Pharmacy Franchise Financing in Colorado

By Brad MacLiver
Authorship and profile at Google


A Colorado 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., that were created by the Pharmacy Franchisor.
 

There are several options for financing pharmacy franchise businesses in Colorado. All sources for pharmacy franchises or drug stores prefer lending to a pharmacy franchisee who will be working with a nationally recognized name with long track records. Newer pharmacy franchise models do not possess these two traits and will thus be considered more risky.

When a pharmacy has pharmacy name recognition and a long track record, traditional Bank Financing for funding a pharmacy franchise is available. Several banks will show interest in a funding opportunity of this type, but once the bank reviews the loan documents, many of these banks may decline the funding request because they don’t fully comprehend the security provided for the pharmacy loan. Typically, community drug stores have very few traditional assets to offer as security. Lenders for pharmacies in Colorado 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.

CO Pharmacy Franchise Funding Tips:

1. Because there are many pharmacy franchise financing options available, 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 who can help guide a prospective pharmacy franchisee or borrower or a drug store loan.

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

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Types of Colorado Pharmacy Financing that is Available

By Brad MacLiver
Authorship and profile at Google


There are quite a few different options available for funding CO pharmacy franchises, traditional community drug stores, and specialty pharmacies in Colorado.

SBA Financing for Pharmacy Business Loans

The United States Small Business Administration (SBA) will partially guarantee loans for pharmacy franchise lenders which in turn reduces the risk exposure for the lender. A standard loan program known as 7(a) is designed for funding pharmacy franchises. These 7(a) loans are able to provide funds for Colorado pharmacy franchise entry fees, the real estate for the pharmacy's location, necessary property improvements, its working capital, and any pharmacy equipment they need.

It is required that the borrowers for the pharmacy franchise be creditworthy, have no bankruptcies, and have ample down payment.  However, there are possible variations here, and the business is required to repay the loan using the cash flow of the Colorado 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 SBA fees for guaranteeing pharmacy business loans. These fees, which are paid to the government and not kept by the bank, can be rolled into the Colorado pharmacy financing.

Patriot Express Business Loan Program

This is another SBA loan program that can be used for Colorado 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 pharmacy loan process.

CO 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 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 CO 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 Colorado 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 Pharmacy Finance

Not all prospective pharmacy franchise owners in Colorado 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 CO 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 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 pharmacy crashes, so does the retirement fund. The method of providing less expensive financing for the pharmacy 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 pharmacy franchise. Drug store owners paying franchise royalty payments may not survive the tightening profit ratios. Due to this, these Colorado 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 pharmacy owner in Colorado 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 CO 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 pharmacy is requesting. To assist the successful funding process a pharmacy owner in CO is advised to use a pharmacy industry specialist to capitalize on the funding opportunities that are available.

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Discover the pharmacy finance options by visiting www.BuyingAndSellingPharmacies.com and for a free pharmacy business valuation visit www.PharmacyValuations.com.
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Financial Discount Rates for Colorado Pharmacy Cash Flow Instruments

By Brad MacLiver
Authorship and profile at Google


When a Colorado (CO) pharmacy is considering selling a cash flow instrument such as the pharmacy’s receivables, or a pharmacy business note, the price the pharmacy owner in Colorado receives will reflect how much time is involved before the Buyer/Investor/Funder of the cash flow instrument will recoup his principal investment and the desired rate of return the Investor needs to make it desirable to take the risk of buying the pharmacies cash flow instrument.
                   
To entice an Investor to shift the risk of holding the cash flow instrument from the pharmacy owner in Colorado to the Investor, there is typically a financial incentive for the Investor. The incentive is the rate of return, which is required to compensate for the Investors perceived risk. The risk is based on the credit of the cash flow instrument’s Payor, previous payment history, seasoning, interest rate, and other variables. Discount rates may change depending on the circumstances of the cash flow instrument, the economy, etc.

