South Dakota Pharmacy Owners - Merry Christmas!

We want to wish a Merry Christmas and a Happy New Year to all of the pharmacy owners located in South Dakota (SD).

   Watch our Christmas video:    http://youtu.be/Lm-6ls-rzrY   

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.

********************

 

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.

 

********************

 

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.


************************

  
 

Is it Worth Selling a South Dakota Pharmacy Note at a Discount?

By Brad MacLiver
Authorship and profile at Google


When a SD 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 South Dakota 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 South Dakota 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 SD pharmacy note? What are the desired goals? Is lessening the exposure to risk something to consider? Are there any financial reasons to pay off debt? Do you need capital for a new venture? Do you have any dreams of exotic vacations or world travel that could only 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 actually willing to pay for the business instead of a simply “earnings times x” formula. The real aspects of what is happening in the South Dakota pharmacy industry must be considered and it is advantageous to have a pharmacy industry specialist calculate the pharmacy business valuation.

3. How much cash is immediately required by the holder of the pharmacy note in SD?

4. A pharmacy note in South Dakota 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 SD Pharmacy Note Investor is not holding all the risk.

Understanding the Risk for the Note Buyer:

1. SD 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 pharmacy business buyer cannot meet the payment obligations. Incompetency could lead to late payments, missed payments, or bankruptcy.

2. SD Pharmacy Industry Changes - 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 South Dakota pharmacy business note you may be creating financing where there is a “negative loan to value.” Example: the pharmacy business note is for $150,000, but there is only $50,000 of tangible assets for collateral.

5. Title Insurance – Pharmacy business notes 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 South Dakota 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 pharmacy. This provides the SD pharmacy business seller, and future note seller, valuable insight into structuring the pharmacy business note so it can be successfully purchased.

************************


 

Using Business Notes for Financing South Dakota Pharmacy Acquisitions

By Brad MacLiver
Authorship and profile at Google


When acquiring or selling a SD 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 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 in South Dakota will provide them an alternative course of action.

Advantages of Creating and Selling a Pharmacy Business Note in South Dakota

1. The process of selling a pharmacy or drug store to an individual can be easier and less time consuming when the pharmacy seller in South Dakota agrees to carry a business note, than a buyer pursuing traditional financing.

2. By offering Seller Carryback Financing, often referred to as Private Finance, a pharmacy business owner in South Dakota can greatly increase the number of potential buyers for their business, and most likely sell the business at a higher price.

3. When pharmacy business notes are created, several options exist, such as keeping it for monthly income, selling just a part of the SD pharmacy business note to meet current financial needs and keeping the remainder for future income, selling the entire pharmacy note for a large lump sum.

4. By selling either the entire or a portion of the SD pharmacy business note, you can free up capital to use for new ventures or pay off old debt.

5. When a South Dakota pharmacy business note is created and sold, 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 in South Dakota, 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 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.

************************


 

Should a Broker be Used When Buying a South Dakota Pharmacy

By Brad MacLiver
Authorship and profile at Google


When deciding between using a SD pharmacy broker, or pursuing the acquisition of a pharmacy yourself, buyers of South Dakota pharmacies and drug stores need to weigh several factors including skills, knowledge, and time.

Many South Dakota pharmacy buyers are experts behind the counter, but many who have never bought a pharmacy in the past, don’t have the complete understanding of all the variables including negotiation for the best price, State and Federal Regulations, the best options for financing the acquisition, and structuring the deal. These are skills that many pharmacy buyers believe they possess, but pharmacy buyers need to recognize how many times they have actually purchased a pharmacy compared to a pharmacy industry expert.

Knowledge is power and using a pharmacy broker with extensive know how in valuing and transferring pharmacies will save a pharmacy buyer in SD considerable time and headaches resulting in a more cost efficient transaction. The cost of acquisition must be considered in the analysis of Return on Investment (ROI). If the acquisition will benefit the buyer, then any additional time spent with a stagnant transaction will be benefits lost.

Transactions are definitely time consuming. When handling a transaction yourself, how many additional hours will you need to work to complete the South Dakota pharmacy acquisition and then still not be certain if all the details were done correctly?

