Estate Planning for South Dakota Pharmacy Owners

By Brad MacLiver
Authorship and profile at Google


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

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

Developing a plan to transfer the business will be time consuming, but done correctly will allow the business to be successfully transferred in an acceptable manner. An estate plan for a pharmacy owner does not need to be changeless process. Fine-tuning, updating, and amendments are recommended as government regulations, economic conditions, and personal expectations change.

Estate planning allows a South Dakota independent drug store owner to anticipate and arrange for the transfer of the drug store. The plan will be formatted in attempts to eliminate uncertainties, assist the transfer by trimming expenses, and reduce taxes.

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

When there are non-family members as partners in the drug store business, it is essential that the estate planning incorporate a Buy-Sell Agreement. A buy-sell agreement, governs the transfer of the business between South Dakota pharmacy partners. The agreement may also be known as a partner buyout agreement, or a business will. To help protect the family in the event of a partner’s death, the buy-sell agreement may be funded with a life insurance policy.

The transfer of the pharmacy, estate planning, and buy-sell agreements should incorporate a pharmacy business valuation performed by a third party that has expertise in the pharmacy industry, performs several pharmacy business valuations every year, and has up-to-date industry data as a foundation for the conclusions. Relying on simple accounting formulas, multipliers, or valuators without experience in South Dakota pharmacy will not provide an accurate business valuation.

Most SD pharmacy owners spend a significant part of their life building the business. Their efforts should not be torn down because the pharmacy owner refuses to accept their own mortality and plan accordingly. Sometimes, the only pharmacist in small pharmacies is the owner. If a licensed pharmacist can't fill the scripts, the customer files are required to be transferred to another pharmacy by law. Because of this, a pharmacy’s business value may plunge downward to a negligible figure in a matter of days after the passing of the owner. An estate plan outlines contingencies that should address this issue. It is unfortunate that due to not having an effective plan in place, a number of pharmacy owners in South Dakota die every year and their family is left with an asset that has very little value.

Additional Tips for Estate Planning: 1. When the sole means of income for several family members is family drug store, it becomes even more necessary to have a plan for succession in place.
2. By developing estates with clear directives, disputes can be avoided.
3. Minimizing tax liabilities is a major objective for most completing an estate plan, therefore expert tax advice should be sought.
4. Many on-line documents and books are available that provide advice and documents for developing an estate plan. When going the self-help route, it is advisable to have a paid expert review the completed documentation to ensure that it can be legally complied with when the time comes.
5. While developing the estate plan it is essential to talk with children and other family members of the South Dakota pharmacy owner especially if there are some family that work in the business and others that don’t.

Pharmacy Franchise Financing in South Dakota

By Brad MacLiver
Authorship and profile at Google


SD pharmacy franchises are contractual relationship between two parties known as the Franchisor and Franchisee.  The Pharmacy Franchisor is the party who has developed their drug store business model, branded all pharmacy-related products, and produced the system in which their pharmacy franchisees operate. The second party, the Pharmacy Franchisee, purchases a franchise license from the South Dakota Pharmacy Franchisor, and usually pays an ongoing pharmacy franchise fee, or royalty fees, to use the name, products, systems, trade secrets, etc., created by the Pharmacy Franchisor.

Quite a bit of options for financing a pharmacy franchise business are available. All pharmacy franchise funding sources, for drug stores, prefer lending to a pharmacy franchisee who will be working with a nationally recognized name and long track records. Newer South Dakota pharmacy franchise models won’t possess these two traits and will be considered more risky.

Traditional Bank Financing used to fund a pharmacy franchise will be available when a pharmacy franchise has both a long track record and pharmacy name recognition. Many of the banks will show interest in this type of funding opportunity. Unfortunately once the bank reviews the loan documents, many of these banks decline the funding request because they don’t understand the security provided for the pharmacy loan. Community drug stores typically have very little traditional assets to offer as security. Lenders for pharmacy will use traditional methods for analyzing the cash flow available to service to the debt, and they will also need to understand the nontraditional collateral that will secure the loan.

As a borrower, even when incorporated, the independent drug store owner’s personal credit rating will be a factor, along with personal tax returns, and financial statements. The amount of actual cash on hand and the verification of the source of the down payment will be critical factor in qualifying for a pharmacy business loan in South Dakota.