If the CO pharmacy owner or an investor could take the cash flow instrument to the bank and cash it in at face value, this would mean the asset would hold more value. This can’t happen, however, so the risk of holding the cash flow instrument makes it worth less than its face value.

Time Value of Money:
When cash has more value to a dollar today instead of tomorrow, this is known as Time Value of Money (TVM). Most business people know about TVM and how it is fundamental to both personal and corporate decision making, but in order to ensure that we are on the same page, let's cover the basics of TVM.

TVM assumes that money earns interest over time. Therefore, as the cliché says time is money, and because of this we can compare money at different points in time that have different values and call them equal.

An example: If $2.00 today earns 10% interest, it will be worth $2.20 at the same time next year. Therefore, $2.00 today = $2.20 next year = $5.40 ten years from now.

Within the same reasoning the reverse is true. An investor will not pay $2.00 today for a dollar that won’t be collected until next year, or 10 years from now. Today’s dollar will be discounted to reflect risk, inflation, the strength of the economy, etc.

Along with interest rates and principal amounts, a cash flow instruments such as Pharmacy Business Notes, are originated with a certain time period. The TVM can be looked at, as if it were on a sliding scale. The earlier in time the Note is paid off, the smaller the amount becomes. When the Note is paid early, you don’t get to collect the compounded interest amount, which would have accumulated if you had waited the full time period. The Note has already been written and the terms set. Unlike a loan where the rate of return needed to cover the risk is added to the loan amount. An investor cannot go back to the buyer of your business and change the terms of the note. Therefore, the investor looks at the portion of the note, which is going to be purchased and subtracts the rate of return needed to justify the risk. This is called Discounting. The amount of the discount is contingent on the risk.

Example:

If you sell something for a $2.00 with 5% interest, equal payments received over a 15 year period, you would expect to receive $4.16. However, should the note be paid in full in 5 years you will only have collected $2.55. You are not collecting the other $3.11 because you are no longer risking anything (you are not earning it). If you want an investor to advance you the $4.16, you will no longer have any risk because you have transferred it to the Investor. To compensate the Investor for accepting the risk of holding the note, the Investor will discount the note, and pay you an amount equivalent to the time and risk involved.

The price you receive when selling your note will be the discounted rate according to the basic TVM principals minus the amount that allows an investor to justify the risk.                               

If a note is a length of 3, or more years, it may be beneficial for you to sell only a portion of the note. Because the payments from a month in the 5th year will hold less value than payments collected this year, it is beneficial to you to only sell the number of months that you need to obtain the cash that meets your current financial needs. You can always sell more payments at a later date if you need additional funds. Determine what cash you really need and we will calculate the number of months we will purchase to meet your needs.

Although it involves a much shorter period of time, understanding discount rates is the same when selling a pharmacy’s accounts receivables in Colorado.


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Is it Worth Selling a Pharmacy Note in Colorado at a Discount?

By Brad MacLiver
Authorship and profile at Google


When a Colorado (CO) pharmacy acquisition has been accomplished by using the private financing method of a pharmacy business note, the holder of the pharmacy note has the option of selling the pharmacy business note for a lump sum of cash instead of waiting for the monthly payments and taking the risk those payments will always be made. Pharmacy business notes can be sold by using a discounting method. Instead of buying a pharmacy note at its face value, the Colorado pharmacy note will be discounted. Meaning the Investor will pay less than face value due to the risk being transferred from the Pharmacy Note Holder (the note seller) to the Pharmacy Note Investor (the note buyer).

Most pharmacy business note sellers only look at the discount rate and quickly calculate in their head that they are giving up too much money to make the selling of the CO pharmacy note an attractive proposition. However, further analysis needs to be completed before a final decision is made by weighing the discounted amount with the benefits of a lump sum of cash.

1) What is the motivation for selling the Colorado pharmacy note? What are the desired goals? Is reducing the exposure to risk a consideration? Is there a financial decision to pay off debt? Is capital required for a new venture? Are there dreams of exotic vacations or world travel that could be accomplished with a lump sum of cash? How important is it to accomplish these goals? What are the opportunity costs if you don’t have the lump sum of cash to achieve your goals, or invest in something that pays a higher return? Determine investment and family priorities.

