In Idaho, Is it Worth Selling a Pharmacy Note at a Discount?

By Brad MacLiver
Authorship and profile at Google


When a ID 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. Idaho pharmacy business notes can be sold by using a discounting method. Instead of buying a pharmacy note at its face value, the 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 Idaho 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 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 pharmacy note in Idaho? What are the desired goals? Is reducing the exposure to risk a consideration? Is there a financial decision to pay off debt? Is capital required for a new venture? Are there dreams of exotic vacations or world travel that could be accomplished with a lump sum of cash? How important is it to accomplish these goals? What are the opportunity costs if you don’t have the lump sum of cash to achieve your goals, or invest in something that pays a higher return? Determine your investment and family priorities wisely.

2. Do you know the Current Fair Market Value of the pharmacy business? This is what someone is actually willing to pay for the business.  This is not just an “earnings times x” formula because real aspects of what is happening in the pharmacy industry must be considered.  It is advantageous to have a pharmacy industry specialist calculate the Idaho pharmacy business valuation.

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

4. A Idaho pharmacy note that is seasoned has more value than a “green” note that doesn’t have a payment history. Are you willing to hold onto the note for a certain period of time to allow the business buyer enough time to prove to an Note Investor the capability of the payor making the payments?

5. Are you willing to perform a "partial sell" by selling only a portion of the Note? The discount rate can be a more attractive proposition when only a portion of the note is sold and the Pharmacy Note Investor in Idaho is not holding all the risk.

Understanding the Risk for the Note Buyer:
1. ID 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. ID 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 Idaho pharmacy competition either building in the neighborhood or through mail order.

4. Loan to Value - When originating a pharmacy business note in Idaho, you may be creating financing where there is a “negative loan to value.” Example: the pharmacy business note is for $300,000, but there is only $100,000 of tangible assets for collateral.

5. Title Insurance – ID 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 Idaho 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 ID 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 Pharmacy Acquisitions in Idaho

By Brad MacLiver
Authorship and profile at Google


When acquiring or selling an Idaho 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 an Idaho pharmacy owner is considering selling their drug store, looking at the benefits of originating a business note and not just the perceived costs, they may find that offering Private Finance in the form of a Pharmacy Business Note will provide them an alternative course of action.

Advantages of Creating and Selling an ID Pharmacy Business Note

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

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

3. When a pharmacy business note is created there are the options of keeping it for monthly income, selling the entire ID pharmacy note for a large lump sum, or selling part of the pharmacy business note to meet current financial needs and keeping the remainder for future income.

4. Selling either a portion, or the entire pharmacy business note in ID, frees up capital that can be used for new ventures, or paying off old debt.

5. When an Idaho 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 the terms and interest rate are set and agreed upon between the seller and buyer of the business. A pharmacy valuation performed by a valuation company that has expertise in pharmacy valuations will assist negotiating the purchase price. 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 Idaho 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 ID 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.

Additional Tips for Business Notes:
1. Business notes that have been poorly structured. may prevent their sale. Seek professional guidance before originating a financial instrument that can’t be sold.

2. The sellers of business notes must fully understand the risks of Investors in order to successful sell the business note.

3. Private Finance in the form of a Business Note is an alternative financing method that should be looked at as a valid business financing option.

************************
 

Acceleration Clauses in Idaho Pharmacy Business Loans and Commercial Leases

By Brad MacLiver
Authorship and profile at Google


A provision of many ID 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 Idaho pharmacy business loan or lease documents provided to the independent drug store owner will describe the rights, conditions, and obligations relevant to the acceleration clause. In the event that pharmacy owner in Idaho (the borrower) cannot meet their obligations, the loan or lease goes into default. A default can be caused by a payment that is even one day late, which means commercial and pharmacy business loans lease documents should be read and thoroughly understood before signing.

Tips Regarding Acceleration Clauses: 1. If slowing cash flow of a pharmacy is going to cause a business loan default but the Idaho pharmacy owner has additional unencumbered assets, they might be able to negotiate with the lender by offering additional collateral.

2. If its possible for the ID pharmacy to 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 be aware of the laws in their state where they operate because 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, Idaho pharmacy owners should help the process by assisting the landlord re-lease the property. However, please note, should the ID pharmacy be in the process of being sold and the files and inventory moved to a competitor’s location, the pharmacy buyer will require restrictions in the Purchase and Sale Agreement  that the new tenant cannot be another pharmacy.