SD 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 South Dakota 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 pharmacy owners need to make sure their funding request is enough to get the SD 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 South Dakota pharmacy industry specialist who can provide quality answers and sound advice.

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Types of Financing Available for South Dakota Pharmacies

By Brad MacLiver
Authorship and profile at Google


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

SBA Financing for Pharmacy Business Loans

The U.S. Small Business Administration (SBA) partially guarantees loans for South Dakota pharmacy franchise lenders reducing the risk exposure for the lender. A loan program called 7(a) is a standard for funding pharmacy franchises. These loans can provide funds for pharmacy franchise entry fees, real estate where the pharmacy will be located, property improvements, working capital, and pharmacy related equipment.

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

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

Patriot Express Business Loan Program

Another SBA loan program that can be utilized for South Dakota pharmacy franchise business loans is the Patriot Express Business Loan Program.  This is reserved for military veterans, their spouses, active service members, and survivors.  The pharmacy loan process will then involve the Department of Veterans Affairs.

South Dakota 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 in SD

Specific franchise loan programs are also available for veterans that have been honorably discharged.  These programs can be considered for pharmacy franchise loans.

Pharmacy Financing From the Franchisor in South Dakota

Financing a pharmacy franchisee with a pharmacy franchisor is a usual topic of discussion. Potential drug store franchises should be directed by Franchisors toward funding programs that have previously been successful for their other pharmacy franchisees. Preferred lenders will be familiar already with the pharmacy franchisor and their methods.

Pharmacy franchisors can also provide some initial funding. 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 SD Pharmacy Finance

Not all prospective pharmacy franchise owners have enough cash on hand. Part of the drug store business financing may require the borrower to liquidate personal stocks, provide personal assets as collateral, refinance their home, or use their 401k to assist the lenders security for making the South Dakota 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 South Dakota pharmacy. Since the SD 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 in South Dakota crashes, so does the retirement fund. The method of providing less expensive financing for the South Dakota 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 in South Dakota 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 pharmacy franchises may only have the options of bankruptcy, or buying out the franchise agreement when allowable.

Buying out the franchisor allows the pharmacy in South Dakota to remove the franchisor from the equation. This in turn allows the pharmacy owner more flexibility in their business decisions. The pharmacy franchisor sold the drug store franchise with expectations of earning income from the cash flow their pharmacy franchisees. Due to their long term plan, Franchisors may not be willing to allow the pharmacy franchisee to remove itself from the franchisor. However if a Franchise Agreement Buyout can be negotiated, the buy-out transaction can also be financed.

Unfortunately many banks don’t understand the dynamics of the SD 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 South Dakota pharmacy owner is advised to use a pharmacy industry specialist to capitalize on the funding opportunities that are available.

 

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Financial Discount Rates for Pharmacy Cash Flow Instruments in South Dakota

By Brad MacLiver
Authorship and profile at Google


When a SD 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 South Dakota 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 South Dakota pharmacy owner 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 could possibly change depending on circumstances regarding the cash flow instrument or the economy.

If the South Dakota pharmacy owner or an investor could take the cash flow instrument to the bank and cash it in at face value, the asset would then have additional value. However, because this cannot happen, any risks of holding the cash flow instrument makes it worth less than its face value.

Time Value of Money:
The concept of cash being more valuable to have a dollar today instead of tomorrow is based on the Time Value of Money (TVM). Most business people are aware of the TVM and how it is fundamental to both personal and corporate decision making, but to make sure we are on the same page, we will 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 $30.00 today earns 10% interest, it will be worth $33.00 at the same time next year. Therefore, $30.00 today = $33.00 next year = $77.81 ten years from now.

Within the same reasoning the reverse is true. An investor will not pay $1.00 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 in SD, 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 $30.00 with 15% interest, equal payments received over a 9 year period, you would expect to receive $105.54. However, should the note be paid in full in 4 years you will only have collected $52.47. You are not collecting the other $53.07 because you are no longer risking anything (you are not earning it). If you want an investor to advance you the $105.54, 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 South Dakota pharmacy’s accounts receivables.


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