Merry Christmas - Alabama Pharmacy Owners

To all of the owners and their staff working in Alabama (AL) pharmacies, and drug stores - MERRY CHRISTMAS!  Watch our Christmas video:     http://youtu.be/Lm-6ls-rzrY

The new year may bring new challenges to the pharmacy industry. Whether you are located in a typical retail location, closed door, grocery store, hospital, or are a pharmacy mail order facility we can assist you with valuations, finance, and acquisitions (selling or expanding the business).

Estate Planning for Alabama Pharmacy Owners

By Brad MacLiver
Authorship and profile at Google


Many ALabama (AL) pharmacy owners are experiencing lower profit margins and have considered selling due to current market conditions. The pharmacy industry has been experiencing a roll-up for a number of years, which has been consolidating the pharmacy seller's customer traffic into less pharmacy locations. Regardless, there are a number of pharmacies in Alabama that are not located geographically with other nearby pharmacies, so no consolidation is taking place. A number of pharmacy and drug store owners, despite their location or what is happening in the industry, are taking a stance and won’t consider selling. However, just like taxes, the business will inevitably need an exit.

Estate Planning is something many people in all industries tend to shy away from. For the Alabama pharmacy owner who works six days a week, rarely takes vacations, fills scripts all day long, mops the floor, and then does the books at night, there usually isn’t much spare time to consider things such as estate planning. However, keeping in mind that there will eventually be a transfer of the business, it is important for the pharmacy owner to consider a proper plan of succession for the pharmacy business.

Developing a plan to transfer the business will be time consuming, but done correctly will allow the business to be successfully transferred in an acceptable manner. An estate plan for an Alabama pharmacy owner does not need to be changeless process. Fine-tuning, updating, and amendments are recommended as government regulations, economic conditions, and personal expectations change.

Estate planning allows a pharmacy owner to anticipate and arrange for the transfer of the drug store. The plan will be formatted in attempts to eliminate uncertainties, assist the transfer by trimming expenses, and reduce taxes.

The process may involve Trusts, Wills, Living Wills, Power of Attorney, Medical Power of Attorney, Business Valuations, Life Insurance, Charitable Remainder Trusts, Buy-Sell Agreements, and other legal documents. All of the different aspects of the estate planning are to provide the AL pharmacy owners coordinated directives.

When there are non-family members as partners in the drug store business, it is essential that the estate planning incorporate a Buy-Sell Agreement. A buy-sell agreement, governs the transfer of the business between pharmacy partners. The agreement may also be known as a partner buyout agreement, or a business will. To help protect the family in the event of a partner’s death, the buy-sell agreement may be funded with a life insurance policy.

Estate planning, buy-sell agreements, and the transfer of the Alabama pharmacy should incorporate a pharmacy business valuation completed by a third party that has expertise in the pharmacy industry, performs a large number of pharmacy business valuations each year, and has current industry data as a basis for the conclusions. Using simple accounting formulas, multipliers, and valuators inexperienced in pharmacy will not provide an accurate business valuation.

Most pharmacy owners in Alabama spend a major part of their life building the business. The efforts should not disappear because the pharmacy owner refuses to accept their mortality and plan accordingly. The only pharmacist in some small pharmacies is the owner. If the scripts can’t be filled by a licensed pharmacist then by law the customer files must be transferred to another pharmacy. Due to this, a pharmacy’s business value may drop to a negligible figure in just a few days after the passing of the owner. Contingencies outlined in an estate plan should address this issue. Unfortunately due to not having an effective plan in place, each year a number of pharmacy owners in Alabama die and their family is left with an asset with very little value.

Tips:        
1. When the family drug store is the sole means of income for several family members it becomes even more crucial to have a succession plan in place.
2. To avoid disputes, estate plans should be developed with clear directives.
3. Minimizing tax liabilities is a major objective for most completing an estate plan, therefore expert tax advice should be sought.
4. Many on-line documents and books are available that provide advice and documents for developing an estate plan. When going the self-help route, it is advisable to have a paid expert review the completed documentation to ensure that it can be legally complied with when the time comes.
5. While developing the estate plan it is essential to talk with children and other family members of the AL pharmacy owner especially if there are some family that work in the business and others that don’t.


 

Financing Pharmacy Franchises in Alabama

By Brad MacLiver
Authorship and profile at Google


An Alabama (AL) pharmacy franchise are formed as a contractual relationship between two parties. The first party is the Pharmacy Franchisor who develops their drug store business model, brands the pharmacy related products, and produces the system under which the pharmacy franchisees will operate. The second party is the Pharmacy Franchisee who purchases a franchise license from the Pharmacy Franchisor and typically pays an ongoing pharmacy franchise fee, or royalty fees, to use the products, name, systems, trade secrets, etc., created by the Pharmacy Franchisor in Alabama.