Just finding the appropriate pharmacy to buy can be an expensive, laborious, and time consuming process. If the pharmacy’s numbers appear to provide the ROI the pharmacy buyer requires, is the pharmacy seller in South Dakota both cooperative with the buyer and knowledgeable about the transaction process?

Pharmacy sellers in SD, their attorney, their CPA, and even their families can slow the process. Pharmacy buyers need to understand this and have the credentials that all of the various parties can have faith in while undergoing the many steps of the acquisition.

After a pharmacy has met the buyer’s preliminary requirements, a current market pharmacy business valuation based on a sound financial and market analysis, and not just a simple accounting or multiple formula, needs to be completed to verify the current value of the pharmacy. In today’s market, pharmacy sellers usually want a higher acquisition price for their family owned pharmacies, than what the current market is willing to pay. A certified valuation completed by a third party who possesses extensive experience in the South Dakota pharmacy industry will help guide the buyer and seller in their negotiations.

Buying a SD pharmacy business is not like buying a used car. There are many steps that must be taken. Pharmacy buyers who are not discussing an acquisition with a pharmacy seller who will actually move forward with providing all the documentation and financial statements will be losing valuable time in their acquisition search. Both the seller and buyer need to have a meeting of the minds and provide a collective effort in pursuing the closing of the pharmacy acquisition. By the time a closing occurs and all aspects of the transaction have been completed, substantial cash and time will have been invested.

When inexperienced parties are undergoing the acquisition process it can be a draining experience full of headaches and worries. A smoother and more confident process can be accomplished when a pharmacy industry expert is involved in the transaction. A pharmacy broker in South Dakota will take steps to pre qualify the buyer. This allows the seller the knowledge they are working with a real buyer and not a tire kicker.

If the buyer will need financing to complete the deal they will find many banks will not finance a pharmacy acquisition. A broker working exclusively in the SD pharmacy industry will have sources of funding who understand the industry and will fund pharmacy acquisitions.

In South Dakota pharmacy mergers and acquisitions it is important to understand confidentiality, and how the perceived changes may affect employees and customers. A broker acting as the middle man between the buyer and seller can assist the confidentiality of the transaction.

There are many things to consider when purchasing a pharmacy. Using a South Dakota pharmacy business broker who specializes in the pharmacy industry will benefit both parties involved in the buying and selling of a pharmacy.

************************

Using Tax Strategies When Selling Pharmacies in South Dakota

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

When pharmacy owners sell their South Dakota pharmacy it is considered a capital asset. The difference between the amounts it is sold for and the amount spent to either purchase or start the pharmacy is a capital gain, or a capital loss. In the U.S., all capital gains must be reported and the appropriate tax paid.

Specific tax strategies can be used to help offset the tax liabilities when selling a SD pharmacy or a drug store. Unless a professional is handling a large number of pharmacy acquisitions, they usually do not know these federal regulations that allow for reducing the tax liability for the pharmacy owner in South Dakota.

Many Business Brokers, CPA’s, attorneys, and other professional advisors inform their clients that selling a SD 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 South Dakota pharmacy transaction allowing the reduction of the tax burden to the pharmacy owner.

Some capital gain tax strategies exist that must be implemented before any obligation to sell the pharmacy. When a drug store owner is considers to sell their pharmacy now or in the next few years, it is urgent that the best course of action be considered now instead of later.

Estate planning when selling a South Dakota pharmacy should also be a consideration. Specific federal regulations allow an asset to be converted to an income stream, provide a tax deduction, increase asset diversification, and provide risk reduction, along with offering effective retirement and estate planning. If the pharmacy seller in SD 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 along with small and regional pharmacy chains will be considering selling their South Dakota pharmacies and drug stores. Tax considerations should be a paramount part of the decision process.

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

************************
 

EBITDA and South Dakota Pharmacy Acquisitions

By Brad MacLiver
Authorship and profile at Google


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

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

For the effective use of EBITDA, these larger companies should possess significant assets, have heavy amortization schedules, or bear substantial amounts of debt. Considering independent pharmacies in South Dakota don’t meet that criteria, this formula is not a useful measure as the sole means for valuing pharmacies for acquisition purposes.

