Using Tax Strategies in Colorado When Selling a Pharmacy

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. Colorado (CO) pharmacy buyers participate in the pharmacy industry roll-up to achieve economies of scale in purchasing, marketing, information systems, logistics, distribution, and top management. Colorado pharmacy sellers both independent owners and drug store chains must consider their current market value, recognize narrowing profit margins, and be aware of what their tax consequences will be if they sell.

When pharmacy owners sell their pharmacy in Colorado it is considered a capital asset. The difference between the amount the pharmacy is sold for and the amount spent to either purchasing or starting the pharmacy is a capital gain, or a capital loss. In the U.S., all capital gains must be reported to the government and the appropriate taxes must be paid.

Specific tax strategies can be used to help offset the tax liabilities when selling a CO 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 Colorado pharmacy owner.

Many Business Brokers, CPA’s, attorneys, and other professional advisors inform their clients that selling a 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 Colorado 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 Colorado pharmacy. When a drug store owner is considering selling their CO 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 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 Colorado 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 pharmacy profits continue to slip, more independent pharmacy owners in Colorado along with small and regional pharmacy chains will be considering selling their pharmacies and drug stores. Tax considerations should be a paramount part of the decision process.

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

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EBITDA and Pharmacy Acquisitions in Colorado

By Brad MacLiver
Authorship and profile at Google


EBITDA is an acronym that stands for: earnings before interest, taxes, depreciation and amortization. It is often used to measure the value of some businesses and also is used in the comparison of similar companies.
        
Generally speaking, EBITDA is an easy method to evaluate various companies and to compare them against industry averages by removing the non-core and irregular operating costs such as interest.  This factors can vary depending on the management’s choice of financing or taxes, which can fluctuate depending on acquisitions or losses from prior years. Also, arbitrary factors of depreciation and amortization are a factor.

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

To effectively use EBITDA, these larger companies should possess their significant assets, keep heavy amortization schedules, or bear significant amounts of debt. Considering independent Colorado pharmacies don’t meet that criteria, this formula is not a practical measure as the sole means for valuing pharmacies for acquisition purposes.

Method To Calculate EBITDA: 1. First, calculate net income by obtaining the total income and subtracting total expenses.
2. Determine the total amount of taxes to be paid to federal, state, and local governments.
3. Calculate interest fees that are paid to companies or individuals for the use of credit or capital.
4. Establish the total cost of depreciation.  This is the expense recorded to allocate a tangible asset's cost over its useful life.
5. Calculate the cost of amortization.  This is the expense for consumption of the value of intangible assets such as goodwill, patents, or copyrights over either a specific period of time or the asset's expected life.
6. Add the values in steps #1 through #5.

An example of EBITDA calculation:
1. Net Income            1,100
2. + Taxes paid            310
3. + Interest Expenses     205
4. + Depreciation           90
5. + Amortization           55
6. = EBITDA              1,760

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.

Knowledgeable Colorado pharmacy specialists performing pharmacy business valuations will use EBITDA in pharmacy valuations, but only as part of a larger formula when computing values for specialty 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 Colorado pharmacy acquisitions.

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 pharmacy in Colorado. 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 CO pharmacy. Instead of the EBITDA number, pharmacy buyers should be focusing on sales, gross profit, cash flow, and customer mix.

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Pharmacy Industry in Colorado: 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 in CO. These factors are affecting the pharmacy business valuations of Colorado pharmacies and drug stores all across the U.S.

Local demographics:

The valuation process also includes local market conditions and local demographics. Smaller communities have less growth potential and with the declining profits a buyer will need to purchase at a lower value because they will have to service the debt from a business loan and still try to make a living. The same is true for communities that have lost population due to economic conditions, or have a high rate of unemployment. Fewer people, or fewer customers with the ability to purchase, will mean fewer sales and less chance of any substantial improvement in the near term. This results in a lower pharmacy business value.

Colorado Pharmacists Shortage:

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

Fewer Buyers:

There are also fewer corporate buyers due to some of the largest pharmacy chains being purchased and consolidated in the pharmacy industry roll up. Many smaller chains have run into financial difficulties and have thus stopped expanding. When there are fewer willing or capable to purchase, it is more difficult to drive prices higher.

Current Market Conditions Requires Industry Roll-up:

The consolidation of the Colorado pharmacy industry is required to get more traffic into a single store.  Simple economics dictates that 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 no expectation of a turn around, so pharmacy owners should not be fooled by inexperienced Brokers who claim grand outcomes and overstate pharmacy business values that aren't based on realistic market conditions.

With the consolidation of the pharmacy industry in Colorado 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.

Pharmacies Providing Mail Order:

Some insurance companies are designating a noticeable amount of CO 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.

Choose a firm that provides Colorado pharmacy business valuations based on real market conditions and does not use a simple formula for calculating the value of a pharmacy. Complex methods are used to derive the value of a pharmacy.

It is best to use a company that specializes in pharmacy and has extensive and current industry data.  Choose CO pharmacy specialists who have been working in the pharmacy industry long enough to have extensive pharmacy experience and an excellent reputation.  A company with good credentials possesses large amounts of national data.  The largest financial institutions, national chain pharmacies, regional pharmacy chains, independently owned drug stores, and pharmacy equity investment groups use the services of companies fitting this description.

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