There are a number of options for financing a pharmacy franchise business. All pharmacy franchise funding sources, for drug stores, prefer lending to a pharmacy franchisee who will be working with a nationally recognized name and long track records. Newer Alabama pharmacy franchise models won’t possess these two traits and will be considered more risky.

Traditional Bank Financing used in funding a pharmacy franchise is available when a pharmacy franchise has the track record and pharmacy name recognition. Many of the banks will show interest in this type of funding opportunity. Unfortunately once the bank reviews the loan documents, many of these banks decline the funding request because they don’t understand the security provided for the Alabama pharmacy loan. Community drug stores typically have very little traditional assets to offer as security. Lenders for pharmacy will use traditional methods for analyzing the cash flow available to service to the debt, and they will also need to understand the nontraditional collateral that will secure the loan.

As a borrower, even when incorporated, the independent drug store owner’s personal credit rating will be a factor, along with personal tax returns, and financial statements. The amount of actual cash on hand and the verification of the source of the down payment will be critical factor in qualifying for a pharmacy business loan in Alabama.

AL Pharmacy Franchise Funding Tips:

1. Because there are many pharmacy franchise financing options available, Alabama pharmacy owners should perform proper due diligence then obtain the pharmacy funding that best suits their situation.

2. It is advisable to have an accountant or attorney that is familiar with pharmacy franchise financing to review the pharmacy business loan documents.

3. There are pharmacy consulting services and franchise associations in Alabama who can help guide a prospective pharmacy franchisee or borrower or a drug store loan.

4. New pharmacy owners need to make sure their funding request is enough to get the pharmacy running and profitable. Less than ample funding for the initial stages may put the drug store in a position of needing additional funding. Smaller working capital loans that would be in a subordinated position will be more difficult to obtain at a later date.

When pharmacy owners in AL have questions and need information regarding pharmacy franchise business loans, or any types of funding for community drug stores and pharmacies, they should contact an Alabama pharmacy industry specialist who can provide quality answers and sound advice.

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Financing Types Available in Alabama for Pharmacies

By Brad MacLiver
Authorship and profile at Google


There are a number of different options available for funding AL pharmacy franchises, specialty pharmacies, and traditional community drug stores.

SBA Financing for Pharmacy Business Loans in Alabama

The U.S. Small Business Administration (SBA) partially guarantees loans for pharmacy franchise lenders reducing the risk exposure for the lender. A loan program called 7(a) is a standard for funding pharmacy franchises. These loans can provide funds for pharmacy franchise entry fees, real estate in which the Alabama pharmacy will be set up, improvements to property, pharmacy-related equipment, and working capital.

All borrowers for the pharmacy franchise must be without any bankruptcies, creditworthy, and have an ample down payment.  There can be variations here, but regardless, the business must be able to repay any loans using the cash flow of the pharmacy.

Terms of loans can range from five to twenty years.  Within standards set by the SBA, interest rates can be fixed or adjustable.  They are negotiated by the lender and dependent on the financial condition of the pharmacy transaction.

There are SBA fees for guaranteeing Alabama pharmacy business loans. These fees, which are paid to the government and not kept by the bank, can be rolled into the pharmacy financing.

Patriot Express Business Loan Program

This is another SBA loan program that can be used for pharmacy franchise business loans and is reserved for military veterans, active service members, their spouses, and survivors. The Department of Veterans Affairs would be involved in the Alabama pharmacy loan process.

Pharmacy funding from the Patriot Express program can furnish relatively fast approval times, may accept a smaller down payment from the borrower than traditional business loans, and lower credit scores may also be accepted. Patriot Express business loans provide opportunities for lower interest rate pharmacy business loans.

Funding for AL Pharmacists Who Are Veterans

There are specific franchise loan programs available for honorably discharged veterans and these Vet programs can be considered for pharmacy franchise loans.

Pharmacy Financing From the Franchisor

Financing a pharmacy franchisee in Alabama is a usual topic in discussions with an AL pharmacy franchisor. Franchisors should be able to direct potential drug store franchisees toward funding programs that have previously been successful for their other pharmacy franchisees. Preferred lenders will already be familiar with the pharmacy franchisor and their systems.

Pharmacy franchisors may also provide some funding internally. Lower collateral will be offset by higher interest rates. This may help with qualifying for a pharmacy acquisition of a franchise, but may hurt the franchisee’s long term cash flow. Due diligence of pharmacy franchisor funding should be completed before any final decisions are made.

Personal Assets Used in Alabama Pharmacy Finance

Not all prospective pharmacy franchise owners in Alabama have enough cash on hand. Part of the drug store business financing may require the borrower to liquidate personal stocks, provide personal assets as collateral, refinance their home, or use their 401k to assist the lenders security for making the pharmacy business loan.

If the borrower still does not have enough personal assets then a family member or a friend may be required as a partner in the Alabama pharmacy. Since the pharmacy partner’s cash and assets will also be at risk of loss, these partners may require some controlling interest in the drug store.

