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.

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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.

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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.

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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.

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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.

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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.

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Acceleration Clauses in Pharmacy Business Loans and Commercial Leases in Utah

By Brad MacLiver
Authorship and profile at Google


A provision of many UT 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 Utah pharmacy business loan or lease documents provided to the pharmacy owner will describe the rights, conditions, and obligations relevant to the acceleration clause. When the pharmacy owner in Utah (the borrower) doesn’t meet their obligations then the loan or lease goes into default. A payment that is even one day late can cause a default. Due to this, pharmacy business loans and commercial lease documents should be thoroughly read and understood before signing.

A Few Tips:
1. Should a pharmacy’s slowing cash flow cause a business loan to default, they may be able to negotiate with the lender by offering additional collateral if the pharmacy owner has additional unencumbered assets.

2. If a Utah pharmacy is able to catch up on their payments they can reinstate the business loan before the acceleration starts.

3. States have different rules which regulate the notification of an acceleration clause being exercised. Utah Pharmacy owners should understand the laws in the state where they operate because lack of knowledge is not an acceptable excuse.
                                 
4. When an acceleration clauses are exercised on commercial leases, the possibility exists that the landlord is unable to collect rent from both the defaulting tenant and a new tenant at the same time. In order to save themselves some money, pharmacy owners in Utah should help the process by assisting the landlord re-lease the property. However, please note, should the pharmacy be in the process of being sold and the files and inventory moved to a competitor’s location, the UT 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 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 Utah 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 for acquisition, or expansion, due diligence and understanding of all aspects of the transaction should be considered. Using the services of a Utah pharmacy industry expert to guide a pharmacy owner through the maze of details will benefit the pharmacy owner in UT in making the best business decision.

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Utah Pharmacy Acquisition Finance

By Brad MacLiver
Authorship and profile at Google


When a UT pharmacy or drug store is being sold, seldom does the buyer pay “out of pocket” cash for the acquisition. Even when cash is available, Utah pharmacy acquisition strategies usually involve financing the transaction.

Typical acquisitions take 6-9 months to complete, so the pharmacy seller in Utah 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 Utah 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 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 Utah pharmacies instead of a valuation company that has a broader spectrum.

In order to complete a valuation the selling company needs to provide up-to-date data. Lenders will not accept old data, or a sellers “gut feeling.” Lenders need to make a decision to finance based on sound and verifiable information.                

It is very important to structure the transaction.  Obviously, the seller will want as much money as possible, in cash.  Likewise, the buyer needs to spread out the debt service and they want to have as little cash as necessary invested in the acquisition.

Pharmacies and drug stores are involved in an industry where business loans are more difficult to obtain due to the majority of the value in a pharmacy in Utah is the customer files instead of hard assets. This means that in order for the acquisition to be financed, you need a lender with a strong understanding of the industry and what the company offers to reduce the perceived risk beyond the collateralized assets.

Utah 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. Because of these circumstances, many lenders refuse loan money to these traditional money making businesses. A successful transaction will involve a lender who understands the Utah pharmacy industry.

Tips regarding UT pharmacy acquisitions and finance:

1. Attorneys and CPAs who have been representing the Utah 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 Utah 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 Utah 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 UT pharmacy.

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Pharmacy Industry: Current Market Conditions in Utah

By Brad MacLiver
Authorship and profile at Google


Currently there are a number of factors that are impacting the current market conditions of the U.S. pharmacy industry in Utah (UT). These factors are affecting the pharmacy business valuations of pharmacies, Utah drug stores, and pharmacies all across the U.S.

Local demographics:

The valuation process includes local market conditions and local demographics. Smaller communities have less growth potential and with the declining profits a buyer will need to purchase at a lower value because they will have to service the debt from a business loan and still try to make a living. The same is true for communities that have lost population due to economic conditions, or have a high rate of unemployment. Fewer people, or fewer customers with the ability to purchase, will mean fewer sales and less chance of any substantial improvement in the near term. This results is a lower pharmacy business value for your UT drug store.

Utah Pharmacists Shortage:

Pharmacies in Utah and across the country have had difficulties in finding pharmacists.  This shortage of pharmacists not only affects employee opportunities it also affects the number of potential independent buyers. 

Fewer Buyers:

There are also fewer corporate buyers. Some of the largest pharmacy chains have been purchased and consolidated in the Utah pharmacy industry roll up. Many smaller chains have run into financial difficulties and have stopped their expansion or themselves have been acquired by the larger chains. It is more difficult to drive a business price higher when there are fewer willing, or capable, to purchase the pharmacy.

Current Market Conditions Requires Industry Roll-up:

The consolidation of the pharmacy industry is required to get more traffic into a single store.  Due to simple economics, when any business has a reduction in profits they are less attractive to a buyer and Utah pharmacy business values drop. There are many factors contributing to the downward pressure of pharmacy values and there is not any expectation of a turn around.  Pharmacy owners should not be tricked by inexperienced brokers that are claiming grand outcomes with overstated pharmacy business values not grounded on realistic market conditions.

