Using Tax Strategies When Selling Alabama Pharmacies

By Brad MacLiver
Authorship and profile at Google


Industry Roll-Ups are where an industry’s many players are consolidated into smaller groups for economic benefits. AL pharmacy buyers participate in the pharmacy industry roll-up in Alabama to achieve economies of scale in purchasing, marketing, information systems, logistics, distribution, and top management. Pharmacy sellers both independent owners and drug store chains must consider their current market value, recognize the narrowing of profit margins, and realize what their tax consequences will be if they sell.

When Alabama pharmacy owners sell their pharmacy it is considered a capital asset. The difference between the amounts it is sold for and the amount spent to either purchase or start the pharmacy in Alabama is a capital gain, or a capital loss. In the U.S., all capital gains must be reported and the appropriate tax paid.

Specific tax strategies can be used to help offset the tax liabilities when selling a Alabama pharmacy or a drug store. Unless a professional is handling a large number of pharmacy acquisitions, they usually do not know these federal regulations that allow for reducing the tax liability for the AL pharmacy owner.

Many Business Brokers, CPA’s, attorneys, and other professional advisors inform their clients that selling a pharmacy in Alabama will result in tax consequences. However, most of these professionals do not handle the buying and selling of Alabama pharmacies on a daily basis and may not realize the different aspects of structuring a pharmacy transaction allowing the reduction of the tax burden to the pharmacy owner.

There are some capital gain tax strategies that must be implemented before any obligation to sell the pharmacy. When a drug store owner is considering selling their pharmacy either now, or in the next few years, it is urgent the best course of action be considered now instead of later.

Estate planning when selling a Alabama pharmacy should also be a consideration. Specific federal regulations allow an asset to be converted to an income stream, provide a tax deduction, increase asset diversification, and provide risk reduction, along with offering effective retirement and estate planning. If the pharmacy seller in Alabama is nearing a retirement age, or will be working as an AL pharmacist for another company, instead of being an owner, then estate planning should also be considered.

As reimbursements are cut, more regulations are applied, and pharmacy profits continue to slip, more independent pharmacy owners along with small and regional Alabama pharmacy chains will be considering selling their AL pharmacies and drug stores. Tax considerations should be a paramount part of the decision process.

Pharmacy owners in AL should consult with a pharmacy industry expert for advice on structuring the sale of their pharmacy. Someone with extensive experience in Alabama pharmacy and drug store acquisitions will have the knowledge and expertise to structure the transaction for tax considerations. Like all tax planning issues, waiting until the end of the year is not always the best strategy. Following this advice can place larger sums of money in the bank of pharmacy owners when an Alabama pharmacy is sold.

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Pharmacy Acquisitions and EBITDA in Alabama

By Brad MacLiver
Authorship and profile at Google


EBITDA is an acronym for earnings before interest, taxes, depreciation and amortization and is often used to measure the value of some businesses. It can also be used in the comparison of similar companies.

Generally, EBITDA makes it easier to evaluate various companies and to compare them against industry averages by removing the non-core and irregular operating costs, such as interest, which can vary depending on the management’s choice of financing, taxes which can fluctuate depending on acquisitions or losses from prior years, and arbitrary factors of depreciation and amortization.

The EBITDA formula can be used as a guideline when valuing larger companies, or when comparing the profitability of large similar companies in the same industry.

For the effective use of EBITDA, these larger companies should possess significant assets, have heavy amortization schedules, or bear substantial amounts of debt. Considering independent pharmacies don’t meet that criteria, this formula is not a useful measure as the sole means for valuing Alabama pharmacies for acquisition purposes.

To Calculate EBITDA:
1. First, calculate the business' net income by obtaining total income and subtract total expenses.
2. Then determine the total value of taxes paid to federal, state, and local governments.
3. Determine interest fees that will be paid to companies or individuals for the use of credit, or capital.
4. Establish the cost of depreciation, which is the expense recorded in order to allocate a tangible asset's cost over its useful life.
5. Determine the cost of amortization, which is the expense for the consumption intangible assets' (like goodwill, patents, and copyrights) value over a specific period of time or the asset's expected life.
6. Add values #1 through #5 together.

