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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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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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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