2) What is the Current Fair Market Value of the pharmacy business? This is what someone is really willing to pay for the business, and not just an “earnings times x” formula. Real aspects of what is happening in the pharmacy industry must be considered and it is advantageous to have a pharmacy industry specialist in Colorado calculate the pharmacy business valuation.

3) How much cash is immediately required by the holder of the pharmacy note?

4) A pharmacy note in Colorado that is seasoned has more value than a “green” note that doesn’t have a payment history. Are you willing to hold the note for a certain amount of time to allow the business buyer time to prove to an Note Investor the capability of the payor making the payments?

5) Are you willing to sell only a portion of the Note (this is called a “Partial Sell”)? The discount rate can be a more attractive proposition when only a portion of the note is sold and the CO Pharmacy Note Investor is not holding all the risk.

Understanding the Risk for the Note Buyer:
1) Pharmacy Buyer Competency - There is the risk that the pharmacy buyer may not run the business as efficiently as you have, sales drop, and the Colorado pharmacy business buyer cannot meet the payment obligations. Incompetency could lead to late payments, missed payments, or bankruptcy.

2) Pharmacy Industry Changes in CO - Changes caused by influences either within the industry, or regulations governing the industry, can make it increasingly difficult for the pharmacy business buyer to meet the contractual financial obligations.

3) Future Competition - Sales and income of the store may be affected by yet unforeseen pharmacy competition either building in the neighborhood or through mail order.

4) Loan to Value - When originating a pharmacy business note you may be creating financing where there is a “negative loan to value.” Example: the Colorado pharmacy business note is for $300,000, but there is only $100,000 of tangible assets for collateral.

5) Title Insurance – Pharmacy business notes in CO don’t have title insurance that will make good a loss arising through defects of titles, or liens.     

6) Time Value of Money - Where a dollar received today is more valuable than a dollar received in the future.

7) Opportunity Costs - When the selection of holding the pharmacy business note ties up capital and prevents potential financial gains from other investments.

It is beneficial to discuss the options and potential origination of a pharmacy note with Pharmacy Business Note Investor before the Purchase and Sale Agreement is finalized for the acquisition of the Colorado pharmacy. This provides the pharmacy business seller, and future note seller, valuable insight into structuring the pharmacy business note so it can be successfully purchased.

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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 Roll-Up in Colorado

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. Aspects of the industry, such as Recessions or new government regulations, that may be stifling profits end up providing incentives to consolidate.
               
A primary reason for an industry roll-up is to achieve economies of scale in purchasing, marketing, information systems, logistics, top management, and distribution. Consolidated businesses have less risk from the impact of an unsatisfied customer as well, as well as the reward of being able to recruit or keep key employees.

An example of an industry roll-up can be seen with the Colorado pharmacy industry. It is a well established industry and is still experiencing sales growth. However, pharmacies and drug stores 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 pharmacists - a required key employee.

Industry roll-ups are often initiated by investors seeking investment opportunities. However, in the case of Colorado CO)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 pharmacy chains.

During the pharmacy industry roll-up pharmacies in CO 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, 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 CO pharmacy funding programs allow an individual 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 pharmacy roll-up because they recognize that combining the individual pharmacy businesses 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 Colorado 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 a pharmacy owner through the maze of details will benefit the pharmacy owner in making the best business decision.

All transactions involved in the pharmacy roll-up in CO need to have the business valued at the current market value. Business valuations for the 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. Colorado Pharmacy owners have been watching what has been occurring in the pharmacy industry. 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 pharmacy industry will continue to slide to lower levels, and thus the CO pharmacy industry roll-up will continue.

