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.

 

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

 

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.

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

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.

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

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.

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