Pharmacy Finance Australia

Pharmacy ownership is regulated at two levels. State and territory pharmacy laws restrict who can own or hold a financial interest in a pharmacy, generally to registered pharmacists, partnerships of pharmacists and companies owned by pharmacists, with limited exceptions such as some friendly societies. Most states also cap the number of pharmacies one pharmacist can have an interest in. Separately, the Commonwealth approves a pharmacist to supply PBS medicines at particular premises, and new approvals or relocations are assessed against the Pharmacy Location Rules. Lenders like these barriers because they limit new competition, but they also mean every purchase carries regulatory conditions.

A pharmacy business is valued on maintainable earnings. A specialist valuer starts with EBITDA, deducts a market salary for the working proprietor, removes one-off items and tests the result against script volumes, gross margin, wages and rent as a share of sales. A multiple is then applied that reflects location, lease, competition and growth. Stock is normally counted at settlement and paid for at cost on top of the agreed price. The lender works from the independent valuation rather than the contract price, which is why realistic earnings figures matter more than the asking price.

Goodwill lending is where pharmacy differs from a general business acquisition loan. For most small businesses, lenders want property security for most of the debt. For registered pharmacists, specialist healthcare lenders and the health divisions of major banks will commonly lend around 60% to 80% of the pharmacy valuation, secured by a general security agreement over the business, personal guarantees and an interest in the lease. Terms are usually up to 10 years and should not run past the lease plus options. Some lenders allow an initial interest only period. Offering property as additional security can lift the total amount borrowed.

Buying the freehold changes the structure. The premises are funded as commercial property, typically at 65% to 70% LVR over terms up to 25 years, and some healthcare policies go higher for an established pharmacist who will occupy the building. Many buyers hold the property in a separate entity that leases to the pharmacy at market rent, which keeps the asset apart from trading risk and gives the lender a clear lease to assess. Entity structure, stamp duty and GST treatment all need accountant and legal advice before contracts are signed. Owning the premises also removes much of the lease risk from the goodwill.

Partnership buy-ins are common, because many pharmacists enter ownership as a junior partner. Lenders do not take security over part of a pharmacy, so the incoming partner usually borrows from the lender that already holds security over the business, often with all partners guaranteeing the facility. Because the senior partner stays involved and the sale proceeds often reduce existing debt, lenders can be more flexible on the junior partner's contribution than for a solo purchase. The comparison of buying into a practice versus buying the premises covers similar issues for other health professionals.

An investor does not need to be a pharmacist to own a building leased to a pharmacy. Lenders assess it as leased commercial property, looking at the tenant's trading strength, lease term, rent against market and how easily the shop could be re-let. Pharmacy regulators in some states review leases and other commercial arrangements to check that no non-pharmacist holds a financial interest in the business, so turnover rent and similar clauses need legal advice. A self managed super fund can also buy the premises, including to lease to a member's pharmacy at market rent, but the fund cannot own or fund the pharmacy business itself. Get licensed SMSF advice.

Serviceability is tested on the pharmacy's maintainable earnings plus any other verified income, against all existing and proposed debt at an assessment rate above the actual rate. Some lender policies look for interest cover of around two times. Assessors also consider policy risk, since changes to PBS pricing and dispensing arrangements, such as the move to 60 day dispensing for many medicines, flow directly into dispensary income. Pharmacy loans are commonly reviewed annually against financial covenants. Refinancing is straightforward for a well run pharmacy with a long lease, and a sale to another pharmacist is the usual exit.