5. Lenders prefer not to have to go through the foreclosure process, so if your ID 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 pharmacy in ID for acquisition, or expansion, due diligence and understanding of all aspects of the transaction should be considered. Using the services of a pharmacy industry expert to guide a pharmacy owner through the maze of details will benefit the Idaho pharmacy owner in making the best business decision.

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

Using Multiples in Idaho Pharmacy Business Valuations

By Brad MacLiver
Authorship and profile at Google


People who have purchased a residence are familiar with real estate appraisals. With an ID 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.

Pharmacy Business Valuations in Idaho are part of the due diligence that will be conducted when there is a possible acquisition of the pharmacy business, or Idaho 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). Take into account that when using simple methods such as multipliers, you must understand a few points.  Firstly, financial statements are typically prepared to account for the lowest possible taxes.  Secondly, stated profits are not typically the company's actual cash flow.  And thirdly, company assets probably have a different value than what is on the books for tax purposes.

By understanding the above points, you should understand that a pharmacy valuation based on simple multipliers may not reflect the true market value of the Idaho drug store.   So, when financing is involved, simple multiplier methods are unacceptable.  Banks and finance companies require an unbiased, third party Idaho pharmacy valuation to be completed using advanced calculations, industry knowledge, and sound financial planning.

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.

Due to the aging population sales are increasing as the older generations are purchasing more prescriptions. However at the same time, government and insurance reimbursements have been drastically reduced causing a major decline in nets profits for the pharmacy industry. Lower profits means it is harder for the business to service debt. That in turn means it is harder to obtain funding, and when there is funding it will be in lower amounts. Someone who is not an ID pharmacy specialist and used a gross sales multiplier would be way off in their calculation compared to other pharmacy valuations. A banker that sees valuations that are not within realistic industry comparisons is not going to fund the deal and fees paid for the business valuation will have been wasted.

When it is necessary to have a pharmacy business valuation completed, it is strongly advised to pay more for a specialist that can provide a banker realistic and current information. Don’t try and save a few bucks by cutting corners, and then end up wasting time, money, and possibly even ruin a chance of obtaining funding that either the pharmacy business owner, or pharmacy buyer was seeking.

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

Estate Planning for Idaho Pharmacy Owners

By Brad MacLiver
Authorship and profile at Google


With the current market many Idaho pharmacy owners are experiencing lower profit margins, and have considered selling. A pharmacy industry roll-up has been going for years, consolidating the pharmacy seller's customer traffic into fewer drug store locations. There are however a number of pharmacies that are not in a geographical location with other nearby pharmacies, such consolidation can not take place. Some Idoho pharmacy and drug store owners, despite their location or what is happening in the industry, has taken a stand and will not consider selling. But like paying taxes, an exit of the company is ultimately inevitable.

Estate Planning is a subject that many people, in all industries, timid. The pharmacy owner who works 6 days a week, taking very few vacations, fill scripts all day, then mops the floor and makes the books at night, it usually is not much time to consider additional things like estate planning. But, knowing that it will be a transfer of business, it is crucial for Idaho pharmacy owners to consider a proper succession plan for the pharmacy business.

Develop a plan to transfer operations will be time consuming, but done correctly allows the company to be successfully transferred in an acceptable manner. An estate plan for a pharmacy owner need not be immutable process. Fine-tuning, updating, and changes recommended by government regulation, economic conditions and personal expectations change.

Estate planning allows an Idaho drug store owner to anticipate and provide for the transfer of the store. The plan will be formatted in an attempt to eliminate uncertainty, to assist the transfer by trimming costs and cutting taxes.

Process may involve Trusts, wills, living wills, Power of Attorney, Medical Power of Attorney, Business Valuation, Life Insurance, a charitable remainder Trusts, Buy-Sell Agreements and other legal documents. All aspects of estate planning for the pharmacy owners coordinated guidelines.

If there are non-family members as partners in the Idaho drug store business, it is crucial that estate planning include a Purchase-Sale Agreement. A buy-sell agreement, governs the transfer of business between the pharmacy partners. The agreement may also be known as a partner buyout agreement, or a company wants. To protect the family in the event of death of a partner, buy-sell agreement funded with life insurance.

Estate planning, buy-sell agreements, and transfer of the pharmacy to a pharmacy valuation completed by a third party expertise in the pharmaceutical industry to take a large number of pharmaceutical companies perform annual appraisals, and the current industry data as a basis for conclusions. Using simple accounting formulas, multipliers, and valuator inexperienced in pharmacies will not provide an accurate business valuation.

