Is it Worth Selling a Pharmacy Note in Montana at a Discount?

By Brad MacLiver
Authorship and profile at Google


When a MT pharmacy acquisition has been accomplished by using the private financing method of a pharmacy business note, the holder of the pharmacy note has the option of selling the pharmacy business note for a lump sum of cash instead of waiting for the monthly payments and taking the risk those payments will always be made. Pharmacy business notes can be sold by using a discounting method. Instead of buying a pharmacy note at its face value, the Montana pharmacy note will be discounted. Meaning the Investor will pay less than face value due to the risk being transferred from the Pharmacy Note Holder (the note seller) to the Pharmacy Note Investor (the note buyer).

Most pharmacy business note sellers only look at the discount rate and quickly calculate in their head that they are giving up too much money to make the selling of the MT 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 Montana pharmacy note? 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 investment and family priorities.

2. What is the pharmacy business' Current Fair Market Value? This is what someone is really willing to pay for the business, and not just an “earnings times x” formula. Real aspects of what is happening in the pharmacy industry must be considered and it is advantageous to have a pharmacy industry specialist in MT calculate the pharmacy business valuation.

3. How much cash does the holder of the MT pharmacy note require immediately?

4. A Montana 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 while to allow the business buyer time to prove to an Note Investor the capability of the payor making the payments?

5. You may want to consider selling only a portion of the Note. This is called a “Partial Sell”. The discount rate of a note can be a more attractive proposition when only a portion of it is sold and the Montana Pharmacy Note Investor is not holding all the risk.

Understanding Risks for the Note Buyer:

1. 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. Pharmacy Industry Changes - Changes caused by influences either within the industry, or regulations governing the industry, can make it increasingly difficult for the Montana pharmacy business buyer to meet the contractual financial obligations.

3. Future Competition - Sales and income of the store may be affected by yet unforeseen pharmacy competition either building in the neighborhood or through mail order.

4. Loan to Value - When originating a Montana pharmacy business note you may be creating financing where there is a “negative loan to value.” Example: the pharmacy business note is for $325,000, but there is only $110,000 of tangible assets for collateral.

5. Title Insurance – Pharmacy business notes don’t have title insurance that will make good a loss arising through defects of titles, or liens.     

6. Time Value of Money - Where a dollar received today is more valuable than a dollar received in the future.

7. Opportunity Costs - When the selection of holding the Montana 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 in Montana before the Purchase and Sale Agreement is finalized for the acquisition of the pharmacy. This provides the MT pharmacy business seller, and future note seller, valuable insight into structuring the pharmacy business note so it can be successfully purchased.

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Using Business Notes for Financing Pharmacy Acquisitions in Montana

By Brad MacLiver
Authorship and profile at Google


When acquiring or selling a MT pharmacy or drug store, one alternative is to have the seller originate the financing and carry back a business note. Many pharmacy owners will choose not to take this approach at first glance because they want their cash and their exit, but when a Montana pharmacy owner considers to sell their drug store, if they look at the benefits of originating a business note and not just the perceived costs, they may discover that offering Private Finance as a Pharmacy Business Note will provide them with an alternative course of action.

Advantages of Creating and Selling a Montana Pharmacy Business Note

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

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

3. When a Montana pharmacy business note is created there are the options of keeping it for monthly income, selling the entire 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 Montana, frees up capital that can be used for new ventures, or paying off old debt.

5. When a pharmacy business note is created and sold, with the proper professional guidance, a transaction can be structured that allows the Montana 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. The seller of the business accepts the promissory note, which is secured by the business including any inventory and equipment that belongs to the business. The pharmacy business seller then sells the note to an Investor who is willing to hold the pharmacy note in exchange for compensation. Since Investor can’t go back to the pharmacy business buyer and change the terms of his purchase agreement, the seller of the note must discount the note. The Investor is compensated from the difference of what the note was originated for and the discounted price paid for the Montana pharmacy business note.

Tips:

1. Poorly structured business notes may prevent their sale, so seek professional advice before originating a financial instrument that can’t be sold.

2. Sellers of business notes need to fully understand the Investors risk in order to successful sell the business note.

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

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Using Tax Strategies in Montana 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. MT pharmacy buyers participate in the Montana pharmacy industry roll-up to achieve economies of scale in purchasing, marketing, information systems, logistics, distribution, and top management. Pharmacy sellers both independent owners and drug store chains must consider their current market value, recognize the narrowing of profit margins, and realize what their tax consequences will be if they sell.

When pharmacy owners sell their Montana pharmacy it is considered a capital asset. The difference between the amounts it is sold for and the amount spent to either purchase or start the pharmacy is a capital gain, or a capital loss. In the U.S., all capital gains must be reported and the appropriate tax paid.

Specific tax strategies can be used to help offset the tax liabilities when selling a pharmacy or a drug store in Montana. However, unless consulting with a professional who handles many pharmacy acquisitions, they usually do not know these federal regulations that allow for reducing the tax liability for the pharmacy owner.