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Acceleration Clauses in Pharmacy Business Loans and Commercial Leases in Colorado

By Brad MacLiver
Authorship and profile at Google


A provision of many Colorado (CO) pharmacy business loans and commercial leases is an acceleration clause. The acceleration clause in the loan/lease agreements allows the lender to accelerate their collection of payments contingent on an event occurring. These events may include lack of payment by the borrower, failure to keep the property adequately insured, failing to pay tax assessments, not maintaining the property, selling the property/asset, etc.
                     
Lenders view the acceleration clause as an important tool in their business loan and commercial lease programs. Loan and lease documents might not specifically address the foreclosure of a property, or repossession of an asset.  This is when the acceleration clause comes into effect.  Without this clause, a lender would be able to only foreclose on one missed payment at a time.  By having acceleration clause, the lender can demand immediate and full payment of all remaining balances and fees, despite whatever event kicks the clause into gear.

Pharmacy business loan or lease documents that are provided to the pharmacy owner in Colorado will describe the the rights, the conditions, and the obligations relevant to the acceleration clause. When the pharmacy owner (the borrower) doesn’t meet their obligations then the loan or lease goes into default. A payment that is even one day late can cause a default. Due to this, pharmacy business loans and commercial lease documents should be thoroughly read and understood before signing.

Tips:
1. If a pharmacy’s slowing cash flow is going to cause a business loan default, but the pharmacy owner in Colorado has additional unencumbered assets they may be able to negotiate with the lender by offering additional collateral.

2. If a Colorado pharmacy can catch up on their payments they can reinstate the business loan before the acceleration starts.

3. States have different rules requiring notification of an acceleration clause being exercised. Pharmacy owners should understand the laws in the state where they operate. Lack of knowledge is not an excuse.
                                 
4. When an acceleration clause is exercised on a commercial lease, there is the possibility the landlord cannot collect rent from both the defaulting tenant and a new tenant at the same time. To save themselves some money, CO pharmacy owners should help the process by assisting the landlord re-lease the property. However, please note, should the Colorado pharmacy be in the process of being sold and the files and inventory moved to a competitor’s location, the Colorado pharmacy buyer will require restrictions in the Purchase and Sale Agreement  that the new tenant cannot be another pharmacy.

5. Lenders prefer not to have to go through the foreclosure process, so if your pharmacy is headed in that direction start talking with the lender about finding a solution. Communication with the lender is a good thing.

6. Some pharmacy business loans and commercial leases require a “personal” guarantee from the business owner. This means that the business owner’s personal assets and credit will become involved in the event of a default. The “corporate” status of the business will not keep the lender from seizing the personal assets.

When considering financing a Colorado pharmacy for acquisition, or expansion, due diligence and understanding of all aspects of the transaction should be considered. Using the services of a CO pharmacy industry expert to guide a pharmacy owner through the maze of details will benefit the Colorado pharmacy owner in making the best business decision.

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Colorado Pharmacy Acquisitions and Bridge Loans

By Brad MacLiver
Authorship and profile at Google


With the changes in the CO pharmacy industry independent drug store owners, small and regional pharmacy chains in Colorado, and pharmacy equity investment groups are acquiring pharmacies to obtain a larger competitive footprint in a geographic area. During the acquisition phase of the business expansion there may be opportunities that require action, which is faster than the traditional funding process.

Bridge Loans are a short-term financing option and are used while waiting for permanent financing, or the next stage of financing to be obtained. Bridge loans provide funding to "bridge" the gap between a company’s current needs and their long term financing requirements.  Permanent financing is generally used to "take out," or pay back, the bridge loan.
                                                         
One of the characteristics of a bridge loan is that they can close quickly, which in turn allows a company to capitalize on a timely business opportunity, or acquisition. The quick access to money can also allow a business the chance to avoid penalties, bankruptcy, or other temporary problems. If longer term issues need to be dealt with, this “transitional financing” provides the company time until longer term financing can be secured.

Another characteristic of bridge loans is that the process usually requires less documentation than conventional financing. Bridge loan lenders don’t usually have the same government regulations to adhere to, so they tend to have more flexibility in their lending criteria and the documentation they require. However, less documentation does not mean they won’t perform due diligence to have a comfort level with the transaction before they fund.