EBITDA calculation example:
1. Net Income            3,500
2. + Taxes paid            750
3. + Interest Expenses     450
4. + Depreciation          250
5. + Amortization          150
6. = EBITDA              5,100

EBIDTA has several hindurances, such as:
1. It is easy to confused the number with cash flow.
2. EBIDTA can make even firms that are completely unprofitable appear to be financially healthy.
3. Its numbers are simple to manipulate.
4. The formula can overlook cash requirements for growth in accounts receivable.
5. It is easy to miss cash requirements for growth in inventories.
6. EBIDTA is not factual when valuing small companies.
7. For companies with few assets, small amounts of debt, or low depreciation or amortization schedules, EBITDA is ineffective.

EBITDA was being used in the past to estimate cash flow during a company buyout to calculate whether or not companies could service their debt. By factoring out interest, taxes, depreciation, and amortization, this allowed for unprofitable businesses to appear financially healthy. This method of valuation was also used extensively during the dotcom era to value unprofitable businesses, with few assets, little earnings, and the results from that method caused many to go bust. This was a blaring example of misapplying EBITDA.

Knowledgeable pharmacy specialists performing Alabama pharmacy business valuations will use EBITDA in retail and specialty pharmacy valuations, but only as part of a larger formula when computing values for specialty AL pharmacies especially those who have a niche in HIV, disease management, long term care, etc. However, EBITDA does not need to be used as part of the usual formula for standard retail pharmacy acquisitions in Alabama.

The EBITDA number for a specific existing pharmacy is important, for the most part, when the existing ownership is establishing their store value for the purpose of a line of credit, borrowing, creating a Trust, stock values, etc., but EBITDA does not have the same importance when selling a Alabama pharmacy. This is due to the fact the buyer will not have the same expenses as the seller.

Buyers may not have the same tax base, interest expense, or the same depreciation schedule, thus it is important that the buyer calculate an estimated EBITDA that is specific to their operating model, business systems, buying power, cost of operations, etc., not the sellers. It should also be noted that EBITDA assumes that the buyer will acquire all of the assets, working capital, accounts receivable, and liabilities. Those assumptions do not hold true regarding an acquisition of a pharmacy. Instead of the EBITDA number, pharmacy buyers in Alabama should be focusing on sales, gross profit, cash flow, and customer mix.

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Pharmacy Industry Roll-Up in Alabama

By Brad MacLiver
Authorship and profile at Google


AL Industry Roll-Ups are where an industry’s many players are consolidated into smaller groups for economic benefits. Recessions, new government regulations, or other aspects of the industry that may be stifling profits end up providing incentives to consolidate.
           
One of the principle reasons for an industry roll-up is to achieve economies of scale in purchasing, marketing, information systems, logistics, distribution, and top management. Businesses that are consolidated also have less risk from the impact of an unsatisfied customer and have the reward of being able to recruit, or keep, key employees.

One example of an industry roll-up can be seen with the Alabama pharmacy industry. This industry is well-established and still experiencing sales growth. Pharmacies and drug stores, however, have seen a steady decline in their profit margins due mainly to government regulations, even as sales increase. There has also been a shortage of AL pharmacists - a required key employee.

Industry roll-ups are often initiated by investors seeking investment opportunities. However, in the case of pharmacies, the roll-up is a necessity due to declining net profits ratios. Companies that are acquired in a roll-up are usually small independently-owned businesses whose owners believe in the economic benefits of combining forces with a larger organization, or simply need an exit strategy. In the pharmacy industry roll-up, independents have been a majority of the acquisitions, but there has also been a consolidation of a number of the larger Alabama pharmacy chains.

During the pharmacy industry roll-up pharmacies with better financial wherewithal are acquiring their local competition and combining two or more stores into a single location. This results in more customer traffic through a single location and reduces the expenses that come with multiple locations. This can dramatically drive up total sales while driving down the administrative and overhead costs per customer.

To help fund pharmacy acquisitions during the roll-up in Alabama, specific funding programs have been developed. These pharmacy chain funding programs are backed by major financial institutions that provide the funding for pharmacy acquisitions. These pharmacy funding programs allow an individual Alabama pharmacy business, or an investment group, the capital to acquire and combine pharmacies in geographic areas.