Retirement Accounts Used in Pharmacy Finance

Retirement Plans can be self-directed and used to invest into an Alabama pharmacy franchise. The retirement plan can purchase stock in the AL pharmacy franchise. This is similar to how the retirement plan currently may be investing in publicly traded stocks and mutual funds. Lower debt service and higher profit potential may result when incorporating this option that uses less external financing in funding the franchise.

The downside is, if the pharmacy crashes, so does the retirement fund. The method of providing less expensive financing for the pharmacy in Alabama needs to be weighed against the risk of failure.

Because of the factors involved such as deferred taxes, early or improper distributions, and IRS involvement, funding a pharmacy transaction with a retirement account should be handled by a company who has expertise in this arena. Pharmacists and investors interested in using this financing structure should research the Employee Retirement Income Security Act of 1974 (ERISA).

Pharmacy Franchise Agreement Buyout Funding

Understand that pharmacy situations in Alabama are changing, economic factors are a concern, mail order pharmacy is growing, and market shares are shifting. All of these can have a negative impact on the cash flow of a pharmacy franchise. Drug store owners paying franchise royalty payments may not survive the tightening profit ratios. Due to this, these pharmacy franchises may only have the options of bankruptcy, or buying out the franchise agreement when allowable.

Buying out the franchisor allows the Alabama pharmacy to remove the franchisor from the equation. This in turn allows the pharmacy owner more flexibility in their business decisions. The pharmacy franchisor sold the drug store franchise with expectations of earning income from the cash flow their pharmacy franchisees. Due to their long term plan, Franchisors may not be willing to allow the pharmacy franchisee to remove itself from the franchisor. However if a Franchise Agreement Buyout can be negotiated, the buy-out transaction can also be financed.

Unfortunately many banks don’t understand the dynamics of the AL pharmacy industry. This lack of Alabama pharmacy knowledge results in the banks looking at the funding request and all they see is a business that has very little collateral compared to amount of financing the pharmacy is requesting. To assist the successful funding process a pharmacy owner is advised to use a pharmacy industry specialist to capitalize on the funding opportunities that are available.

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Alabama Sale & Purchase Agreements

By Brad MacLiver
Authorship and profile at Google


The contract that provides a pharmacy broker the business seller in Alabama’s permission to sell their drug store is called a Pharmacy Listing Agreement.  While in the process of presenting the Alabama business that is being sold to qualified drug store buyers, preliminary offers and negotiations will take place.

Once preliminary stages are negotiated, it is then time to put forth details regarding potential pharmacy transaction in the form of a contract. This contract is known as the Purchase and Sale Agreement, but it is known by other names such as an Asset Purchase and Sale Agreement, Pharmacy Asset Purchase Agreement, Asset Purchase Agreement, or other variations of these names.  Whatever the title written on the contract, this document is considered the “blueprint” for transferring the Alabama pharmacy business to the new owner.

The Pharmacy Purchase and Sale Agreement details how much the buyer agrees to pay and what assets the seller in Alabama is conveying to the buyer. When the agreement is put in writing, describes the transaction in some detail, and is accepted and signed by both parties, this contract becomes a legally binding agreement. Therefore, during the negotiated development of the Pharmacy Purchase and Sale Agreement proper diligence should be taken.

It is not often that a pharmacy’s corporate stock will be purchased due to liability issues, so these transactions are almost always asset-only purchases.

The elements of Pharmacy Purchase and Sale Agreements can include: assets being purchase, assets being excluded, aspects of counting and purchasing the inventory, both electronic and hard copies of pharmacy customer files, liabilities, purchase price, closing date, transferring title of the assets being purchased, pharmacy customer file conversion, representations and warranties, non compete, restrictive covenants, transferring the phone, notifying customers, signs, Board of Pharmacy notification, accounts receivables, employment of business seller and pharmacy employees, confidentiality, counting the pharmacy’s inventory, costs associated with the closing, lien searches, actions to be taken before the date of closing, along with the pharmacy’s computers, office equipment, any automated filling machines, and other items of value.

 

Although it covers many aspects of transferring the business assets from the Alabama pharmacy seller to the new owner, it should be understood that the Purchase & Sale Agreement does not provide tax and legal guidance for the seller. Those issues do not pertain to the buyer of the assets. Therefore, the pharmacy seller should be well advised by a knowledgeable pharmacy broker, accountant, or attorney regarding tax consequences, restrictive covenants, and the structure of the deal. These aspects of the deal may not have any impact from the buyer’s point of view, but if not considered carefully may have affects to the seller’s financial position after the transaction is closed.

Pharmacy owners in Alabama who are considering selling will benefit when working with a specialist who operates exclusively in the Alabama pharmacy industry and can provide expert guidance in bringing about a transaction that provides the most benefits regarding the seller’s tax consequences, family and estate planning. Proper planning and a blueprint that structures the transaction appropriately will increase the net amount of money the seller receives for the pharmacy’s assets.

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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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