A pharmacist’s guide to: Structuring loans and financing

This article first appeared in The Capsule, a publication of Pharmacists Manitoba.

Whether buying, expanding or selling a pharmacy, financing goes far beyond the amount borrowed or the interest rate – it can be a deciding factor in whether a pharmacy transaction succeeds or fails. Those undertaking a pharmacy transaction must answer questions such as: Who or what entity is borrowing the money; what assets are available for a lender to take as security; whether anyone is personally responsible for the loan; and what restrictions the loan places on the business.

These questions are particularly important for pharmacies given their regulated nature. In Manitoba, The Pharmaceutical Act (Manitoba) sets out that a pharmacy may only be established or operated under a pharmacy license. The Pharmaceutical Act also requires disclosure concerning the ownership of the pharmacy and, where the applicant is a corporation, the applicant must disclose its legal and beneficial shareholders, officers and directors. Financing must therefore be structured alongside the pharmacy’s corporate and regulatory arrangements rather than treated as a separate banking matter.

Identifying the borrower

An early step in arranging financing is identifying the individual or entity that will be borrowing the money. This is important because the borrower may not necessarily own all of the assets involved in the pharmacy’s operations. Lenders will need to confirm which entity owns the assets intended to secure the loan.

If the borrower is a corporation, The Corporations Act (Manitoba) provides the board of directors with the legal authority to manage the corporation’s business and affairs. However, this authority can be restricted by the corporation’s articles of incorporation, by-laws or shareholder agreement (if applicable), all of which may require additional approvals before a major financing transaction can proceed. Even where the directors and officers have the power to approve financing arrangements, they remain subject to statutory duties. Under the Corporations Act, directors and officers must act honestly and in good faith with a view to the best interests of the corporation, and they must exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. They are expected to properly review the terms of any loan, consider the risks to the business and ensure the financing is appropriate for the corporation’s financial position and long-term success. In light of these legal responsibilities, all significant financing transactions should be formally approved through proper corporate resolutions and documented in the corporate records of the corporation.

Understanding lender security

As referred to above, a secured loan is a loan backed by assets, known as collateral, that the lender can seize or liquidate if the borrower defaults on repayment. Collateral typically includes tangible and intangible business assets such as equipment, inventory and accounts receivable. For a pharmacy, these categories can represent a substantial portion of its operating assets. Where the borrower also owns real property, a lender may require a mortgage over the land and buildings as additional security for the loan.

Given this broad range of assets, a lender may require a General Security Agreement (GSA), granting it security over a variety of the pharmacy’s personal property. Under The Personal Property Security Act (Manitoba) (PPSA), security may attach to property currently owned by the borrower and, where the agreement provides, to after-acquired property. In practical terms, this means the lender’s security can continue to cover new inventory or replacement equipment acquired after the financing closes, rather than being limited to the property owned on closing day. It is important to note that a GSA only covers personal property. Where the borrower owns real property, a separate mortgage registered against title to the land would typically be required to secure the lender’s interest in that real property.

In addition to collateral and mortgages, lenders may also look to personal or corporate guarantees as part of the overall security package, particularly where the available business collateral and any real property security do not fully support the loan. A personal guarantee is a commitment by an owner or shareholder to repay a loan personally if the corporation does not. Operating a pharmacy through a corporation does not, by itself, make a shareholder personally responsible for every corporate debt; however, signing a personal guarantee creates that separate obligation. Prior to signing any guarantee, the amount covered, the debts it applies to and all other terms and conditions should be clearly understood.

Financing the purchase or sale of a pharmacy

A pharmacy acquisition does not need to be financed entirely through a single bank loan, as transactions may involve a combination of different financing sources.

As part of this combination, the seller can assist in financing the deal through a vendor take-back loan. Instead of receiving the entire purchase price at closing, the seller agrees to receive part of the price over time, with or without interest. This can bridge the gap between the buyer’s available cash and bank financing, but it also means the seller remains a creditor after the sale. If both the bank and the seller take security, the parties must determine who gets paid first if the business fails. In most cases, the lender financing the deal will rank first and the seller will rank second.

Restrictions after loan closes

The terms of pharmacy financing also extend beyond the interest rate and repayment schedule. A loan agreement may also contain covenants, which are ongoing promises or restrictions that the borrower must follow while the loan remains outstanding. A pharmacist should therefore consider whether the financing terms could restrict future decisions about the pharmacy, particularly if additional borrowing or significant expenditures may later be required.

The loan documents will also identify events of default and the lender’s available remedies. Pharmacists should pay particular attention to cross-default provisions, which provide that a default under another specified financing arrangement also triggers a default under the lender’s agreement. For a secured loan, default can have particularly significant consequences, as previously discussed.

Conclusion

Financing should be treated as an integral part of the pharmacy transaction rather than a separate matter. The structure of the financing can affect the pharmacist’s personal exposure, the assets available to the lender and the ongoing operation of the pharmacy after closing. Whether a pharmacist is purchasing, expanding or selling a pharmacy, the financing arrangements should be considered alongside the transaction structure, ownership requirements and other regulatory obligations. Understanding these terms early on can help pharmacists assess both the immediate cost of financing and the longer-term legal and commercial obligations that come with it.

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