Merry Christmas Florida

Merry Christmas to all of the pharmacy owners in the "sunshine state."
There will be some challenges in the coming year and we at www.PharmacyValuations.com are prepared to assist you.

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Estate Planning in Florida for Pharmacy Owners

By Brad MacLiver
Authorship and profile at Google


With the current market conditions many FL pharmacy owners are experiencing lower profit margins and have considered selling their drug stores after a professional business valuation has been completed. A Florida pharmacy industry roll-up has been occurring for a number of years, consolidating the pharmacy seller’s customer traffic into fewer pharmacy locations. However, there are a number of pharmacies that are not in a geographic location with other nearby pharmacies, so consolidation can’t take place. Some pharmacy and drug store owners, despite where they are located or what is happening in the industry, have taken a stance and won’t consider selling. However, just like paying taxes, an exit of the business, is eventually inevitable.

Estate Planning is a topic many people avoid. For the pharmacy owner who works 6 days a week, takes very few vacations, fills scripts all day, then mops the floor and does the books at night, there usually isn’t much time to consider additional things such as estate planning. However, knowing that there will eventually be a transfer of the business, it is important for the pharmacy owner in Florida to consider a proper succession plan for the pharmacy business.

Developing a plan to transfer the business will require a lot of time, but it will allow the business to be successfully transferred in an acceptable manner if done correctly. An estate plan for a Florida pharmacy owner does not need to be an inflexible process; adjustments, updates, and amendments are advised as government regulations, economic conditions, and personal expectations change.

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

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

When non-family members operate as partners in the drug store business, it is crucial that the estate planning incorporate a Buy-Sell Agreement.  Buy-sell agreements govern the transfer of businesses between pharmacy partners. The agreement may also be referred to as a partner buyout agreement or business will. In the event of a partner's death, the buy-sell agreement may be funded with a life insurance policy to help protect the family.

Estate planning, buy-sell agreements, and the transfer of the Florida 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 FL 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 Florida pharmacy owners 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 pharmacy owner in Florida especially if there are some family that work in the business and others that don’t.



 

Florida Pharmacy Franchise Financing

By Brad MacLiver
Authorship and profile at Google


A Florida (FL) pharmacy franchise is a contractual relationship between two parties. One, the Pharmacy Franchisor is the party that developed their drug store business model, branded the pharmacy related products, and produced the system the pharmacy franchisees will operate under. The second party, the Pharmacy Franchisee, purchases a franchise license from the Pharmacy Franchisor, and usually pays an ongoing pharmacy franchise fee, or royalty fees, to use the name, products, systems, trade secrets, etc., created by the Florida Pharmacy Franchisor.

Several options are available for the financing of a pharmacy franchise business. All pharmacy franchise funding sources for pharmacies or drug stores prefer to lend to a franchisee who works with a nationally recognized name and with long track records. Newer pharmacy franchise models in Florida don't possess either of these two traits and will be considered 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 Florida 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.

FL Pharmacy Franchise Funding Tips:

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

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

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

4. New independent drug store owners in Florida 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 FL pharmacy owners have questions and need information regarding pharmacy franchise business loans, business valuations, or any types of funding for community drug stores and pharmacies, they should contact a pharmacy industry specialist in Florida who can provide quality answers and sound advice.

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Financing Types for Pharmacies Available in Florida

By Brad MacLiver
Authorship and profile at Google


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

SBA Financing for Pharmacy Business Loans

The U.S. Small Business Administration (SBA) partially guarantees loans for Florida 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 where the pharmacy will be located, property improvements, working capital, and pharmacy related equipment.

Borrowers for the pharmacy franchise in Florida must be creditworthy, without any bankruptcies, have ample down payment, but there are variations here, and the business must be able to repay the loan from the cash flow of the pharmacy.

Terms can range from 5 to 20 years. Within SBA standards interest rates may be adjustable or fixed and will be negotiated by the lender dependent on the financial strength of the pharmacy transaction.

There are also SBA fees to guarantee pharmacy business loans. These fees are paid directly to the government, not kept by the bank, but can be rolled into the financing of the Florida pharmacy.

The Patriot Express Business Loan Program

This is yet another SBA loan program that pharmacies can used for franchise business loans.  This loan is reserved for military veterans, active service members, their spouses, and survivors.  For this loan, the Department of Veterans Affairs would become involved in the process.

Pharmacy funding in Florida 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 FL 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 in Florida From the Franchisor

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

Pharmacy franchisors in Florida 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 Pharmacy Finance

Not all prospective pharmacy franchise owners 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 Florida pharmacy. Since the FL 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 a pharmacy franchise. The retirement plan can purchase stock in the 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 Florida pharmacy crashes, so does the retirement fund. The method of providing less expensive financing for the pharmacy in Florida 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 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 Florida 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 pharmacy to remove the franchisor from the equation. This in turn allows the Florida 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 pharmacy industry. This lack of 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 Florida pharmacy is requesting. To assist the successful funding process a pharmacy owner in Florida is advised to use a pharmacy industry specialist to capitalize on the funding opportunities that are available.

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Purchase & Sale Agreements in Florida

By Brad MacLiver
Authorship and profile at Google


A Pharmacy Listing Agreement is the contract that provides a pharmacy broker the Florida business seller’s permission to sell their drug store. During the process of presenting the business being sold to qualified drug store buyers there are negotiations and preliminary offers.

