Podcast: Pharmacy Financing With First Financial Bank

Drug Topics®: Hello and welcome to Over the Counter, a podcast from Drug Topics®. Today, we're joined by Bo Garmon and Drew Hegi, pharmacy loan officers at First Financial Bank, one of the nation's leading small business lenders.

The First Financial Bank lending team has over 80 years of pharmacy experience and includes current and past pharmacy owners. We sat down with Bo and Drew to discuss the ins and outs of the financial side of pharmacy ownership, from the biggest challenges facing first time pharmacy owners to navigating the SBA loan process.

Bo, I'd like to start with you. Can you just give us a quick introduction?

Bo Garmon: Hey, Lauren. Yeah, I’m Bo Garmon, pharmacy loan officer with First Financial Bank. I’ve been with the group for well over 9 years now, since we started the pharmacy division. Just a little background on that: We are dedicated to working solely with independent pharmacies as far as providing financing, and we serve our clients nationwide.

Drug Topics®: Great, thank you so much. And Drew, could you go ahead and introduce yourself?

Drew Hegi: Yeah, similar to Bo, we both been here almost 10 years. This year, we'll both hit our 10-year anniversary of being in the pharmacy division. We just help practicing pharmacists become store owners, maybe first time buyers get an ownership, or we can help existing pharmacy owners with a number of different projects, whether they're wanting to buy a second store, a third store, or build a building… We can talk more about all the things that we offer. Bo and I are the 2 loan officers in our pharmacy division working each and every day helping pharmacist.

Drug Topics®: Let's just jump right in. First time pharmacy ownership is a huge undertaking, and I'm sure there are a lot of aspects that potential owners have not considered. Would you be able to share some of the top financial issues to keep in mind?

Hegi: I don't mind jumping into that. That's one of the things that we enjoy most about our job—helping those first-time buyers navigate the ins and outs of taking out a loan to buy a store. There's a lot going on in terms of transitioning from an operation standpoint, and pharmacists have enough to worry about—getting that staff and getting to know patients—it's rewarding for us to be able to make the financing process as seamless and as easy as possible.

Bo and I have the benefit of being solely dedicated to 1 specific industry, so we truly can become experts in how to make these deals happen. Things that can trip people up is the SBA process in general; we do mostly Small Business Administration loans, which is a great fit for pharmacies, because there's not a lot of collateral when it comes to drug stores. Most of the value is in the patient files and the cash flow. From a tangible collateral standpoint, there's no real estate or dirt typically, but the businesses can be very valuable.

Our average loan size is around a million and a half dollars probably. It's a big loan, but the application process with any type of government guaranteed loan can be somewhat cumbersome. We try to help the applicants through that process: understanding cash flow and understanding financial statements is a big piece that's always new for first time buyers. [Things like,] tell me more about this [profit and loss] balance sheet, what do you see in what trends, what direction is the business moving in? We can advise and consult with buyers in that regard. Helping them identify cash that's needed—a lot of times a significant down payment will have to be supplied by the buyers—so there’s talking through options there.

Every situation is different. Everybody comes with a different financial background and a different career path. Some are very familiar with independent pharmacy, and some are coming from a chain and don't necessarily understand the role of buying groups and wholesalers and having that relationship and which direction to turn. We try to be a resource, as best we can, to get them in that store [and] have financing process be just 1 less thing that they have to worry about.

Bo, I probably missed some things—is there anything that comes to mind that you would chime in with?

Garmon: To make a long story short, at the end of the day, what we're all looking for here—the first thing we're going to evaluate, when we're looking at a potential acquisition target for a customer is the cash flow. What we want to be able to identify is, does the business we're buying generate enough income or cash flow to support our debt to pay them a reasonable salary and have a little cushion left over?

Drug Topics®: From a financial perspective, could you touch a little bit on the first steps in the pharmacy ownership journey? When you have a pharmacist [come to you], and they say, “I'm ready to set out on my own and own a pharmacy.” Where do they start? What’s the first thing that they need to think about?