Most Idaho pharmacy owners spend a large part of their lives to build the business. The effort should not disappear because the pharmacy owner refuses to accept their mortality, and plan accordingly. The only pharmacist in a small town may be the pharmacy's owner. If the script can not be filled by a licensed pharmacist since the law the client files must be transferred to another pharmacy. Because of this, a pharmacy business value can fall to a negligible figure in just a few days after the death of the owner. Contingencies outlined in an estate plan should address this issue. Unfortunately, due to not having an effective plan in place, each year a number of pharmacy owners die and their families are left with an asset with very little value.

Tips:

1. When the family pharmacy is the only means of income for many families it becomes more crucial to have a set plan in place.

2. To avoid disputes should estate plans should be developed with clear directives.

3. Minimize tax liabilities is an crucial goal for most people to complete an estate plan should be an expert tax advice should be sought.

4 Many online documents and books are available that provide advice and documents to develop an estate plan. When you go to self-help route, it is advisable to have a paid expert review the completed documentation to ensure that it can be legally respected when the time comes.

5. While developing the farm plan, it is crucial to talk with children and other family members of the pharmacy market owner especially if there are any family members who work in business and others do not.

Pharmacy Transactions and Capital Gains Tax in Idaho

By Brad MacLiver
Authorship and profile at Google


Almost everything you own and use for personal, or business, purposes is a capital asset. When Idaho (ID) pharmacy owners sell a capital asset, the difference between the amounts you sell it for and the amount you paid for it (the basis), is a capital gain, or a capital loss.

Capital gains may also refer to "investment income" that arises in relation to real assets, such as property, financial assets, and intangible assets such as goodwill. In the U.S., all capital gains must be reported and the appropriate tax paid.

When selling a pharmacy or a drug store, there are specific tax strategies that can be used to help offset the tax liabilities. 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.

During this period of history where it is more difficult to finance a business, pharmacy sellers in Idaho may already be required to lower their asking price, so a pharmacy buyer can qualify for the financing required. On top of the lower offers they will be required to pay higher percentages in taxes.

This is a dilemma for the pharmacy seller who wants as much money out of the deal as possible. For most pharmacy owners their business is the largest asset they will ever own and selling the business at a certain dollar amount has been part of their retirement and estate planning. Knowing they will need to cut out a larger chunk of the proceeds to give to the government will cause some pharmacy owners to reconsider their retirement plans. The good news is there are financial tools and strategies that allow the Idaho pharmacy owner to proceed with their plans.

Family Foundations are tax exempt/nonprofit organizations, which provide tax advantages and control over philanthropic activities. Family foundations are typically private foundations that are funded by a small number of sources, and do not conduct widespread fund-raising activities. They may receive gifts from friends and limited sources. Family members serve as trustees, directors, and officers. As private foundations they can make grants, or donations to other organizations. Having a Family Foundation provides a number of benefits including, income tax deductions, exemptions from estate and gift taxes, along with the reduction or elimination of other taxes.

One of many strategies currently available to assist capital gains tax burdens is the Charitable Remainder Trust (CRT). CRT's are legally defined as Split Interest Trusts.  That term is applied because of the blend of both philanthropic motivations and personal financial aspects. CRT’s can reduce tax liability, increase the wealth of a business owner, and provide a vessel for charitable giving at the same time.

CRT’s are created when someone donates assets into this special type of Trust. These assets can be cash, stocks, real estate, etc.  The CRT is then established up for a either pre-established of time or until the donor’s (ID pharmacy owners) death.  Individuals (pharmacy owner or family member) can receive income from the assets in the Trust.  Upon death of the donor, the assets will go to a designated charity and part of the income from the Trust can be spent to purchase life insurance for the donor. The proceeds from the life insurance then go to designated heirs who receive the money without incurring any estate tax liability.

Many tax strategies, including the use of CRTs, are not common knowledge, so it's recommended that pharmacy business owners in Idaho be aware of the different tools available when structuring a business transaction. They should also keep in mind that only professionals with vast experience in CRTs should be used to setup a Charitable Remainder Trust. Not following the stringent IRS guidelines could result in penalties, increased taxes, and criminal charges in some cases.

Over the years there have been unscrupulous individuals who have tried using CRTs and similar financial tools in illegal scams. With the increase in capital gains taxes there are expectations more scams will be floating around out there. Be knowledgeable about the possibilities, but be confident you are working with experts in your industry.