Funders are willing to provide the capital for the Alabama pharmacy roll-up because they recognize that combining the individual pharmacy businesses in AL provides a greater total business value than if each individual pharmacy value were added together. This synergistic value reduces the risk of funding the individual acquisition.

When considering the buying, selling, or financing a pharmacy, whether an independent drug store, or multiple pharmacy locations,  due diligence and understanding of all aspects of the transaction should be considered. Using the services of a pharmacy industry expert to guide an Alabama pharmacy owner through the maze of details will benefit the AL pharmacy owner in making the best business decision.

All transactions involved in the pharmacy roll-up need to have the business valued at the current market value. Business valuations for the Alabama pharmacy industry should be calculated by a company that has in-depth knowledge of the pharmacy. Simple accounting formulas used by many to estimate a value do not provide an accurate picture because the simple formulas do not take into account the aspects that are causing the pharmacy industry roll-up.

The aspects of the market which are stimulating the roll-up are also having downward pressure on the pharmacy business valuations. Pharmacy owners in Alabama have been watching what has been occurring in the pharmacy industry in AL. While profit margins slip, new regulations are being imposed, and as reimbursements are pared down there is wide expectation that the business values in the Alabama pharmacy industry will continue to slide to lower levels, and thus the pharmacy industry roll-up will continue.

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Pharmacy Acquisition Finance in Alabama

By Brad MacLiver
Authorship and profile at Google


When an AL pharmacy or drug store is being sold, it is rare that the buyer pay “out of pocket” cash for the acquisition. Even when there is cash available, strategies for pharmacy acquisition usually involve financing the transaction.

A typical acquisition will take 6-9 months to complete, so the Alabama pharmacy seller will need the buyer to provide some proof up front about their ability to close the transaction. This acquisition will involve many hours of due diligence and negotiation, so the process should involve qualified parties.

Along with the buyer and seller the acquisition will involve attorneys, accountants, lenders, valuation companies, industry specialists, along with others. No one wants to pursue 6-9 months of work involving a variety of highly paid professionals without having some confidence of the AL pharmacy buyer’s ability to close the deal.

The process will begin with determining the value of the business. There are many companies that offer valuation services. However, pharmacies are not ice cream stores. There are many aspects of valuing an AL pharmacy that are unique to the industry, so generic valuations or simple accounting formulas should not be used. An industry specialist should be used for valuing the pharmacies instead of a valuation company that has a broader spectrum.

In order for a valuation to be completed, the selling company needs to provide data that is up-to-date. Lenders do not accept old data or a seller's intuition.  They must make decisions to finance based on sound, verifiable information.

Structuring the transaction is extremely important. The seller of course wants as much money as possible and wants cash. The buyer needs to spread out the debt service and wants to have as little cash as possible invested in the acquisition.

Alabama Pharmacies and drug stores are in an industry where it is more difficult to obtain business loan due to the majority of the value in a pharmacy is the customer files and not hard assets. Therefore, for the acquisition to be financed a lender will need a strong understanding of the industry and what, beyond the collateralized assets, the company offers to reduce the perceived risk.

Pharmacies in Alabama have typically been known for generating profits and to be stable businesses. However, they are usually in leased locations, and their furniture, fixtures, and computers will only provide $15-20,000 of collateral for a buyer possibly requesting a million dollar loan. A lot of money is tied up in inventory, but the small pills are considered by a lender to easy to move out the door in the event of default. Due to these circumstances many lenders will not loan money to these traditional money making businesses. A successful transaction takes a lender that understands the pharmacy industry.

Tips regarding pharmacy acquisitions and finance in AL:

1. Attorneys and CPAs who have been representing the Alabama pharmacy seller for many years may see the transaction as putting themselves in a position of losing a client when the business is sold. Make sure they are working diligently on the transaction and are not slowing or undermining the process

2. Since pharmacy acquisitions involve 6-9 months of work to complete , all parties involved need to be aware of time tables. Much too often, items of importance end up sitting on the desk of someone that is outside of the control of the buyer or seller.

3. All financial information needs to be current. Over the lengthy process the data supplied to both the buyer and the lender will need to be updated on a continuous basis. Things can change drastically during a nine month period and the Alabama pharmacy seller will need to continually prove the financial condition of the company.

