Merry Christmas - Utah Pharmacy Owners

Utah (UT) pharmacy and drug store owners the year ahead come bring new challenges. When you need a reliable source to discuss the options for the pharmacy industry you can count on www.PharmacyValuations.com.

Merry Christmas and Happy New Year!

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

Estate Planning in Utah for Pharmacy Owners

By Brad MacLiver
Authorship and profile at Google


With the current market conditions many Utah pharmacy and drug store owners are experiencing lower profit margins and have considered selling. A roll-up of the pharmacy industry has been occurring for a number of years, consolidating the pharmacy seller’s customer traffic into fewer pharmacy locations in Utah. 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.

In all industries, estate planning is a topic many people shy away from. For the pharmacy owner 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 Utah 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 Utah 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 pharmacy 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 Utah 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 pharmacy partners. The agreement may also be known as a partner buyout agreement, or a business will. To help protect an owner's family in the event of a partner’s death, the buy-sell agreement is often funded with a life insurance policy.

Buy-sell agreements, estate planning, and the pharmacy transfer should incorporate a Utah pharmacy business valuation completed by a third party who has expertise in the pharmacy industry.  It is wise to consult a company that performs a large number of pharmacy business valuations each year, and has up-to-date industry data as a basis for the conclusions. Using simple accounting formulas or multipliers with valuators inexperienced in the pharmacy industry will not provide an accurate business valuation.

Most pharmacy owners in Utah spend a major part of their life building the business. Their efforts should not be thrown away because the pharmacy owner refuses to accept their mortality and plan accordingly. In some small pharmacies, the only pharmacist is the owner.  If the scripts are unable to be filled by a licensed pharmacist, the customer files must be transferred to another pharmacy by law. Due to this, a pharmacy’s business value could drop to a negligible figure in a few days after the passing of the owner. The contingencies outlined in an estate plan can address this issue.  Unfortunately, a number of Utah pharmacy owners die and their family is left with an asset with very little value each year to not having an effective plan in place.

Five Additional Tips for Utah Drug Store Owners:       
1. When the family pharmacy is the sole means of income for several family members it is even more crucial to have a succession plan in place.
2. Estate plans should be developed with clear directives to avoid disputes.
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 UT pharmacy owner especially if there are some family that work in the business and others that don’t.


 

Pharmacy Franchise Financing in Utah

By Brad MacLiver
Authorship and profile at Google


A UT pharmacy franchise is a contractual relationship between two parties. One, the Pharmacy Franchisor is the party that developed their drug store business model, branded the pharmacy related products, and produced the system the pharmacy franchisees will operate under. The second party, the Utah Pharmacy Franchisee, purchases a franchise license from the 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.

There are a number of options for financing a pharmacy franchise business. 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 pharmacy franchise models won’t possess these two traits, will be considered more risky, and won't have the track record for the required certified portfolio asset pharmacy valuation.

Traditional Bank Financing used in funding a Utah pharmacy franchise is available when a pharmacy franchise has the 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 will typically have very little traditional assets to use as security. Pharmacy lenders will use traditional cash flow analysis methods in order to service to the debt, but they must also understand how nontraditional collateral works in order to secure the loan.

Even when incorporated, borrowers must take the independent drug store owner’s personal credit rating into account. In addition, they should consider 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 Utah.

UT Pharmacy Franchise Funding Tips:

1. There are a wide variety of pharmacy franchise financing options available, so pharmacy owners should perform proper due diligence in order to obtain the pharmacy funding that best suits their situation.

2. It is advisable to have an accountant or attorney that is familiar with pharmacy franchise financing in Utah 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 Utah pharmacy owners need to make sure their funding request is enough to get the 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 Utah 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 pharmacy industry specialist in UT who can provide quality answers and sound advice.

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

Financing Types Available for Utah Pharmacies

By Brad MacLiver
Authorship and profile at Google


There are a number of different options available for funding Utah (UT) 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 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 Utah 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 UT 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 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 Utah pharmacy financing.