Calculating EBITDA is done by:
1. Determining net income by obtaining total income and subtract total expenses.
2. Calculating the total amount of taxes paid to federal, state, and local governments.
3. Establishing interest fees paid to companies or individuals for the use of credit, or capital.
4. Determining the cost of depreciation (the expense recorded to allocate a tangible asset's cost over its useful life).
5. Calculating the cost of amortization (the expense for consumption of the value of intangible assets, such as goodwill, patents, and copyrights, over a specific period of time, or the asset's expected life.
6. Add #1 through #5 together to determine the EBITDA.

EBITDA calculation example:
1. Total Income          1,820
2. + Total Taxes paid      472
3. + Interest Fees         266
4. + Depreciation Costs    133
5. + Amortization Costs     66
6. = EBITDA              2,757

There are drawbacks of EBITDA that should be taken into account.  EBITDA can be misleading number when it is confused with cash flow, and they an make even completely unprofitable firms appear to be financially healthy.  The numbers are easy to manipulate and they are not factual when valuing small companies.  With EBITDA, it is easy to overlook cash requirements for growth in accounts receivable, as well as miss cash requirements for growth in inventories.  EBITDA is also not effective for companies with few assets, small amounts of debt, or low depreciation or amortization schedules.

EBITDA was being used during the 80's as a means of determining approximate cash flow in leveraged buyouts in order to determine whether companies could service their debt. By factoring out taxes, interest, amortization, and depreciation, this formula 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 SD 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 South Dakota pharmacies especially those who have a niche in HIV, disease management, long term care, etc. However, EBITDA should not be used as part of the usual formula for standard retail pharmacy acquisitions.

The EBITDA number for a specific existing pharmacy is important, for the most part, when the existing ownership is establishing their drug store's 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 South Dakota pharmacy. This is due to the fact the buyer will not have the same expenses as the seller.

Buyers may not have the same tax base, interest expense, or the same depreciation schedule, 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 pharmacy in South Dakota. Instead of the EBITDA number, SD pharmacy buyers should be focusing on sales, gross profit, cash flow, and customer mix.

************************

The Pharmacy Industry Roll-Up in South Dakota

By Brad MacLiver
Authorship and profile at Google


SD Industry Roll-Ups are where an industry’s many players are consolidated into smaller groups for economic benefits. Recessions, new government regulations, or other aspects of the industry that may be stifling profits end up providing incentives to consolidate
               
A principal reason for an industry roll-up is to achieve economies of scale in purchasing, marketing, information systems, logistics, distribution, and top management. Consolidated businesses also have less risk from the impact of an unsatisfied customer and have the reward of being able to recruit, or keep, key employees.

An example of an industry roll-up can be seen with the pharmacy industry in South Dakota. It is a well established industry and is still experiencing sales growth. However, pharmacies and drug stores in SD 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 South Dakota 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 in South Dakota.

During the South Dakota pharmacy industry roll-up pharmacies 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 South Dakota roll-up, specific funding programs have been developed. These SD pharmacy chain funding programs are backed by major financial institutions that provide the funding for pharmacy acquisitions. These pharmacy funding programs allow an individual South Dakota 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 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 in South Dakota through the maze of details will benefit the pharmacy owner in making the best business decision.

All transactions tied with the pharmacy roll-up need to have the business valued at the current market value. Business valuations for the South Dakota pharmacy industry should be calculated by a company that has in-depth knowledge of the South Dakota pharmacy. Simple accounting formulas used by many companies for estimating value does not provide an accurate picture because the simple formulas do not take into account the aspects that are causing the SD pharmacy industry roll-up.

The factors of the market which are stimulating the pharmacy industry roll-up are also having downward pressure on the pharmacy business valuations. Pharmacy owners have been paying attention to what has been occurring in the pharmacy industry. Even 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 South Dakota pharmacy industry roll-up will continue.

************************
 

South Dakota Pharmacy Acquisition Finance

By Brad MacLiver
Authorship and profile at Google


When a SD pharmacy or drug store is being sold, seldom does the buyer pay “out of pocket” cash for the acquisition. Even when cash is available, South Dakota pharmacy acquisition strategies usually involve financing the transaction.
       