When pursuing “pharmacy acquisition finance,” for the best chance of success, make sure the valuation company and the lender have expertise in that industry. Choose a company that has the pharmacy experience and expertise, and is a direct correspondent with lenders who understand Alabama pharmacy.

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Alabama Pharmacy Industry: Current Market Conditions

By Brad MacLiver
Authorship and profile at Google


Currently there are a number of factors that are impacting the current market conditions of the U.S. pharmacy industry. These factors are affecting the pharmacy business valuations of pharmacies in AL and drug stores all across the U.S.

Local demographics:

The valuation process also takes local market conditions and local demographics into account. Smaller communities have less potential for growth and with falling profits, a buyer will need to purchase at a reduced value because they will have to service debts from a business loan and still try to make a living. This is also true for communities that have lost population because of economic conditions, or communities that have a high rate of unemployment. Less people and less customers who have the ability to purchase results in fewer sales and less of a chance for any substantial improvement in the near term. The effect of this is a lower pharmacy business value in Alabama.

Pharmacists Shortage:

Pharmacies in Alabama and across the country have had difficulties in finding pharmacists.  This pharmacist shortage affects not only employee opportunities it also affects the number of potential independent buyers. 

Fewer Buyers:

There are also fewer corporate buyers. Some of the largest pharmacy chains have been purchased and consolidated in the AL pharmacy industry roll up. Many smaller chains have run into financial difficulties and have stopped their expansion. It is more difficult to drive a price higher when there are fewer willing, or capable, to purchase.

Current Market Conditions Requires Industry Roll-up:

The consolidation of the pharmacy industry is required to get more traffic into a single store.  Due to simple economics, when any business has a reduction in profits they are less attractive to a buyer and pharmacy business values drop. There are many factors contributing to the downward pressure of pharmacy values and there is not any expectation of a turn around. Pharmacy owners in Alabama should not be fooled by inexperienced Brokers claiming grand outcomes and over stating pharmacy business values not based on realistic market conditions.

With the consolidation of the Alabama pharmacy industry that has been happening for several years, many new brokers have entered the market to broker pharmacy acquisitions. Most brokers do not have pharmacy related experience, nor do they use current market conditions when they value a pharmacy. Most are using simple accounting formulas that hold no sound reasoning for the value when faced with current pharmacy market conditions. Due to this many brokers are valuing pharmacies 2 to 3 times more than what the market is really willing to pay. Any inexperienced person can quote a high value to capture a listing.  However, that does not mean the over inflated asking price is what the business will actually sell for.

Mail Order Pharmacies:

Some insurance companies are designating a noticeable amount of AL pharmacy patients as “long-term medications” and require they only purchase the medications from mail order pharmacy companies who provide products at lower prices. This results in local pharmacies not only missing out on prescription sales, but front-end sales will also decline since the customer is not entering the store. Pharmacy mail order sales have now surpassed sales from independent retail pharmacies.

 

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340B Pharmacy Discount Programs in Alabama

By Brad MacLiver
Authorship and profile at Google


There is a program established by U.S. Department of Health and Human Services that provides discounted prescription drugs to qualified Federally Qualified Health Centers (FQHC), Disproportionate Share Hospitals (DSH), and other qualifying entities. When these facilities lack their own pharmacies, they are authorized to contract with a local AL pharmacy. The program for drug pricing is often referred to as 340B after the section of the law that established the program.

Section 340B legislation was created to provide indigent and uninsured populations access to severely discounted medications. Since the program was enacted to assist certain populations there are restrictions and regulations in how the program operates and who the medications can be dispensed to.

Alabama Pharmacies can be contracted by a FQHC, or similar 340B qualified entity, to manage and dispense the medications. Patients from these entities provide additional traffic in the pharmacies allowing the pharmacies the opportunity for additional front end sales along with the Rx sales.

Pharmacy owners in Alabama participating in a 340B pharmacy program need to manage their business consistent with customary business practices. In the event of an audit the AL pharmacy should have dispensing and inventory records, billing statements, etc. Business records should show that drugs purchased by customers, under the 340B Drug Pricing Program, were not diverted to people who are not part of the program.

