What lenders actually look at in a pharmacy goodwill submission

Script volumes and gross profit percentage are the headline numbers, and every broker leads with them. They are almost never the reason a pharmacy finance application stalls. The reasons sit further down the page, and most of them are fixable months before you apply.

Goodwill lending is not property lending

When you buy a house, the bank lends against something it can value and sell. When you buy a pharmacy, most of the purchase price is goodwill — an intangible that is worth what it earns and nothing if it stops earning. Security is typically a general security agreement over the business, directors’ guarantees, and often a mortgage over real property as well.

That changes the whole assessment. A residential loan is a security-first decision with a serviceability check. A pharmacy goodwill loan is a cashflow-first decision where security is the backstop. Everything a credit analyst does is an attempt to answer one question: how confident can we be that this business will still produce this cashflow in five years without you?

The five numbers the credit team actually runs

1. Normalised EBITDA — and the add-backs behind it

Reported profit is not the number. The analyst rebuilds earnings by adding back items that will not continue under new ownership and removing benefits that will not either. The common adjustments: the owner’s wage restated to a market rate for a working pharmacist manager, private motor vehicle and travel, one-off legal or consulting costs, related-party rent restated to market, and non-recurring stock write-offs.

Add-backs are not controversial in principle. They are controversial in evidence. An add-back supported by an invoice is accepted; an add-back supported by a conversation is discounted, and the loan shrinks accordingly.

2. Wages to sales

The single most diagnostic operating ratio in community pharmacy, and the one where a lender most quickly forms a view about whether a business is well run. What matters is not only the level but the composition — how much of it is the owner, how much is registered pharmacist cover, and what happens to that ratio when the vendor walks out the door.

3. Gross profit and its mix

A blended gross profit percentage hides the thing the lender cares about: how much of your margin depends on PBS-remunerated dispensing versus front-of-shop and services. Two pharmacies with identical gross profit percentages can carry materially different regulatory exposure, and analysts are increasingly asked to comment on it.

4. Script volume and its trend

Direction matters more than level. A steady 4,000 scripts a week reads better than 4,600 falling. Analysts look for the story behind any step change — a competitor opening, a nearby medical centre closing, a banner change, a refit.

5. Debt service cover

Normalised earnings divided by total commitments, including the loan being applied for, at a stressed interest rate rather than today’s. Lenders set their own floors and buffers. It is worth knowing the number your own file produces before a bank calculates it for you.

The six reasons submissions actually stall

1. Lease term shorter than loan term. This is the big one. A lender being asked for a ten-year facility on a business with four years of lease and no exercised options is being asked to fund an asset that may not exist for the life of the loan. Options are not term until they are exercised or the landlord confirms them in writing.
2. Add-backs without evidence. Every unsupported adjustment is discounted, and each discount reduces earnings, serviceability and the amount available.
3. ATO arrears or an active payment plan. Disclosed early, these are frequently workable. Discovered by the analyst in the BAS history, they change the tone of the entire file.
4. An ownership structure that does not satisfy the pharmacy rules. If the proposed borrower does not match a permitted ownership structure, the credit decision is academic. This should be resolved before an application is lodged, not during it.
5. Understated household living expenses. Declared expenses well below benchmark measures invite a line-by-line review of your personal statements and add weeks.
6. Working capital treated as an afterthought. Stock, the first quarter’s BAS and the timing of PBS payments all need funding. Applications that finance only the purchase price get approved and then run into trouble in month two.

What a submission should contain before it goes anywhere

• Three years of financial statements and tax returns for the business and each related entity
• Year-to-date management accounts, reconciled — not exported and hoped for
• A normalisation schedule with every add-back referenced to source documentation
• Script data by month, with commentary on any step change
• The lease: term, options, rent review mechanism, make-good, and the landlord’s written confirmation
• Banner or franchise agreement and its remaining term
• Stock position and a working capital calculation
• Personal statements of position and living expenses for each guarantor
• Confirmation that the borrowing structure satisfies the pharmacy ownership requirements

How this works at our end

We arrange credit as a credit representative of LMG Broker Services Pty Ltd, with access to a panel of more than 60 banks and lenders. Under the National Consumer Credit Protection Act 2009 we are subject to the Best Interests Duty, which means any product we recommend must be in your best interests and the reasons must be documented and explained to you.

We may receive commission from the lender you choose, generally between 0.60% and 0.75% of the loan amount. Your credit representative may also charge a fee, which is disclosed to you in writing in a Quote and Proposal before any application is lodged. Our Credit Guide sets out the full detail, including our lender panel and our complaints process.