Typical acquisitions take 6-9 months to complete, so the 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 South Dakota 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, pharmacies in SD are not ice cream stores. There are many aspects of valuing a pharmacy that are unique to the industry, so generic valuations or simple accounting formulas should not be used. An industry specialist should be used for valuing the South Dakota pharmacies instead of a valuation company that has a broader spectrum.

The selling company should provide current, up-to-date data to complete a valuation. Old data is not accepted by lenders, and neither is a sellers “gut feeling.”  Lenders to make their decisions to finance based on sound, verifiable data.

Structuring the transaction is extremely important. The seller of course wants as much money as possible and wants cash. The buyer needs to spread out the debt service and wants to have as little cash as possible invested in the acquisition.

Pharmacies in SD and drug stores are in an industry where it is tougher to obtain business loan due to most of the value in a pharmacy being in customer files and not hard assets. For the acquisition to be properly financed, a lender will therefore need a solid understanding of the industry and what, in addition to its collateralized assets, the company has to offer to reduce the perceived risks.

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 South Dakota pharmacy industry.

Tips regarding pharmacy acquisitions and finance:

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

When pursuing “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 South Dakota pharmacy.

************************

340B Discount Programs for Pharmacies in South Dakota

By Brad MacLiver
Authorship and profile at Google


The United States Department of Health and Human Services provides a program for discounted prescription drugs to qualified Federally Qualified Health Centers (FQHC), Disproportionate Share Hospitals (DSH), and other qualified entities. When these facilities don’t have their own pharmacies they are allowed to contract with a local SD pharmacy. The drug pricing program is often referred to as 340B, named after the section of the law that established the program.

Section 340B legislation was enacted to provide indigent and uninsured populations access to deeply discounted medications. Since the program was enacted to assist certain populations there are restrictions and regulations in how the program operates and who the medications can be dispensed to.

South Dakota Pharmacies can be contracted by a FQHC, or similar 340B qualified entity, to manage and dispense the medications. Patients from these entities provide additional traffic in the pharmacies allowing the pharmacies the opportunity for additional front end sales along with the Rx sales.

Pharmacy owners in South Dakota participating in a 340B pharmacy program need to manage their business consistent with customary business practices. In the event of an audit the pharmacy should have dispensing and inventory records, billing statements, etc. Business records should show that drugs purchased by customers, under the 340B Drug Pricing Program, were not diverted to people who are not part of the program.

Along with the additional record keeping a pharmacy owner will need employees who understand the various state and federal rules and regulations, which govern the 340B program. The South Dakota pharmacy will also need to have a location for the 340B inventory, which is separate from their normal inventory, or have a software management system to track the separate inventories.

A system of separating the inventory is required due to the drug inventory used for the 340B pharmacy program is owned by entity that contracted the pharmacy. Since the 340B inventory is not “owned” by the pharmacy this inventory will be treated differently for tax purposes. The South Dakota pharmacy generates income from dispensing fees they are paid instead of a mark-up or profit margin on the inventory.

Since customers participating in a 340B program can only purchase the designated medications from a pharmacy contracted with a 340B entity, this allows a pharmacy to have a market niche. A contracted pharmacy servicing 340B customers benefit from additional customer traffic visiting the store.
 
With the current economic situation and high unemployment, many people have lost their insurance benefits. This will likely expand the need for 340B pharmacy programs and provide additional 340B customers to a participating pharmacy in South Dakota.

However, when a pharmacy owner is weighing the potential benefits of a 340B program, they should also consider other aspects of their business and the current market conditions of the pharmacy industry. What are the pharmacy’s goals over the next couple years? A younger SD pharmacy owner with long term objectives can benefit for many years from the added customers. However, a pharmacy owner considering selling the business in the next couple years should be aware that acquisition values are based on the customer files, and many buyers are not currently willing to include 340B customer files in their offers. This results in a lower pharmacy business valuation and market price for the pharmacy despite the volume of business. Also, considering the current economic conditions, there are several 340B customers who have chosen not to purchase medications despite the deeply discounted prices. Pharmacy owners must consider the additional costs and time of 340B inventory and that customer tracking and reporting may not be offset by the fees received.