Here are some examples of using bridge loans in Colorado pharmacy transactions:

1. An independent pharmacy owner learns about health issues and makes a decision to quickly sell the family owned CO pharmacy to an employee or local competitor. More traditional financing for the pharmacy buyer might require a time line that is not acceptable when considering the circumstances. A bridge loan can be taken out to quickly accomplish the transaction.

2. A small pharmacy chain requires $1 million to expand their business. They have three new equity investors who will be investing into the firm over the next six months, but at different intervals. However, the business has opportunities which necessitate action sooner than 6 months. The quick closing bridge loan allows the pharmacy chain in Colorado access to the needed funds so they can complete their expansion and increase profits. Money from the three new equity investors will be able to pay off the bridge loan.

3. A pharmacy owner in a leased location has an opportunity to quickly acquire a commercial property that would be a great Colorado pharmacy location, but the property is then in disrepair. Bridge loans provide the needed funds to acquire and rehabilitate the property and once that is complete conventional long term financing can be obtained.

4. A pharmacy group developing new CO pharmacy locations can receive bridge loan funding to get through the permitting process of a project when conventional financing isn’t available at this early stage due to there is still too much risk. A bridge loan permits the project to move into the construction phase and then qualify for various other forms of financing.

5. When a Colorado pharmacy is owned by two or more partners and one of the partners is ready to exit the business, a bridge loan can help to ensure both cash flow and uninterrupted operation of the business during the partner buyout.

6. Real estate or equipment bought at auction may have a tight window for closing the deal and timing of traditional financing would keep buyers from proceeding with the opportunity. The benefits of a bridge loan permit the pharmacy owner to quickly respond to the opportunity.

When there are opportunities for business, pharmacies being bought or sold, quick deadlines, an old loan maturing before a new loan can be put in place, funding needs during the permit, planning, or evaluating stages, etc., bridge loans can be an invaluable financial tool.

Some more tips regarding pharmacy bridge loans:                        

1. Although bridge loans are quick to obtain, they are quick to expire.

2. Hard money loans are similar to bridge loans and the terms are often used interchangeably in conversations. Both are short-term, higher interest rate, non-standard loans, but in some circles hard money refers to the lending source and a bridge loan refers to the duration of the loan.

3. Because bridge loans usually come with higher interest rates than traditional financing a larger down payment, meaning a lower Loan to Value (LTV) and a lower level of risk and provides an opportunity for lower interest rates.

4. With the shorter time period of bridge loans borrowers will need to be aware that fees for valuations, legal, dues diligence, etc., will be amortized over a shorter period than traditional financing transactions.

Understand the types of deals that require a bridge loan may be considered speculative in nature, or have higher risk factors. Due to this many banks do not offer bridge loans. Banks must meet government regulations and need to justify their lending practices. Riskier bridge loans do not usually fall within the lending parameters of many banks. Therefore a majority of the bridge loans will come from private investment firms.  It is best to consult a company that has access to a number of funding sources who provide bridge loans.

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Colorado Pharmacy Acquisition Finance

By Brad MacLiver
Authorship and profile at Google


When a CO pharmacy or drug store is being sold, seldom does the buyer pay “out of pocket” cash for the acquisition. Even when cash is available, pharmacy acquisition strategies usually involve financing the transaction.

Typical acquisitions take 6-9 months to complete, so the Colorado pharmacy seller will need the buyer to provide some proof up front about their ability to close the transaction. Acquisitions 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 Colorado 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, CO pharmacies are not ice cream stores. There are many aspects of valuing a pharmacy that are unique to the industry, so simple accounting formulas or generic methods cannot be used. Industry specialists should be used when valuing the pharmacies instead of a valuation company that has a broader spectrum.

In order to complete a valuation the selling company must provide current data. Lenders will refuse old data or a sellers “gut feeling.” Lenders need to make their decision to finance based on sound, verifiable information.                