Along with the additional record keeping a pharmacy owner will need employees who understand the various state and federal rules and regulations, which govern the 340B program. The pharmacy in Alabama will also need to have a location for the 340B inventory, which is separate from their normal inventory, or have a software management system to track the separate inventories.

A system of separating the inventory is required due to the drug inventory used for the 340B pharmacy program is owned by entity that contracted the pharmacy. Since the 340B inventory is not “owned” by the pharmacy this inventory will be treated differently for tax purposes. The pharmacy generates income from dispensing fees they are paid instead of a mark-up or profit margin on the inventory.

Since customers participating in a 340B program can only purchase the designated medications from a pharmacy contracted with a 340B entity, this allows a pharmacy to have a market niche. A contracted pharmacy servicing 340B customers benefit from additional customer traffic visiting the store.

With the current economic situation and high unemployment, many people have lost their insurance benefits. This will likely expand the need for 340B pharmacy programs and provide additional 340B customers to a participating pharmacy in Alabama.

However, when a pharmacy owner is weighing the potential benefits of a 340B program, they should also consider other aspects of their business and the current market conditions of the pharmacy industry. What are the pharmacy’s goals over the next couple years? A younger pharmacy owner with long term objectives can benefit for many years from the added customers. However, a pharmacy owner considering selling the business in the next couple years should be aware that acquisition values are based on the customer files, and many buyers are not currently willing to include 340B customer files in their offers. This results in a lower pharmacy business valuation and market price for the Alabama pharmacy despite the volume of business. Also, due to the current economic conditions there are some 340B customers who despite the deeply discounted prices, have chosen not to purchase medications. Pharmacy owners in Alabama need to consider the added costs and time of 340B inventory and customer tracking and reporting, may not be offset by the fees received.

If a pharmacy owner is considering the benefits of participating in a 340B program, or is considering selling the pharmacy in the couple years, it is advisable to discuss the options with the AL pharmacy industry expert.

Pharmacy Transactions and Capital Gains Tax for the State of Alabama

By Brad MacLiver
Authorship and profile at Google


How could a “Capital Asset” affect you, an Alabama pharmacy owner if you want to sell your pharmacy business; and what is a capital asset anyhow?

Start by only looking at your Alabama pharmacy and not any of your personal belongings, and now try and sell your pharmacy; what you will then have is your pharmacy business as a capital asset. Look now at the difference in the cost you paid for the pharmacy (the basis), and the sum the pharmacy sells for, be it profit or loss, and this is what is regarded by the United States government as either a capital gain or loss and has to be reported and may be taxed.

Capital gains can also be called investment income due to its relation to real assets, such as property, intangible assets such as charitable donations, and financial resources.

With the current economic dip, the capability to attain financing for a potential pharmacy business buyer is difficult, and the available cash will be in smaller amounts. Also, selling your pharmacy business for a profit may be lower due to the higher probability that you, the Alabama pharmacy owner, may have had to reduce your asking price to allow buyers the opportunity to obtain financing; and in the end you may pay a higher percentage of taxes.

How can you the owner of an Alabama Pharmacy combat these issues? Well there are good strategies to do just that, but first you the pharmacy owner should have a specialist that is an expert in the pharmacy business industry, with the tools and strategies required to assist your pharmacy business. Washburn & Associates are these specialists that know how selling your pharmacy for the greatest profit, with the least in taxes is the bottom line.

“Charitable Remainder Trust” or CRT is one tool that may be helpful with the capital gains tax burden. Now, Classifying a CRT; legally explained as “Split Interest Trust,” due to the mix of charitable donations and personal financial positions; CRT’s may decrease the tax liabilities, and increase your pharmacy’s finances while allowing for goodwill giving.

Goodwill donations are what create a Charitable Remainder Trust when you an Alabama pharmacy owner give from your own assets, such as real estate property, cash, and other such items, to this special type of Trust. This Trust is then put in place for a defined time period or until the your, (the donor’s) death; during this time you the pharmacy owner can receive income as well as buy life insurance, if desired, to provide for your designated heirs after you are gone; this would come from this Trust’s assets, and would be without state tax liability. CRT’s are there for use by financial specialists in the pharmacy business industry, like Washburn & Associates, to increase the your pharmacy’s assets and charitable donations by understanding the federal government’s intricate and stringent tax laws written in the Internal Revenue Code 644, that denote how and when a CRT can be set up.