If a SD pharmacy owner considers the benefits of participating in a 340B program, or considers to sell the pharmacy in the couple years, it is advisable to discuss the options with pharmacy industry experts.


 

Pharmacy Acquisitions and Bridge Loans in South Dakota

By Brad MacLiver
Authorship and profile at Google


With the changes in the SD pharmacy industry independent drug store owners, small and regional pharmacy chains, and pharmacy equity investment groups are acquiring South Dakota 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.

Examples of using Bridge Loans in SD Pharmacy Transactions:

1. An independent South Dakota pharmacy owner learns of health issues and decides to quickly sell the family owned pharmacy to an employee or local competitor. Traditional finance methods for the pharmacy buyer may involve a time line that is not acceptable when considering the circumstances. A bridge loan can be utilized to quickly accomplish the transaction in this situation.

2. A small pharmacy chain requires $1 million so they can expand their business. They have 3 new equity investors that will be investing in the firm over a period of 6 months, but each at different intervals. However, the business has some opportunities that require action sooner than 6 months. A bridge loan that closes quickly allows the South Dakota pharmacy chain access to the needed funds so they can complete their expansion and increase profits. The money recieved from the 3 new equity investors will 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 SD pharmacy location, but the property is in disrepair. A bridge loan provides the needed funds to acquire and rehab of the property and once that is complete conventional long term financing can be obtained.

4. A pharmacy group in South Dakota developing new 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 allows the project to move into the construction phase and then qualify for other forms of financing.

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

6. Equipment or real estate purchased at auction may have a narrow window for closing the deal. The timing of traditional financing would keep the buyer from proceeding with the opportunity, and the benefits of a bridge loan will permit the pharmacy owner to quickly respond to the opportunity.

When there are business opportunities, buying pharmacies, selling pharmacies, 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 essential financial tool.

Tips regarding pharmacy bridge loans in South Dakota:

1. Bridge loans are quick to obtain but they expire quickly.

2. A bridge loan is similar to a hard money loan 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.

It is necessary to understand that the types of deals that require a bridge loan may be considered speculative or high-risk in nature. Many banks will not offer bridge loans because of this. Banks are required to meet government regulations and they also need to justify their lending practices. High-risk bridge loans do not usually fall within the lending parameters of many banks. The result of this is that a majority of the bridge loans will come from private investment firms.  It is best to consult a company that has access to a several sources of funding who provide bridge loans.

************************

Acceleration Clauses for South Dakota Commercial Leases and Pharmacy Business Loans

By Brad MacLiver
Authorship and profile at Google


A provision of many SD 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, but this is where the acceleration clause comes into effect. Without the clause the lender would only be able to foreclose on one missed payment at a time. With the acceleration clause, despite whatever event kicks the clause into gear, the lender can demand immediate and full payment of all remaining balances and fees.

The pharmacy business loan or lease documents that are provided to the South Dakota pharmacy owner will describe the rights, the obligations, and the conditions related to the acceleration clause. When the borrow, the pharmacy owner in this case, doesn’t meet their obligations, the loan or lease will then go into default. A default can be caused by a payment that is even one day late. Pharmacy business loans and commercial lease documents should be thoroughly read and understood before signing because of this.

More Tips:
1. If a pharmacy’s slowing cash flow is likely to cause a business loan default, they may be able to negotiate with the lender by offering additional collateral should the pharmacy owner in South Dakota have any additional unencumbered assets.

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

3. Different 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, pharmacy owners should help the process by assisting the landlord re-lease the property. However, please note, should the pharmacy be in the process of being sold and the files and inventory moved to a competitor’s location, the South Dakota pharmacy buyer will require restrictions in the Purchase and Sale Agreement  that the new tenant cannot be another SD 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 South Dakota pharmacy for acquisition, or expansion, due diligence and understanding of all aspects of the transaction should be considered. Using the services of a SD pharmacy industry expert to guide a pharmacy owner through the maze of details will benefit the pharmacy owner in making the best business decision.

