. CA Pharmacy Industry Changes - Changes caused by influences either within the industry, or regulations governing the industry, can make it increasingly difficult for the pharmacy business buyer to meet the contractual financial obligations.

3. Future Competition - Sales and income of the store may be affected by yet unforeseen California pharmacy competition either building in the neighborhood or through mail order.

4. Loan to Value - When originating a CA pharmacy business note you may be creating financing where there is a “negative loan to value.” Example: the pharmacy business note is for $300,000, but there is only $100,000 of tangible assets for collateral.

5. Title Insurance – Pharmacy business notes in CA don’t have title insurance that will make good a loss arising through defects of titles, or liens.     

6. Time Value of Money - Where a dollar received today is more valuable than a dollar received in the future.

7. Opportunity Costs - When the selection of holding the California pharmacy business note ties up capital and prevents potential financial gains from other investments.

It is beneficial to discuss the options and potential origination of a pharmacy note with Pharmacy Business Note Investor before the Purchase and Sale Agreement is finalized for the acquisition of the pharmacy. This provides the California pharmacy business seller, and future note seller, valuable insight into structuring the pharmacy business note so it can be successfully purchased.

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Using Business Notes in California for Financing a Pharmacy Acquisition

By Brad MacLiver
Authorship and profile at Google


When acquiring or selling a CA pharmacy or drug store, one alternative is to have the seller originate the financing and carry back a business note. At first glance many pharmacy owners will not want to take this approach. They want their cash and their exit. When a California pharmacy owner is considering selling their drug store, looking at the benefits of originating a business note and not just the perceived costs, they may find that offering Private Finance in the form of a Pharmacy Business Note will provide them an alternative course of action.

Advantages of Creating and Selling a CA Pharmacy Business Note

1. The process of selling a California pharmacy or drug store to an individual can be easier and less time consuming when the pharmacy seller agrees to carry a business note, than a buyer pursuing traditional financing.

2. By offering Seller Carryback Financing, often referred to as Private Finance, a CA pharmacy business owner can greatly increase the number of potential buyers for their business, and most likely sell the business at a higher price.

3. When a pharmacy business note is created there are the options of keeping it for monthly income, selling the entire pharmacy note for a large lump sum, or selling part of the pharmacy business note to meet current financial needs and keeping the remainder for future income.

4. Selling either a portion, or the entire California pharmacy business note, frees up capital that can be used for new ventures, or paying off old debt.

5. When pharmacy business notes are created and sold, transactions can be structured that allows the pharmacy business seller the biggest advantage in achieving the seller’s goals with the proper professional guidance.

The terms and interest rate are agreed upon and set between the seller and buyer of the business when originating a California pharmacy business note. The seller of the business will accept the promissory note, which is secured by the business.  This includes any inventory or equipment that belongs to the business. The pharmacy business seller sells the note to an Investor that is willing to hold the pharmacy note for compensation. Since Investors cannot go back to the pharmacy business buyer later and adjust the terms of their purchase agreement, the note seller must discount the note, which compensates the Investor from the difference of what the note was originated for and the discounted price paid for the pharmacy business note in CA.

Tips:

1. Poorly structured business notes may prevent their sale, so seek professional advice before originating a financial instrument that can’t be sold.

2. Sellers of business notes need to fully understand the Investors risk in order to successful sell the business note.

3. Private Finance, in the form of a Business Note, is an alternative that should be looked at as a business financing option.

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