Hegi: Typically with a phone call. Bo and I receive phone calls all the time from pharmacists who say they have an opportunity in front of them and that they're ready to move forward and want to know how to do that. We have them gather the past 3 years of tax returns for the business; like Bo said, we want to make sure that there's enough cash flow that the business is doing well, it's financially healthy, because you don't want to step into a situation where you're going to be stressed out about paying bills and paying yourself a reasonable salary. We want to make sure the business is doing well, and those tax returns will give us an idea of cash flow.

Mostly, we just do everything over email. Being a nationwide lender like we are, pharmacists aren’t coming into our office to fill out application paperwork, so we'll just email them over the loan application, the personal financial statement to be filled out, a resume template, which gives us an idea of what your work history an education has been to this point, top 100 drugs… There's a number of different reports that we’ll ask for and we'll put all that in a consolidated email. From there, we can quickly move to putting the package together, pulling credit reports, talking through the structure of the deal, [asking] how much working capital do you think you may need?

We typically loan about 90% of the purchase price. But then you also need money in your business bank account to run and operate the business, to pay your staff, to pay your wholesaler while you're waiting on those third-party reimbursements to come in. So, sort of going through that collaborative process of getting the loan amount nailed down, [loan] terms, collateral, things like that.

It's a lot of conversations on the front end. Then we take that and get it approved by our bank board. From there, once it's approved, we’re working on closing, getting purchase agreements, lease agreements, insurance, all of those things that you'll need in the file to close. It sounds like a lot, but again, we try to have everything very spelled out on the front end and set expectations as far as timeline goes. That's usually where we get started and the first steps are.

Garmon: There's a number of things that need to take place before approaching the bank. The first step of that journey is, if you're just looking, you have to identify a target. And that might mean that you need to consider some things: Are you willing to relocate? How big of a search area are you looking for? Once that target is identified, then you do some due diligence, gather the financials, and start some negotiations with seller until we can determine a price that's fair for both parties. Once you nail that down, at that point, then you can approach the bank.

Drug Topics®: Are there any resources from First Financial Bank that you can recommend?

Hegi: We do have projection templates. It's a good exercise to put together some financial projections on any business that you're thinking about taking over in terms of ownership.

If you're buying [a business], look at the historicals, but also create the way you see the next 3 years going. Do you think you can grow top-line revenue? What expenses do you think you can eliminate and cut to reduce your overall spend and create increased profitability? If you're starting a store from scratch—a brand new pharmacy—putting together financial projections, obviously, you're going to be hopefully growing and gaining new patients each and every year. But what does that look like in terms of [profit and loss] and sales and cost of goods sold? How are you going to add staff to keep up with the volume and delivery expenses and things like that? They all go into it. We can definitely provide a projection template.

We also have a pharmacy questionnaire that acts as a mini business plan. It's [looks at] if you're buying a store, what's going on right now in terms of the accounting, the marketing, competitors, your relationship with your wholesaler. A lot of that is spelled out in that template, and it can be a resource as you kind of think through what you want your business to look like after you take over. And, it helps us communicate the plan back to our bank board as we get deals approved.

We do have some templates in that regard, and obviously, [clients] can lean on our experience as well, talking through things that we've seen work well with others. Anything else come to mind, Bo, from a resource standpoint?

Garmon: We have a checklist out there of items that we need to collect from a borrower to get started that they can access as well.

Drug Topics®: That that all sounds really helpful. Again, there are just so many intricacies to this process and I'm sure there are things that people aren’t considering, because it's their first time and they've never had to deal with this before.

That leads perfectly into my next question, which is: What are the biggest challenges that first time pharmacy owners might face when they're seeking out financing, and how can those challenges be alleviated?

