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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By Brad MacLiver
Authorship and profile at Google
When acquiring or selling a CO pharmacy or drug store, one alternative is to have the seller originate the financing and carry back a business note. At first glance many pharmacy owners will not want to take this approach. They want their cash and their exit. When a Colorado pharmacy owner is considering selling their drug store, looking at the benefits of originating a business note and not just the perceived costs, they may find that offering Private Finance in the form of a Pharmacy Business Note will provide them an alternative course of action.
Advantages of Creating and Selling a Pharmacy Business Note in Colorado
1. The process of selling a Colorado pharmacy or drug store to an individual can be easier and less time consuming when the pharmacy seller agrees to carry a business note, than a buyer pursuing traditional financing.
2. A Colorado pharmacy business owner can greatly increase the number of potential buyers for their business by offering Seller Carryback Financing, which often known as Private Finance. They will most likely sell the business at a higher price.
3. When a pharmacy business note is originated, there are several options including keeping it for monthly income, selling the whole pharmacy note for a large lump sum, or selling part of the Colorado pharmacy business note to meet current financial needs and keeping the remainder for future income.
4. Selling either a portion or the whole CO pharmacy business note will free up capital that can be used for either new ventures or paying off old debt.
5. When a pharmacy business note is created and sold in CO, with the proper professional guidance, a transaction can be structured that allows the pharmacy business seller the biggest advantage in achieving the seller’s goals.
When originating a pharmacy business note the terms and interest rate are set and agreed upon between the seller and buyer of the business. The seller of the business accepts the promissory note, which is secured by the business including any inventory and equipment that belongs to the business. The pharmacy business seller then sells the note to an Investor who is willing to hold the pharmacy note in exchange for compensation. Since Investor can’t go back to the Colorado pharmacy business buyer and change the terms of his purchase agreement, the seller of the note must discount the note. The Investor is compensated from the difference of what the note was originated for and the discounted price paid for the pharmacy business note.
Tips:
1. Poorly structured business notes may prevent their sale, so seek professional advice before originating a financial instrument that can’t be sold.
2. Sellers of business notes need to fully understand the Investors risk in order to successful sell the business note.
3. Private Finance, in the form of a Business Note, is an alternative that should be looked at as a business financing option.
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More information about financing pharmacy transactions in Colorado is available at www.WashburnAndAssociates.com.
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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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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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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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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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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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