With the consolidation of the pharmacy industry that has been happening for several years, many new brokers have entered the market to broker pharmacy acquisitions. Most brokers do not have pharmacy related experience, nor do they use current market conditions when they value a pharmacy. Most are using simple accounting formulas that hold no sound reasoning for the value when faced with current pharmacy market conditions. Due to this many brokers are valuing Utah pharmacies 2 to 3 times more than what the market is really willing to pay. Any inexperienced person can quote a high value to capture a listing. So beware... an over inflated asking price is NOT what the business will actually sell for.

Mail Order:

Some insurance companies are classifying a noticeable amount of pharmacy patients as “long-term” and these patients are required to only purchase their medications from mail order pharmacy companies who provide products at lower prices. The result of this in local Utah pharmacies is that they are not only missing out on prescription sales, but front-end sales will also decline because customers are not entering the store. Pharmacy mail order sales have currently surpassed the sales from independent retail pharmacies.

Choose a firm that provides Utah pharmacy business valuations based on real market conditions and does not use a simple formula for calculating the value of a pharmacy. Complex methods are necessary to accurately derive the value of a pharmacy.

It is best to use a company that specializes in pharmacy and has extensive and current industry data. Choose a pharmacy specialists who has been working in the pharmacy industry long enough to have extensive pharmacy experience and an excellent reputation. A company with good credentials possesses large amounts of national data and it is this data that can support the valuation's conclusions.

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When you are considering buying, selling, or financing a pharmacy business, discover more topics and find the tips and resources you need to make a decision at www.BuyingAndSellingPharmacies.com.
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Using Multiples for Pharmacy Business Valuations in Utah

By Brad MacLiver
Authorship and profile at Google


Anybody who has purchased a home should be familiar with real estate appraisals. With a UT pharmacy business there are times when both the real estate and the business itself needs to be appraised. The pharmacy business appraisal, which does not include the real estate, is more commonly called a Pharmacy Business Valuation.

Pharmacy Business Valuations in Utah are part of the due diligence that will be conducted when there is a possible acquisition of the pharmacy business, or pharmacy financing is needed. Pharmacy Business Valuations in Utah 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 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.

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 Utah pharmacy industry. Reduced profits means it will be harder for businesses to service debt.  That means it will be harder to obtain funding, and whatever funding is available will be in lower amounts. Someone who is not a specialist in the pharmacy industry and uses a gross sales multiplier would get a calculation that would be way off when compared to other UT pharmacy valuations. A banker who sees a valuation that is not within realistic comparisons in the industry will not fund the deal.  Any fees paid for the business valuation will have been pointless.

When it is necessary to have a pharmacy business valuation completed in Utah, it is strongly recommended to pay the extra amount for a specialist who can provide a banker with realistic and current information. Don’t try to save a few pennies by cutting corners, which will only end up wasting your time, your money, and possibly even ruin chances to obtain funding that either the pharmacy business owner or pharmacy could put to use.

 

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340B Discount Programs for Pharmacies in Utah

By Brad MacLiver
Authorship and profile at Google


The U.S. 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 UT 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.

Utah 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 participating in a 340B pharmacy program need to manage their business consistent with customary business practices. In the event of an audit the pharmacy in Utah 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 UT pharmacy owner will need employees who understand the various state and federal rules and regulations, which govern the 340B program. The 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 Utah pharmacy this inventory will be treated differently for tax purposes. The Utah 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. It is likely this will expand the need for 340B pharmacy programs and provide additional 340B customers to participating pharmacies.

However, should the pharmacy owner weigh the potential benefits of a 340B program, they should also look at other aspects of their business in addition to the current market conditions of the pharmacy industry. Over the next few years, what are the pharmacy’s goals?  Younger pharmacy owners with long term objectives can benefit for many years from the added customers, but a pharmacy owner who considers selling the business in the next couple years should be aware that acquisition values are based on customer files.  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, due to the current economic conditions there are some 340B customers who despite the deeply discounted prices, have chosen not to purchase medications. Pharmacy owners in Utah need to consider the added costs and time of 340B inventory and customer tracking and reporting, may not be offset by the fees received.

If a pharmacy owner in UT is considering the benefits of participating in a 340B program, or is considering selling the pharmacy in the couple years, it is advisable to discuss the options with the pharmacy industry expert.

 

Pharmacy Transactions and Capital Gains Tax in Utah

By Brad MacLiver
Authorship and profile at Google


Nearly everything you own and use for either personal or business purposes is a capital asset. When UT pharmacy owners sell a capital asset, the difference in the amount it sells for and the amount you paid for it (the basis) is called either a capital gain or a capital loss.

The term "Capital gains" may also be used refer to investment income that arises in relation to real assets such as financial assets, property, or intangible assets like goodwill.  All capital gains in the United States must be reported and its appropriate tax paid.

When selling pharmacies or a drug stores in Utah, there are certain tax strategies that can be utilized to help offset tax liabilities.  Pharmacy owners who don't consult a professional who handles a large number of pharmacy acquisitions will typically not know these federal regulations that allow for reducing the tax liability for themselves.

