Funding Requirements for A Pharmacy Partnership

Question:

Expert Response

Thank you for your question.

I believe your question addresses two aspects:
1) How does your property debt affect your ability to purchase a pharmacy; and
2) What equity is requited to purchase a pharmacy in a partnership.

First and foremost, bank lending is assessed on two components - Loan to Value (LVR) Ratios and Earnings Coverage.  The first dictates that you can only borrow a certain percentage against any investment.  While the second relates to your ability to pay back the loan.

LVR's for pharmacy are sitting at about 75% of the value of the pharmacy.  This means that you need unsecured equity of at least 25% (plus transaction costs) to enable you to purchase the pharmacy.

If you are leveraged to 90% in property, it is unlikely that you will be able to use this as equity for a pharmacy purchase.  This is because these assets are at capacity lending with your financial institution.  When looking to lend, financial institutions look to what level of unsecured debt you have available to contribute to the transaction.  A bank would not look at your situation as 'unfavourable' but would not consider this as 'un-usable' towards equity in a pharmacy purchase.

In addition, the bank would also consider the repayments you are obliged to make on these properties when considering your ability to repay funding for the pharmacy.

So before proceeding with the purchase of the property, realise that you may not be able to use these investments as equity until you have paid down some debt.  In addition, consider how you are going to fund the repayments, and whether or not there is still capacity for you to pay off a pharmacy loan.

To your next question, equity required for partnerships can be a completely different ball game to purchasing the pharmacy as a whole.  For those of you who are unaware (probably very few), Partnership can make the whole process a lot easier as the senior partner is essentially funding the junior partner in.  Banks do not lend against half a pharmacy, they take security against the whole business.  It's all or nothing and they rarely like to be second in line from a security position.  In a partnership situation the young Pharmacist can lend up to 100%.  Remember the Senior Partner normally uses the funds received to reduce his or her debt (or even repay the whole debt) and hence reducing the Banks exposure even further.  When this is taken into account the junior partner nearly always has the ability to lend more when buying in this type of situation.  However, the senior partner will require appropriate measures to protect his or her assets.

Under a pharmacy partnership, your equity contribution may be lesser in financial means - if your partner agrees to this.

Banks will feel comforted by the fact that the Senior Partner who has been in business some years will still be in control or can monitor the junior partner hence they will almost always lend above that of a single buyer scenario.

If you require further information/examples about partnerships in pharmacy, visit the Medici Capital website:
http://www.medici.com.au/partnerships

For more information about funding arrangements for a partnership, contact our finance department:
http://www.medici.com.au/finance/