Structuring the transaction is very important. The seller will naturally want as much money as possible, and they want cash. Also, the buyer will need to spread out the debt service with as little cash as possible invested in the acquisition.

Pharmacies and drug stores belong to an industry where it is more difficult to obtain business loan due to the majority of the value in a pharmacy in Colorado is the customer files and not hard assets. The acquisition must therefore be financed a lender with a strong understanding of the industry and what, beyond the collateralized assets, the company offers to reduce the perceived risk.

Pharmacies 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 Colorado pharmacy industry.

Tips regarding CO pharmacy acquisitions and finance:

1. Attorneys and CPAs who have been representing the 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 in Colorado 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 pharmacy seller will need to continually prove the financial condition of the company.

When pursuing “CO 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 pharmacy.

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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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Estate Planning for Colorado Drug Store Owners

By Brad MacLiver
Authorship and profile at Google


With the current market many Colorado drug store owners are experiencing lower profit margins, and have considered selling. A drug store industry roll-up has been going for years, consolidating the drug store seller's customer traffic into fewer drug store locations. There are however a number of Colorado pharmacies that are not in a geographical location with other nearby pharmacies, such consolidation can not take place. A drug store and drug store owners, despite their location or what is happening in the industry, has taken a stand and will not consider selling. But like paying taxes, an exit of the company is ultimately inevitable.

Estate Planning is a subject that many people, in all industries, timid. The Colorado drug store owner who works 6 days a week, taking very few vacations, fill scripts all day, then mops the floor and makes the books at night, it usually is not much time to consider additional things like estate planning. But, knowing that it will be a transfer of business, it is essential for drug store owners to consider a proper succession plan for the drug store business.

Develop a plan to transfer operations will be time consuming, but done correctly allows the company to be successfully transferred in an acceptable manner. An estate plan for a Colorado drug store owner need not be immutable process. Fine-tuning, updating, and changes recommended by government regulation, economic conditions and personal expectations change.

Estate planning allows a drug store owner to anticipate and provide for the transfer of the store. The plan will be formatted in an attempt to eliminate uncertainty, to assist the transfer by trimming costs and cutting taxes.

Process may involve Trusts, wills, living wills, Power of Attorney, Medical Power of Attorney, Business Valuation, Life Insurance, a charitable remainder Trusts, Buy-Sell Agreements and other legal documents. All aspects of estate planning for the drug store owners coordinated guidelines.

If there are non-family members as partners in the drug store business, it is essential that estate planning include a Purchase-Sale Agreement. A buy-sell agreement, governs the transfer of business between the drug store partners. The agreement may also be known as a partner buyout agreement, or a company wants. To protect the family in the event of death of a partner, buy-sell agreement funded with life insurance.

Estate planning, buy-sell agreements, and transfer of the drug store to a drug store valuation completed by a third party expertise in the pharmaceutical industry to take a large number of pharmaceutical companies perform annual appraisals, and the current industry data as a basis for conclusions. Using simple accounting formulas, multipliers, and valuator inexperienced in pharmacies will not provide an accurate business valuation.

Most Colorado drug store owners spend a large part of their lives to build the business. The effort should not disappear because the drug store owner refuses to accept their mortality, and plan accordingly. The only pharmacist in a small town may be drug store's owner. If the script can not be filled by a licensed pharmacist since the law the client files must be transferred to another drug store. Because of this, a drug store business value fall to a negligible figure in just a few days after the death 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 drug store owners die and their families are left with an asset with very little value.

Tips for the Drug Store Owner:

1. When the family drug store is the only means of income for many families it becomes more essential to have a set plan in place.

2. To avoid disputes should estate plans should be developed with clear directives.

3. Minimize tax liabilities is an essential goal for most people to complete an estate plan should be an expert tax advice should be sought.

4 Many online documents and books are available that provide advice and documents to develop an estate plan. When you go to self-help route, it is advisable to have a paid expert review the completed documentation to ensure that it can be legally respected when the time comes.