Once the preliminary stages have been negotiated it is time to put forth the details of the potential Florida pharmacy transaction in contract form. This contract is usually called the Purchase and Sale Agreement, but it may also be referred to as an Asset Purchase and Sale Agreement, Pharmacy Asset Purchase Agreement, Asset Purchase Agreement, or variations of these contract titles. Whatever the title is on the contract, this document should be considered the “blueprint” for transferring the pharmacy business to the new owner.  

The Pharmacy Purchase and Sale Agreement gives detailed information regarding how much the buyer agrees to pay and what assets the seller in Florida is conveying to the buyer.  Once the agreement is put in writing, describes the transaction in detail, and is then accepted and signed by both the seller in Florida and buyer, this contract is then a legally binding agreement.  Keeping this in mind, proper diligence should be taken during the negotiation process of the Pharmacy Purchase and Sale Agreement.

Due to liability issues it is seldom that a pharmacy’s corporate stock will be purchased. Therefore, these transactions almost always are only asset purchases.

Elements of the Pharmacy Purchase and Sale Agreement include, but are not limited to: all assets being purchased or excluded, any aspects of purchasing and counting the inventory, both hard and electronic copies of any pharmacy customer files, liabilities, the purchase price and closing date, the title transfer 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, and any automated filling machines.

Although it covers many aspects of transferring the business assets from the Florida pharmacy seller to the new owner, it should be understood that the Purchase & Sale Agreement does not provide tax and legal guidance for the Florida 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 Florida who are considering selling will benefit when working with a specialist who operates exclusively in the 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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Learn more about the pharmacy acquisition process and discover things to look for an what to avoid when you are considering buying, selling, or financing a pharmacy by visiting www.BuyingAndSellingPharmacies.com

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Using Tax Strategies in Florida When Selling 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. FL pharmacy buyers participate in the pharmacy industry roll-up to achieve economies of scale in purchasing, marketing, information systems, logistics, distribution, and top management. Florida 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 pharmacy owners sell their pharmacy in FL 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 Florida pharmacy 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 Florida 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 pharmacy owner in FL.

Many Business Brokers, CPA’s, attorneys, and other professional advisors inform their clients that selling a FL pharmacy will result in tax consequences. However, most of these professionals do not handle the buying and selling of 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 in Florida.

There are some capital gain tax strategies that must be implemented before any obligation to sell the pharmacy in Florida. 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 Florida 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 is nearing a retirement age, or will be working as a 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 Florida pharmacy profits continue to slip, more independent pharmacy owners along with small and regional pharmacy chains will be considering selling their pharmacies and drug stores in Florida. Tax considerations should be a paramount part of the decision process.

Pharmacy owners should consult with a pharmacy industry expert for advice on structuring the sale of their Florida pharmacy. Someone with extensive experience in 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 in Florida when a pharmacy is sold.

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Pharmacy Acquisitions and Florida EBITDA

By Brad MacLiver
Authorship and profile at Google


EBITDA is an acronym which means: Earnings Before Interest, Taxes, Depreciation and Amortization.  EBITDA is often used to measure the value of some businesses and in the comparison of similar companies.

EBITDA typically makes it easier to evaluate various companies and to compare them against industry averages by removing the non-core and irregular operating costs like 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 formula for EBITDA can be seen 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 Florida pharmacies for acquisition purposes.

Here is what needs to be calculated for EBITDA: 1. Net income can be calculated by obtaining total income and subtract total expenses.
2. Total amount of taxes paid to federal, state, and local governments.
3. Interest fees paid to companies or individuals for the use of credit, or capital.
4. Cost of depreciation, or the expense recorded to allocate a tangible asset's cost over its useful life.
5. Cost of amortization, or the expense for consumption of the value of intangible assets (such as goodwill, patents, and copyrights) over a the asset's expected life or specific period of time.

Finally, add steps #1 through #5.

EBITDA calculation example:
1. Net Income            1,070
2. + Taxes paid            308
3. + Interest Expenses     210
4. + Depreciation          104
5. + Amortization           52
6. = EBITDA              1,744

Drawbacks of EBITDA: 1. Can be misleading number when it is confused with cash flow.
2. Can make even completely unprofitable firms appear to be financially healthy.
3. Numbers are easy to manipulate.
4. Can overlook cash requirements for growth in accounts receivable.
5. Can miss cash requirements for growth in inventories.
6. Not factual when valuing small companies.
7. Not effective for companies with few assets, small amounts of debt, or low depreciation or amortization schedules.

During the 1980s EBITDA was being used as a proxy for cash flow in leveraged buyouts to calculate whether companies could service their debt. Factoring out interest, taxes, depreciation, and amortization can allow an unprofitable business to appear financially healthy. This method of valuation was 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.

Pharmacy specialists who are knowledgeable and performing pharmacy business valuations in FL will use EBITDA in pharmacy valuations, but this will only be a part of a larger formula when computing values for specialty Florida pharmacies especially those who have a niche in HIV, disease management, long term care, etc. However, EBITDA should not be used as part of the usual formula for standard retail pharmacy acquisitions.

The EBITDA number for a specific existing pharmacy in FL is, for the most part, important when the existing ownership is establishing their store value for the purposes of a credit line, borrowing, creating a Trust, stock values, etc., but EBITDA does not have the same importance when selling a Florida 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. It is thusly important that the buyer estimate an 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, Florida pharmacy buyers should be focusing on sales, gross profit, cash flow, and customer mix.

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