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Buy-Sell Agreements for Alabama Pharmacy Owners

By Brad MacLiver
Authorship and profile at Google


When an AL pharmacy is owned by two or more people the stockholders/partners should have a Buy-Sell Agreement. A buy-sell agreement is a written document that provides the procedures and governs the future sale of the pharmacy business.
                 
Alabama Pharmacy buy-sell Agreements protect the interest of the parties who own the pharmacy and directs the actions triggered by a stockholder leaving the business due to death, disability, divorce, dissolution, or retirement. The agreement will govern how and when the shares of the pharmacy business can be sold, or transferred. It will also provide guidance as to how the pharmacy will be valued along with the obligations of the remaining shareholders of the pharmacy.

Buy-sell agreements are important because the different elements of a future sell are predetermined and won’t need to be negotiated during a heated dispute, or during a grieving period. It provides both the stockholder and the family a comfort level that when the inevitable time comes for an exit strategy that the process was thoroughly thought out in advance.

Disadvantages of not having a buy-sell agreement between pharmacy owners in Alabama is that a disability may leave one partner working more and another not adding to the productivity. In the event of a death, without an agreement, one partner may be left with a nonproductive heir, or a new partner may be inserted that has personality conflicts with the surviving partner. The wrong partner could be devastating for the AL pharmacy business.

There are various types of buy-sell agreements such as: Entity Buy-Sell Agreement, Cross-Purchase Buy-Sell Agreement, Wait and See Buy-Sell Agreement, Disability Buy-Sell Agreement. Buy-sell agreements are also known as a Business Will or a Buyout Agreement.

Potential elements of a Buy-Sell Agreement: 1. Stockholders names and the number of shares and voting rights of each. 
2. Guidance for the certified Alabama pharmacy valuation and purchase of a stockholder’s shares.
3. Mutual covenants and considerations.
4. Restrictions on transferring, purchasing or encumbering the company’s stock.
5. Protocol in the event of a shareholder’s divorce or termination of a shareholders employment.
6. Obligation to buy/sell shares from an estate.
7. Purchase of insurance to ensure ability to meet obligations.
8. Purchase of stock paid in lump sum or by installments.
9. Remedies for breach of the agreement or default of payment.
10. Until transfer is complete the right to inspect books and records.
11. Amendments and notices for offers or legal matters.
12. Enforceability of the agreement, the binding effects, and arbitration procedures for disputes.
13. Process for dissolution, or liquidation, of the corporation.
14. Maintaining the premises during a transition.
15. Preserving representations and warranties.
16. The terms of transfer.
17. Bill of Sale.

To ensure that the money required is available, buy-sell agreements are often funded with a life insurance policy. Should the death of one of the AL pharmacy owners occur, the life insurance settlement will provide the funds for the remaining pharmacy owner to buyout the partners shares from the estate.

Life insurance coverage for each partner needs to be in place, because without a way to accomplish the purchase of the pharmacy shares the buy-sell agreement will not be functional. As the business expands and develops, the amount of insurance need to be adjusted to provide an adequate coverage. Without insurance, the surviving stockholder could possibly not have enough cash to satisfy the required amount to buy out the estate, which will leave the survivor with an unwanted partner.

A certified Alabama pharmacy business valuation is required in order to have the adequate insurance coverage and to determine the specifics of the buy-out terms. There are several companies out there who provide business valuations and, due to the current market conditions and dynamics of the pharmacy industry, it is best to consult a valuation firm that has extensive pharmacy experience. Multipliers and simple accounting formulas do not provide adequate or realistic valuations for an AL pharmacy business.

Pharmacy buy-sell agreements are critically important documents that must be prepared with seriousness and care. Even with a partnership that is long-standing, by the time an event occurs that will require that document, it will already be too late.

Tips for Alabama Buy-Sell Agreements: 1. These agreements are critical documents that should never be taken lightly. Make sure to consult a licensed professional.
2. Documents must take the proper laws and regulations, which vary from state to state, into account, so seek the proper guidance.
3. It is possible that the premiums for insurance that will fund the buy-sell agreement are deductible.
4. Make certain that the Alabama pharmacy valuation is performed by an established AL pharmacy industry expert.