Garmon: The first thing is a down payment, or what we in our world, the SBA world, what we refer to as an equity injection. Most banks are going to want to see at least 2 months’ worth of proof of funds for that down payment in the account. It's important for people to prepare and have savings on hand. A lot of times we're dealing with a large price tag. I think Drew mentioned—and not to get totally in the weeds—but typically we require 10% down of the total project costs. So, if it's a $3 million deal, you're looking at $300,000, which—a lot of people don't carry that kind of liquidity. So that can be a challenge.

There’s some ways around it; there's some things that we can do to help with down payment. In many cases, the sellers can pull a note up to half of that; 5% of the down payment can come from in the form of the seller note. There are some things, some guidelines that are set forth by the SBA for the that note to be eligible for down payment. The main thing is that they can’t receive payments on that for the life of our loan, which is typically 10 years. A lot of times that can be a tough sell, but it's also an avenue to help us to get to that that required equity injection.

Hegi: Sometimes, applicants will worry about their amount of student debt. Pharmacy school is very expensive, and a lot of student loans are definitely a part of getting through school. We're okay with that. It's not anything that we haven't seen before. More times than not, it’s not an obstacle that we're not over able to overcome.

I would say one challenging thing is, there's a lot of pharmacies out there that just don't make a lot of money, unfortunately, with the PBM pressures and margin compression, stores just aren't as profitable as they used to be. And so, you have to be somewhat disciplined as a buyer. That store that you think you may want to buy, or have always had hopes of buying sometimes isn't… I would say the majority of our credit decisions, whether we're going to do a deal or not do a deal, is based on the store [and] based on the performance of the pharmacy. We do have to look at a lot of deals where we say, that's not something that you could buy with bank financing because there's just not enough money being generated by the business to pay you a salary and pay us a loan payment. That would either need to be purchased with just solely cash or potentially owner financing.

So, you do have to be somewhat disciplined. A lot of times, we help first-time buyers to understand why this the store may not be worth what the seller wants for it. But really, if you take care of your credit, if you have some cash like Bo mentioned, if the store is a good cash flowing store, we can find a way to make that deals happen almost each and every time.

Drug Topics®: I really like that you brought up the student loan aspect of it and how that's not necessarily an obstacle. I feel like student loans particularly for the health care profession are just so high. It’s nice to hear that that's not going to necessarily stop someone from being able to progress forward with this whole project.

I know you touched on this earlier, that First Financial Bank is approved to offer SBA loans through the SBA preferred lender program. So, what does this mean for those who are seeking a loan for pharmacy ownership?

Garmon: I can touch on that. A lot of pharmacy owners or potential owners take advantage of loan programs offered by the SBA, which is the Small Business Administration. These programs are offered through participating banks that they partner with the SBA to lend money to small businesses. Typically, they are just a commercial loan in which the bank actually lends the money to the small business, and then the SBA provides that lending institution a guarantee based on guidelines set forth by the SBA. Those are going to be consistent through all banks.

The banks do have some flexibility in setting the rates that are offered. But as you mentioned, you're going to want to deal with a bank that has PLP or preferred lender participants status. What that means is that that lender has the ability to offer or issue loan approvals in house and not have to send those off to SBA for their approval, which can greatly reduce the amount of time it takes to get funding. The banks that have that status are typically doing a lot larger volume of SBA loans. Therefore, they're probably a little more familiar with the guidelines set forth by SBA.

Drug Topics®: Beyond the financing to purchase the pharmacy itself, what kind of support does First Financial Bank offer to its customers and to its clients?

Hegi: I think we’re available and accessible, more so than other banks, from my experience, where you really just need 1 phone number, either Bo or myself, in terms of your point of contact. Obviously, we have loan assistants and back office help at our at our corporate office who can help you with anything you may need, but in terms of communicating and getting through the process—and even on an ongoing basis, staying in touch and allowed us to review financial statements and giving you feedback on what we're seeing and what other customers are doing that are successful. We travel to probably 12 to 14 trade shows a year. So, seeing us out and about standing at a tradeshow booth and catching up.