5. While developing the farm plan, it is essential to talk with children and other family members of the drug store market owner especially if there are any family members who work in business and others do not.

 

Colorado Pharmacy Transactions and Capital Gains Tax

By Brad MacLiver
Authorship and profile at Google


Almost everything you own and use for personal, or business, purposes is a capital asset. When Colorado (CO) pharmacy owners sell a capital asset, the difference between the amounts you sell it for and the amount you paid for it (the basis), is a capital gain, or a capital loss.

Capital gains may also refer to "investment income" that arises in relation to real assets, such as property, financial assets, and intangible assets such as goodwill. In the U.S., all capital gains must be reported and the appropriate tax paid.

When selling a pharmacy or a drug store, there are specific tax strategies that can be used to help offset the tax liabilities. Unless a professional is handling a large number of Colorado pharmacy acquisitions, they usually do not know these federal regulations that allow for reducing the tax liability for the pharmacy owner.

During this period of history where it is more difficult to finance a business, pharmacy sellers may already be required to lower their asking price so pharmacy buyers in Colorado can qualify for the required financing.  In addition to lower offers, they are then required to pay higher percentages in taxes.

This is a problem for the pharmacy seller who wants as much money as possible out of the deal. For most CO pharmacy owners, their business is the most valuable asset they will ever own and selling that business at a specific dollar amount has been part of their retirement and estate planning. Knowing they are required to cut out a larger chunk of their proceeds to pay in taxes will cause some pharmacy owners to reconsider their retirement plans. The good news is that there are financial tools and strategies available that allow the pharmacy owner in Colorado to proceed with their plans.

Family Foundations are a type of tax exempt/nonprofit organization that provides tax advantages and control over philanthropic activities.  Typically, family foundations are private foundations that get their funding from a small number of sources and they do not conduct widespread fund-raising activities. They may receive gifts from limited sources and friends.  Family members serve the foundation as officers, trustees, and directors.  They can make grants or donations to other organizations as private foundations.  Having a Family Foundation provides a great deal of benefits including income tax deductions, exemptions from gift and estate taxes, and elimination or reduction of other taxes.

One strategy, but not the only one, that is currently available to assist the capital gains tax burden is the Charitable Remainder Trust (CRT). CRT’s are legally described as Split Interest Trusts. The term is used because of the blend of philanthropic motivations and personal financial aspects. CRT’s can decrease tax liabilities, increase a business owner financial wealth, and at the same time provide a vehicle for charitable giving.

CRT’s are formed when a person donates assets to this special type of Trust. Assets can be cash, stocks, real estate, etc. The CRT is set up for a set period of time, or until the donor’s (pharmacy owners) death. An individual (CO pharmacy owner or family member) can receive income from the Trust’s assets. Upon the donor’s death the assets go to a designated charity. Part of the income from the Trust can be used to purchase life insurance on the donor. The proceeds of the life insurance go to a designated heir(s) who receive the money without incurring any estate tax liability.

Some tax strategies including the use of CRTs are not widely known. It would be advisable for pharmacy business owners to be aware of the different tools that are available in structuring a business transaction. They should also be aware that only a professional with vast experience in CRTs should be used to setup a Charitable Remainder Trust. Not following the strict IRS guidelines could be cause for increased taxes, penalties, and in some cases criminal charges.

Over the years there have been unscrupulous individuals who have tried using CRTs and similar financial tools in illegal scams. With the increase in capital gains taxes there are expectations more scams will be floating around out there. Be knowledgeable about the possibilities, but be confident you are working with experts in your industry.

When you are considering selling your independently owned pharmacy or a small drug store chain, you should consult a firm with extensive experience in Colorado pharmacy and drug store acquisitions. Firms that have the knowledge and expertise to structure the transaction appropriately, for tax considerations, can save a pharmacy owner large sums of money when a pharmacy is sold.