Many Business Brokers, CPA’s, attorneys, and other professional advisors inform their clients that selling a Montana pharmacy will result in tax consequences. However, most of these professionals do not handle the buying and selling of MT 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 pharmacy owner.

There are some capital gain tax strategies that must be implemented before any obligation to sell the pharmacy. When a drug store owner is considering selling their Montana 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 MT 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 Montana pharmacy seller 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 Montana pharmacy profits continue to slip, more independent pharmacy owners along with small and regional pharmacy chains in Montana will be considering selling their pharmacies and drug stores. Tax considerations should be a paramount part of the decision process.

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

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EBITDA and Pharmacy Acquisitions in Montana

By Brad MacLiver
Authorship and profile at Google


EBITDA is an acronym for earnings before interest, taxes, depreciation and amortization and is often used to measure the value of some businesses. It can also be used in the comparison of similar companies.

Generally, EBITDA makes it easier to evaluate various companies and to compare them against industry averages by removing the non-core and irregular operating costs, such as interest, which can vary depending on the management’s choice of financing, taxes which can fluctuate depending on acquisitions or losses from prior years, and arbitrary factors of depreciation and amortization.

The EBITDA formula can be used as a guideline when valuing larger companies, or when comparing the profitability of large similar companies in the same industry.

For the effective use of EBITDA, these larger companies should possess significant assets, have heavy amortization schedules, or bear substantial amounts of debt. Considering independent Montana pharmacies don’t meet that criteria, this formula is not a useful measure as the sole means for valuing MT pharmacies for acquisition purposes.

To Calculate EBITDA:
I) Calculate net income by obtaining total income and subtract total expenses.
II) Determine the total amount of taxes paid to federal, state, and local governments.
III) Compute interest fees paid to companies or individuals for the use of credit, or capital.
IV) Establish the cost of depreciation (the expense recorded to allocate a tangible asset's cost over its useful life).
V) Determine the cost of amortization (the expense for consumption of the value of intangible assets, such as goodwill, patents, and copyrights, over a specific period of time, or the asset's expected life.
VI) Add #1 through #5.

EBITDA calculation example:
I) Net Income              1,530
II) + Taxes paid             372
III) + Interest Expenses     288
IV) + Depreciation           102
V) + Amortization             76
VI) = EBITDA               2,368

Drawbacks of EBITDA:
I) Can be misleading number when it is confused with cash flow.
II) Can make even completely unprofitable firms appear to be financially healthy.
III) Numbers are easy to manipulate.
IV) Can overlook cash requirements for growth in accounts receivable.
V) Can miss cash requirements for growth in inventories.
VI) Not factual when valuing small companies.
VII) Not effective for companies with few assets, small amounts of debt, or low depreciation or amortization schedules.

Cash flow has been used in leveraged buyouts to calculate whether companies could service their debt. The cash flow was estimated by EBITDA. Factoring out interest, taxes, depreciation, and amortization can allow an unprofitable business to appear financially healthy. This method of valuation was used extensively during the dotcom era to value unprofitable businesses, with few assets, little earnings, and the results from that method caused many to go bust. This was a blaring example of misapplying EBITDA.

Knowledgeable pharmacy specialists performing Montana pharmacy business valuations will use EBITDA in pharmacy valuations, but only as part of a larger formula when computing values for specialty pharmacies especially those who have a niche in HIV, disease management, long term care, etc. However, EBITDA should not be used as part of the usual formula for standard retail Montana pharmacy acquisitions.

The EBITDA number for a specific existing pharmacy in Montana is important, for the most part, when the existing ownership is establishing their store value for the purpose of a line of credit, borrowing, creating a Trust, stock values, etc., but EBITDA does not have the same importance when selling a pharmacy. This is due to the fact the buyer will not have the same expenses as the seller.

Buyers may not have the same tax base, interest expense, or the same depreciation schedule, thus it is important that the buyer calculate an estimated EBITDA that is specific to their operating model, business systems, buying power, cost of operations, etc., not the sellers. It should also be noted that EBITDA assumes that the buyer will acquire all of the assets, working capital, accounts receivable, and liabilities. Those assumptions do not hold true regarding an acquisition of a MT pharmacy. Instead of the EBITDA number, pharmacy buyers should be focusing on sales, gross profit, cash flow, and customer mix.

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Montana Pharmacy Industry Roll-Up

By Brad MacLiver
Authorship and profile at Google


MT Industry Roll-Ups are where an industry’s many players are consolidated into smaller groups for economic benefits. Recessions, new government regulations, or other aspects of the industry that may be stifling profits end up providing incentives to consolidate

A principal reason for an industry roll-up is to achieve economies of scale in purchasing, marketing, information systems, logistics, distribution, and top management. Consolidated businesses also have less risk from the impact of an unsatisfied customer and have the reward of being able to recruit, or keep, key employees.

An example of an industry roll-up can be seen with the pharmacy industry in Montana. It is a well established industry and is still experiencing sales growth. However, MT pharmacies and drug stores have seen a steady decline in their profit margins due mainly to government regulations, even as sales increase. There has also been a shortage of pharmacists - a required key employee.