Patriot Express Business Loan Program

This is another SBA loan program that can be used for pharmacy franchise business loans and is reserved for military veterans, active service members, their spouses, and survivors. The Department of Veterans Affairs would be involved in the pharmacy loan process.

Pharmacy funding in Utah 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 UT

There are specific franchise loan programs available for honorably discharged veterans and these Vet programs can be considered for pharmacy franchise loans.

Utah Pharmacy Financing From the Franchisor

Financing a pharmacy franchisee is a usual topic in discussions with a pharmacy franchisor. Franchisors should be able to direct potential drug store franchisees toward funding programs that have previously been successful for their other pharmacy franchisees. Preferred lenders will already be familiar with the Utah pharmacy franchisor and their systems.

Pharmacy franchisors may also provide some funding internally. 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 Pharmacy Finance

Not all prospective pharmacy franchise owners in Utah 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 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 pharmacy. Since the 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 Utah 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 crashes, so does the retirement fund. The method of providing less expensive financing for the Utah 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. Utah pharmacists and investors 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 in UT are changing, economic factors are a concern, mail order pharmacy is growing, and market shares are shifting. These variables can have a negative impact on cash flow of a pharmacy franchises, so there's a chance that drug store owners paying franchise royalty payments may not survive tightening profit ratios.  These pharmacy franchises may be forced to resort to bankruptcy.  Alternatively, they could buy out the franchise agreement when possible.

Buying out the franchisor is an option which allows the pharmacy to take the franchisor out of the equation. This will in turn allow the Utah pharmacy owner more flexibility with their business decisions. The pharmacy franchisor will have sold the drug store franchise with the expectation that the cash flow from their pharmacy franchisees will earn income.  Because of their long term goals, Franchisors may be hesitant to allow a 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 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 pharmacy owner in Utah is advised to use a pharmacy industry specialist to capitalize on the funding opportunities that are available.

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

 

Utah Purchase & Sale Agreements

By Brad MacLiver
Authorship and profile at Google


A Pharmacy Listing Agreement is the contract that provides a Utah pharmacy broker the business seller’s permission to sell their retail or specialty drug store. During the process of presenting the business being sold to qualified drug store buyers there are negotiations and preliminary offers.

After the preliminary stages have been negotiated, it is then time to put the details of the potential pharmacy transaction forth in contract form. This contract will usually be called the Purchase and Sale Agreement, but it is known as several other names, such as an Asset Purchase and Sale Agreement, a Pharmacy Asset Purchase Agreement, an Asset Purchase Agreement, or other variations of these titles. Whatever the title on the contract, this document should be considered the “blueprint” for transferring pharmacy businesses to their new owners.

The Pharmacy Purchase and Sale Agreement details how much the buyer agrees to pay and what assets the seller in Utah is conveying to the buyer. When the agreement is put in writing, describes the transaction in some detail, and is accepted and signed by both parties, this contract becomes a legally binding agreement. Therefore, during the negotiated development of the Pharmacy Purchase and Sale Agreement proper diligence should be taken.

It is rare that a pharmacy’s corporate stock will be purchased due to issues regarding liability. Because of this, these transactions are almost always only asset purchases.

Elements of the Pharmacy Purchase and Sale Agreement include, but are not limited to: assets being purchase, assets being excluded, aspects of counting and purchasing the inventory, both electronic and hard copies of pharmacy customer files, liabilities, purchase price, closing date, transferring title of the assets being purchased, pharmacy customer file conversion, representations and warranties, non compete, restrictive covenants, transferring the phone, notifying customers, signs, Board of Pharmacy notification, accounts receivables, employment of business seller and pharmacy employees, confidentiality, counting the pharmacy’s inventory, costs associated with the closing, lien searches, actions to be taken before the date of closing, along with the pharmacy’s computers, office equipment, and any automated filling machines.