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Buy-Sell Agreement for Colorado Pharmacy owners

By Brad MacLiver
Authorship and profile at Google


When a Colorado pharmacy is owned by two or more shareholders partners should have a Purchase-Sale Agreement. A buy-sell agreement is a written document that contains procedures and controls the future sale of the Colorado pharmacy business.

           
Pharmaceuticals buy-sell agreements protect the interest of the parties who own pharmacy and control the actions triggered by a shareholder to leave the business because of death, disability, divorce, dissolution, or retirement. Agreement will control how and when the shares of the pharmacy business is sold or transferred. It will also provide guidance on how the Colorado pharmacy will be evaluated together with the obligations of the remaining shareholders in the pharmacy.
                    
Buy-sell agreements are important because the various elements of a future sell is predetermined, and does not need to be negotiated during a heated conflict, or during a grieving period. It offers both the shareholder and the family a comfort level that when the inevitable time comes for an exit strategy that the process was carefully considered in advance.

Disadvantages of not having a buy-sell agreement between Colorado pharmacy owners is that a disability can leave a partner who works more and another does not add to productivity. In the event of a death, without an agreement, one party will have a nonproductive heir, or a new partner can be inserted that has personality conflicts with the surviving partner. The wrong partner can be devastating for the pharmacy business.

There are various types of buy-sell agreements: Entity Buy-Sell Agreement, Cross-Purchase Buy-Sell Agreement, wait and see Buy-Sell Agreement, Disability Buy-Sell Agreement. Buy-sale agreements are also known as a company will or a buyout agreement.

 

Seventeen Possible Elements of a Buy-Sell Agreement:

1. Shareholders name and number of shares and voting rights of each.

2 Guide for certified pharmacy valuation and purchase of shares a shareholder.

3 Mutual covenants and considerations.

4. Restrictions on the transfer, purchase or encumber the company stock.

5. Protocol in case of a shareholder's divorce or termination of a shareholders' agreement of employment.

6. Obligation to purchase   sale of shares from an estate.

7 Purchase of insurance to ensure the ability to meet obligations.

8. Purchase of shares paid in lump sum or in installments.

9 Remedies for breach of contract or non-payment.

10 Until the transfer is complete, the right to inspect books and records.

11. Amendments and notices of promotions or legal issues.

12. Enforcement of the agreement, the binding effects and arbitration procedures for disputes.

13. Process for the dissolution or liquidation of the company.

14 Maintenance of the property for a transitional period.

15. Preserve the representations and warranties.

16 The conditions for transfer.

17. Bill of Sale.

To ensure that the necessary funds available, buy-sell agreements are often funded with life insurance. If the death of one of the pharmacy owners occurs, the life insurance settlement provides funding for the remainder of the pharmacy owner to buyout partners share of the estate.

Life insurance for each partner must be in place, because without a way to gain purchase of the pharmacy's share buy-sell agreement will not be functional. As the business grows and develops how much insurance must be adapted to provide adequate coverage. Without insurance, the surviving shareholders may not have enough money to buy the required amount of the estate to meet - leaving the survivor with an unwanted partner.

To have adequate insurance coverage and to determine the details of the buy-out terms, is a certified pharmacy business valuation necessary. There are a large number of companies offering business valuations. Because of the dynamics and the current market of the pharmacy industry, a valuation firm should have extensive pharmacy experience. Accounting Simple formulas and multipliers will be adequate or realistic valuation does not provide for a pharmacy business.

Pharmacy buy-sell agreements are highly important documents that must be completed with care and seriousness. Even with a long term partnership, it's just too late to create a buy-sell agreement, when an event has already happened that would require the document.

Tips for Buy-Sell Agreements:

1 Buy-sell agreements are important documents that should not be taken lightly. Consult a licensed professional.

2 Documents must take the appropriate laws and regulations that vary from state to state. Search the right guidance.

3. Premiums for insurance that the buy-sell agreement, the Fund will be deductible.

4 Ensure that the pharmacy valuation performed by an established pharmaceutical industry expert.