************************
 

South Dakota Pharmacy Industry: Current Market Conditions

By Brad MacLiver
Authorship and profile at Google


There are currently several factors that are having an impact the current market conditions of the U.S. pharmacy industry. These factors are affecting the pharmacy business valuations of pharmacies in SD and drug stores all across the U.S.

Local demographics:

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

South Dakota Pharmacists Shortage:

Pharmacies in South Dakota 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. Some of the largest pharmacy chains have been purchased and consolidated in the SD pharmacy industry roll up. Many smaller chains have run into financial difficulties and have stopped their expansion. It is more difficult to drive a price higher when there are fewer willing, or capable, to purchase.

Current Market Conditions Requires Industry Roll-up:

The consolidation of the pharmacy industry is required to get more traffic into a single store.  Due to simple economics, 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 South Dakota pharmacy values and there is not any expectation of a turn around. Pharmacy owners should not be fooled by inexperienced Brokers claiming grand outcomes and over stating pharmacy business values not based on realistic market conditions.

With the consolidation of the pharmacy industry 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 in South Dakota 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.

Mail Order:

Some insurance companies are designating a noticeable amount of pharmacy patients in SD 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 South Dakota 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 in South Dakota and has extensive and current industry data.  Choose 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.

************************

Using Multiples with Pharmacy Business Valuations in South Dakota

By Brad MacLiver
Authorship and profile at Google


People who have purchased a residence are familiar with real estate appraisals. With a SD pharmacy business there are times when both the real estate the business itself needs to be appraised. The pharmacy business appraisal does not include the real estate and is more commonly called a Pharmacy Business Valuation.

South Dakota Pharmacy Business Valuations are part of the due diligence that will be conducted when there is a possible acquisition of the South Dakota pharmacy business, or SD pharmacy financing is needed. Pharmacy Business Valuations place a reasonable market value on the drug store after consideration has been given to factors such as, but not limited to: assets, financial statements, tax returns, goodwill, customer lists, licensing, competitive advantages, regulatory concerns, management team, inventories, and industry comparisons.

There are a number of accepted methods for valuing a retail drug store business. Each method has its own perspective and the business owner should have a reasonable understanding of the method being used.

One simple method is to use “multipliers” This is when someone takes the net profit, gross sales, or some other figure from the financial statements and then multiplies that number by 3, 5, 8 times (whatever the case may be). However, when using simple methods such as multipliers you need to understand a few points:

1. Financial statements are typically prepared to justify the lowest possible taxes.

2. Stated profits are not usually the actual cash flow of the company.

3. Due to tax reasons company assets probably have a different value than what is on the books.

Understanding the above points, you can understand that a simple pharmacy valuation based on multiples may not reflect the true market value of the drug store.

When financing is involved simple multiplier methods will not be acceptable. Banks and finance companies will require a third party unbiased South Dakota pharmacy valuation completed using advanced calculations, knowledge of the industry, and sound financial reasoning.

When a company specializes in a specific industry, that company will be able to offer a more precise and credible valuation. Specialists usually have more industry data than someone who does not normally value businesses in that industry. The results of not having the proper industry data will result in a more ambiguous valuation.

The population is aging and sales are increasing as the older generations are purchasing more prescriptions.  At the same time, government and insurance reimbursements are drastically being cut back, causing a major drop in nets profits for the pharmacy industry in SD. Reduced profits means it is more difficult for the business to service debt, which in turn means that it is harder for funding to be obtained.  When there is funding available, it will be in lower amounts. Somebody that is not a pharmacy specialist who used a gross sales multiplier would be very inaccurate in their calculation when compared to other pharmacy valuations. Any banker who sees valuations not within realistic industry comparisons is not going to fund the deal and any fees paid for the business valuation will have been wasted.

When you require a South Dakota pharmacy business valuation to be completed, it is highly recommended to pay more for a specialist who provides a banker realistic and current information. Don’t try to save a few bucks by cutting corners, which ends up wasting time, money, and possibly even ruin chances to obtain funding that either the SD pharmacy business owner, or pharmacy buyer was seeking.

************************