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.
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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.
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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.
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By Brad MacLiver
Authorship and profile at Google
Industry Roll-Ups are where an industry’s many players are consolidated into smaller groups for economic benefits. 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.
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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.
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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.
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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.
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