Typically, our customers don't just borrow 1 time from us. They buy that first store and then they may want to go buy another store. The NCPA [National Community Pharmacy Association] has data out there that the average pharmacy owner has multiple stores. And so, that's the way to really get ahead. There's timing, and you’ve got to find the right fit, but once you figure out how to be a store owner-operator, the potential is to go after more stores and build your portfolio from there. Pharmacy is kind of a volume game; the more stores you have, the more opportunity there is for you to build wealth and equity. We're here for you as you sort of get started and as you grow as well.

Drug Topics®: That's actually a really interesting data point. I didn't realize that, because when I think of independent pharmacies, I think of folks owning just the 1 store and I didn't realize that on average, people are owning multiple stores.

If somebody comes to you and they take out the first loan to open that first store, do they have to finish paying off that loan before they can take out another one with you, or do you work with them to help them open those multiple stores at 1 time?

Hegi: Most of our loans, unless you have real estate—say you’re just leasing your space—those are going to be 10-year term loans. We have plenty of customers that will have 3, 4, or 5 loans out with us; [it’s] just kind of been [an] every couple of years type thing, would look to add a new a new business. So that's perfectly fine.

We've been doing this for about 10 years. Our first early on customers, they finally made it to the term of their loan with paying their debt off. But we've done plenty of loans along the way, and we're here anytime. The SBA does have a $5 million cap, and so there are—if you buy a store that's worth $4 million, you have $1 million left and you could use that. But once you hit that $5 million mark, your runway essentially is exhausted with SBA. But up until that point, we'll take a look at anything and everything to help our pharmacists and customers.

Drug Topics®: Awesome, that’s very interesting; I'm glad we were able to touch on that.

Would you be able to share a success story about a client who First Financial Bank was able to help through your pharmacy financing solutions?

Hegi: That’s a good question, Lauren. One group that comes to mind is some pharmacists that we helped back in 2013. They were some of our early customers and they came from corporate pharmacy, where they were pharmacy managers but wanted to get into in pharmacy ownership. We helped each of them start a store from scratch. They were hungry and aggressive and did a great job marketing and growing their businesses, respectively. They have since teamed up and acquired several stores over the course of the last 6 or 7 years. We just helped them purchase a store, we closed a loan for them last week and it was their seventh pharmacy.

So, just seeing customers who had no ownership experience, who got started with us many years ago, started [a pharmacy] from scratch—which is not easy to do at all; it's really difficult to start your own pharmacy and to grow it—and to just see those stores and the way they've grown and are still growing each and every year, is a testament to how well they take care of patients and how well they know their communities.

Even thinking beyond those original stores where they bought existing businesses and have navigated the change of ownership experience and successfully done so, they come to mind as really good customers and you just feel proud of them what they've been able to accomplish 8 years into it. They have 7 stores; that's the kind of potential that we like, that's what we want to see from our customers, that they feel that they have the support from us so that they can go accomplish their goals and dreams and add to their portfolio of stores.

We have many stories like that from our 10 years of being in this space, but seeing those that you got started with early really grow and blossom is pretty rewarding.

Drug Topics®: Awesome, great. Thank you so much for sharing that. I think ending on that high note I think is always really important for our listeners just see, yeah, it’s possible and this is actually an achievable goal.

That was all that I had—is there anything else that we didn't touch on that either of you wants to bring up?

Hegi: No, I enjoyed the discussion. Thanks for teeing questions up, they were good questions, Lauren.

We'd love to talk to any listeners who may have questions about financing, or even just about pharmacy ownership in general. Bo and I are always available you can find our contact numbers on our website, and we would love to visit with you.

Thanks again for having us and giving us a chance to talk about pharmacy financing.

Drug Topics®: Of course. Thank you so much for joining us.