Even though it covers many aspects of transferring the business assets from the Utah pharmacy seller to the new owner, one should take note that the Purchase & Sale Agreement does not provide tax and legal guidance for the seller. Those issues do not pertain to the buyer of the assets. Therefore, the Utah pharmacy seller should be well advised by a knowledgeable pharmacy broker, accountant, or attorney regarding tax consequences, restrictive covenants, and the structure of the deal. These aspects of the deal may not have any impact from the buyer’s point of view, but if not considered carefully may have affects to the seller’s financial position after the transaction is closed.

Pharmacy owners in Utah who are considering selling will benefit when working with a specialist who operates exclusively in the pharmacy industry and can provide expert guidance in bringing about a transaction that provides the most benefits regarding the seller’s tax consequences, family and estate planning. Proper planning and a blueprint that structures the transaction appropriately will increase the net amount of money the seller receives for the Utah pharmacy’s assets.

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

 

Using Tax Strategies in Utah When Selling a Pharmacy

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. UT pharmacy buyers participate in the 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 in Utah must consider their current market value, recognize the narrowing of profit margins, and realize what their tax consequences will be if they sell.

When Utah pharmacy owners sell their 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 Utah 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 pharmacy in Utah 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 UT pharmacy owner.

Many CPA's, business brokers, and other professional advisors, like attorneys, inform their clients that selling a pharmacy will result in tax consequences. However, most of these professionals do not handle the buying and selling of Utah pharmacies on a daily basis and may not realize the different aspects of structuring a pharmacy transaction allowing the reduction of the tax burden to the Utah pharmacy owner.

There are some capital gain tax strategies that must be implemented before any obligation to sell the UT pharmacy. When a drug store owner is considering selling their pharmacy either now, or in the next few years, it is urgent the best course of action be considered now instead of later.

Estate planning when selling a 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 UT 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 Utah pharmacy owners along with small and regional pharmacy chains will be considering selling their pharmacies and drug stores. Tax considerations should be a paramount part of the decision process.

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

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

Bridge Loans and Pharmacy Acquisitions in Utah

By Brad MacLiver
Authorship and profile at Google


With the changes in the UT pharmacy industry independent drug store owners, small and regional pharmacy chains, and pharmacy equity investment groups are acquiring Utah 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 Pharmacy Transactions in Utah:

1. An independent pharmacy owner in Utah learns of health issues and decides to quickly sell the family owned pharmacy to an employee or local competitor. Traditional financing for the pharmacy buyer may require a time line that is not acceptable when considering the circumstances. A bridge loan can be used to quickly accomplish the transaction.

2. A small Utah pharmacy chain needs $1 million to expand their business. They have 3 new equity investors who will be investing in the firm over the next 6 months, but at different intervals. However, the business has opportunities which require action sooner than 6 months. The quick closing bridge loan allows the UT pharmacy chain access to the needed funds so they can complete their expansion and increase profits. Money 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 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 Utah pharmacy group 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 UT 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 bought at auction may have a tight window for closing the deal and timing of traditional financing would keep the buyer from proceeding with the opportunity. The benefits of a bridge loan permit the Utah pharmacy owner to quickly respond to the opportunity.

Bridge loans can be an essential financial tool when there are business opportunities, opportunities to buy or sell Utah pharmacies, short deadlines, old loans maturing before new loans can be put in place, funding requirements during the permit, planning, or evaluating stages, etc.

Additional tips related to pharmacy bridge loans in Utah:

1. Although bridge loans are quick to obtain, they are quick to expire.

2. Bridge loans are similar to hard money loans and the terms are often used interchangeably in conversation. Both loans are short-term, non-standard, high interest rate loans.  However, in some circles, hard money refers to the source of lending while a bridge loan refers to the duration of the loan.

3. Because a bridge loan usually comes with higher interest rate than traditionally financing a larger down payment, there is a lower Loan to Value (LTV) and a lower level of risk which 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.

Understand the types of deals that require a bridge loan may be considered speculative in nature, or have higher risk factors. Due to this many banks do not offer bridge loans. Banks must meet government regulations and need to justify their lending practices. Riskier bridge loans do not usually fall within the lending parameters of many banks. Therefore a majority of the bridge loans will come from private investment firms.  It is best to consult a company that has access to a number of funding sources who provide bridge loans.

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