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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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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