You should consult a firm with extensive experience in pharmacy and drug store acquisitions. Firms that have the knowledge and expertise to structure the transaction appropriately, for tax considerations, can save a pharmacy owner large sums of money when a Idaho pharmacy is sold.

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

Buy-Sell Agreement for Idaho Pharmacy owners

By Brad MacLiver
Authorship and profile at Google


When an Idaho pharmacy is owned by two or more shareholders partners should have a Purchase-Sale Agreement. A buy-sell agreement is a written document that contains procedures and controls the future sale of the Idaho pharmacy business.

       
Pharmaceuticals buy-sell agreements guard the interest of the parties who own an Idaho pharmacy and control the actions triggered by a shareholder to leave the business because of death, disability, divorce, dissolution, or retirement. Agreement will control how and when the shares of the pharmacy business is sold or transferred. It will also provide guidance on how the pharmacy will be evaluated together with the obligations of the remaining shareholders in the Idaho pharmacy.

Buy-sell agreements are important because the various elements of a future sell is predetermined, and does not need to be negotiated during a heated conflict, or during a grieving period. It offers both the shareholder and the family a comfort level that when the inevitable time comes for an exit strategy that the process was carefully considered in advance.

Disadvantages of not having a buy-sell agreement between Idaho pharmacy owners is that a disability can leave a partner who works more and another does not add to productivity. In the event of a death, without an agreement, one party will have a nonproductive heir, or a new partner can be inserted that has personality conflicts with the surviving partner. The wrong partner can be calamitous for the pharmacy business.

There are various types of buy-sell agreements: Entity Buy-Sell Agreement, Cross-Purchase Buy-Sell Agreement, wait and see Buy-Sell Agreement, Disability Buy-Sell Agreement. Buy-sale agreements are also known as a company will or a buyout agreement.

Possible elements of a buy-sell agreement:

1. Shareholders name and number of shares and voting rights of each.

2 Guide for certified pharmacy valuation and purchase of shares a shareholder.

3 Mutual covenants and considerations.

4. Restrictions on the transfer, purchase or encumber the company stock.

5. Protocol in case of a shareholder's divorce or termination of a shareholders' agreement of employment.

6. Obligation to purchase   sale of shares from an estate.

7 Purchase of insurance to ensure the ability to meet obligations.

8. Purchase of shares paid in lump sum or in installments.

9 Remedies for breach of contract or non-payment.

10 Until the transfer is complete, the right to inspect books and records.

11. Amendments and notices of promotions or legal issues.

12. Enforcement of the agreement, the binding effects and arbitration procedures for disputes.

13. Process for the dissolution or liquidation of the company.

14 Maintenance of the property for a transitional period.

15. Preserve the representations and warranties.

16 The conditions for transfer.

17. Bill of Sale

To ensure that the necessary funds available, buy-sell agreements are often funded with life insurance. If the death of one of the pharmacy owners occurs, the life insurance settlement provides funding for the remainder of the Idaho pharmacy owner to buyout partners share of the estate.

Life insurance for each partner must be in place, because without a way to gain purchase of the pharmacy's share buy-sell agreement will not be functional. As the business grows and develops how much insurance must be adapted to provide adequate coverage. Without insurance, the surviving shareholders may not have enough money to buy the required amount of the estate to meet - leaving the survivor with an unwanted partner.

To have adequate insurance coverage and to determine the details of the buy-out terms, a certified pharmacy business valuation is necessary. There are a large number of companies offering business valuations. Because of the dynamics and the current market of the pharmacy industry, a valuation firm should have extensive pharmacy experience. Simple accounting formulas and multipliers will not be adequate or provide realistic valuation for an Idaho pharmacy business. Pharmacy valuations should only be completed by firms that have expertise in the pharmacy industry.

Pharmacy buy-sell agreements are enormously important papers that must be completed with care and seriousness. Even with a long term partnership, it's just too late to create a buy-sell agreement, when an event has already happened that would require the document.

Tips:

1 Buy-sell agreements are important papers that should not be taken lightly. Consult a licensed professional.

2 Documents must take the appropriate laws and regulations that vary from state to state. Search the right guidance.

3. Premiums for insurance that the buy-sell agreement, the Fund will be deductible.

4 Ensure that the pharmacy valuation performed by an established pharmaceutical industry expert.