During this period of financial uncertainty where it is more difficult to finance a business, Utah pharmacy sellers 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 Utah 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 strategy, but not the only one, that is currently available to assist the capital gains tax burden is the Charitable Remainder Trust (CRT). CRT’s are legally described as Split Interest Trusts. The term is used because of the blend of philanthropic motivations and personal financial aspects. CRT’s can decrease tax liabilities, increase a business owner financial wealth, and at the same time provide a vehicle for charitable giving.

CRT’s are formed when a person donates assets to this special type of Trust. Assets can be cash, stocks, real estate, etc. The CRT is set up for a set period of time, or until the donor’s (pharmacy owners in Utah) death. An individual (pharmacy owner or family member) can receive income from the Trust’s assets. Upon the donor’s death the assets go to a designated charity. Part of the income from the Trust can be used to purchase life insurance on the donor. The proceeds of the life insurance go to a designated heir(s) who receive the money without incurring any estate tax liability.

Some tax strategies including the use of CRTs are not widely known. It would be advisable for pharmacy business owners to be aware of the different tools that are available in structuring a business transaction. They should also be aware that only a professional with vast experience in CRTs should be used to setup a Charitable Remainder Trust. Not following the strict IRS guidelines could be cause for increased taxes, penalties, and in some cases criminal charges.

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 Utah 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 UT pharmacy is sold.

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Utah Buy-Sell Agreements for Pharmacy Owners

By Brad MacLiver
Authorship and profile at Google


When a UT pharmacy is owned by two or more people the stockholders/partners should have a Buy-Sell Agreement. A buy-sell agreement is a written document that provides the procedures and governs the future sale of the Utah pharmacy business.

         
Pharmacy buy-sell Agreements protect the interest of the parties who own the Utah pharmacy and directs the actions triggered by a stockholder leaving the business due to death, disability, divorce, dissolution, or retirement. The agreement will govern how and when the shares of the pharmacy business can be sold, or transferred. It will also provide guidance as to how the pharmacy will be valued along with the obligations of the remaining shareholders of the pharmacy in Utah.

Buy-sell agreements are important because the different elements of a future sell are predetermined and won’t need to be negotiated during a heated dispute, or during a grieving period. It provides both the stockholder and the family a comfort level that when the inevitable time comes for an exit strategy that the process was thoroughly thought out in advance.

Disadvantages of not having a buy-sell agreement between Utah pharmacy owners is that a disability may leave one partner working more and another not adding to the productivity. In the event of a death, without an agreement, one partner may be left with a nonproductive heir, or a new partner may be inserted that has personality conflicts with the surviving partner. The wrong partner could be devastating for the pharmacy business.

There are various types of buy-sell agreements such as: Entity Buy-Sell Agreement, Cross-Purchase Buy-Sell Agreement, Wait and See Buy-Sell Agreement, Disability Buy-Sell Agreement. Buy-sell agreements are also known as a Business Will or a Buyout Agreement.

Potential elements of a Utah Buy-Sell Agreement:

1. Stockholders names and the number of shares and voting rights of each. 

2. Guidance for the certified Utah pharmacy valuation and purchase of a stockholder’s shares.

3. Mutual covenants and considerations.

4. Restrictions on transferring, purchasing or encumbering the company’s stock.

5. Protocol in the event of a shareholder’s divorce or termination of a shareholders employment.

6. Obligation to buy/sell shares from an estate.

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

8. Purchase of stock paid in lump sum or by installments.

9. Remedies for breach of the agreement or default of payment.

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

11. Amendments and notices for offers or legal matters.

15. Enforceability of the agreement, the binding effects, and arbitration procedures for disputes.

16. Process for dissolution, or liquidation, of the corporation.

17. Maintaining the premises during a transition.

18. Preserving representations and warranties.

19. The terms of transfer.

20. Bill of Sale.

To ensure that the money required will be available, buy-sell agreements are typically funded with life insurance policies should the death of one of pharmacy owners occur.  In this case, the life insurance settlement provides funds for the remaining Utah pharmacy owner to buyout their partner's shares from the estate.

For each partner, life insurance coverage must be in place because with no way of purchasing the UT pharmacy shares, the buy-sell agreement is non-functional. As the business develops and grows, the amount of insurance needs to be adjusted in order to provide adequate coverage. Without insurance, the surviving stockholder could possibly not have enough cash to satisfy the required amount to buy out the estate, which will leave the survivor with an unwanted partner.

To have adequate insurance coverage and determine the specifics of the buy-out terms, it is necessary to consult a certified pharmacy business for a valuation. There are quite a few companies that provide business valuations and, because of the dynamics and current market conditions of the pharmacy industry, a valuation firm in Utah should have extensive Utah pharmacy experience. Simple accounting formulas and multipliers do not provide adequate or realistic valuations for a pharmacy business.

Pharmacy buy-sell agreements in Utah are extremely important documents that will need to be completed with both seriousness and care. Even if one has a long-standing partnership, it is already too late to create a buy-sell agreement when an event has already occurred that requires the document.

Tips:

1. Buy-Sell Agreements are critical documents that should not be taken lightly. Consult a licensed professional.

2. Documents must address the proper laws and regulations which vary from state to state. Seek the proper guidance.

3. Premiums for insurance that will fund the buy-sell agreement might be deductible.

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