Industry roll-ups are often initiated by investors seeking investment opportunities. However, in the case of Montana pharmacies, the roll-up is a necessity due to declining net profits ratios. Companies that are acquired in a roll-up are usually small independently-owned businesses whose owners believe in the economic benefits of combining forces with a larger organization, or simply need an exit strategy. In the pharmacy industry roll-up in Montana, independents have been a majority of the acquisitions, but there has also been a consolidation of a number of the larger pharmacy chains.

During the pharmacy industry roll-up pharmacies with better financial wherewithal are acquiring their local competition and combining two or more stores into a single location. This results in more customer traffic through a single location and reduces the expenses that come with multiple locations. This can dramatically drive up total sales while driving down the administrative and overhead costs per customer.

To help fund pharmacy acquisitions during the roll-up, specific funding programs have been developed. These funding programs are backed by major financial institutions that provide the funding for MT pharmacy acquisitions. Also, these pharmacy funding programs grant individual pharmacy businesses or investment groups the capital to acquire and combine Montana pharmacies in geographic areas.

Funders are willing to provide the capital for the pharmacy roll-up because they recognize that combining the individual pharmacy businesses provides a greater total business value than if each individual Montana pharmacy value were added together. This synergy reduces the risk of funding the individual acquisition.

When you are considering the buying, the selling, or the financing a pharmacy, due diligence and understanding of all aspects of the transaction should be considered whether an independent drug store or multiple pharmacy locations. Using the services of a pharmacy industry expert to guide a pharmacy owner through the maze of details will benefit the pharmacy owner in making the best business decision.

All transactions involved in the pharmacy roll-up need to have the business valued at the current market value. Business valuations for the pharmacy industry should be calculated by a company that has in-depth knowledge of the pharmacy. Simple accounting formulas used by many to estimate a value do not provide an accurate picture because the simple formulas do not take into account the aspects that are causing the pharmacy industry roll-up.

The aspects of the market which are stimulating the roll-up are also having downward pressure on the Montana pharmacy business valuations. Pharmacy owners in Montana have been watching what has been occurring in the pharmacy industry. While profit margins slip, new regulations are being imposed, and as reimbursements are pared down there is wide expectation that the business values in the Montana pharmacy industry will continue to slide to lower levels, and thus the pharmacy industry roll-up will continue.

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Pharmacy Acquisition Finance in Montana

By Brad MacLiver
Authorship and profile at Google


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

Typical acquisitions take 6-9 months to complete, so the Montana pharmacy seller will need the buyer to provide some proof up front about their ability to close the transaction. Acquisitions will involve many hours of due diligence and negotiation, so the process should involve qualified parties.

Acquisition involves many parties in addition to the buyer and seller.  Attorneys, accountants, lenders, valuation companies, industry specialists, and other experts will be involved in the lengthly acquisition process. Nobody has a desire to pursue 6-9 months of work that involves a variety of highly paid professionals without having some confidence of the Montana pharmacy buyer’s ability to close the deal.

The process begins with determining valuating the business.  There are many companies out there that offer valuation services, but pharmacies in MT are not ordinary businesses.  Several aspects to valuing a pharmacy are unique to the industry, and using generic valuations or simple accounting formulas will be unreliable. An industry specialist should be used for valuing the Montana 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.                

Structuring the transaction is extremely important. The seller of course wants as much money as possible and wants cash. The buyer needs to spread out the debt service and wants to have as little cash as possible invested in the acquisition.

Pharmacies and drug stores are in an industry where it is more difficult to obtain business loan due to the majority of the value in a pharmacy in MT is the customer files and not hard assets. Therefore, for the acquisition to be financed a lender will need a strong understanding of the industry and what, beyond the collateralized assets, the company offers to reduce the perceived risk.

Montana Pharmacies have typically been known for generating profits and to be stable businesses. However, they are usually in leased locations, and their furniture, fixtures, and computers will only provide $15-20,000 of collateral for a buyer possibly requesting a million dollar loan. A lot of money is tied up in inventory, but the small pills are considered by a lender to easy to move out the door in the event of default. Due to these circumstances many lenders will not loan money to these traditional money making businesses. A successful transaction takes a lender that understands the pharmacy industry.

Tips regarding pharmacy acquisitions and finance:

1. Attorneys and CPAs who have been representing the 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 MT pharmacy acquisitions 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 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 you are working with a valuation company and lender who have expertise in that industry. Choose a company who has the Montana pharmacy experience, expertise, and is a direct correspondent with lenders who understand pharmacy in MT.

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340B Discount Programs for Montana Pharmacies

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 MT 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.

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 in Montana 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 Montana pharmacy should have dispensing and inventory records, billing statements, etc. Business records should show that drugs purchased by customers, under the 340B Drug Pricing Program, were not diverted to people who are not part of the program.

Along with the additional record keeping a pharmacy owner will need employees who understand the various state and federal rules and regulations, which govern the 340B program. The Montana 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 in Montana. Since the 340B inventory is not “owned” by the pharmacy this inventory will be treated differently for tax purposes. The pharmacy generates income from dispensing fees they are paid instead of a mark-up or profit margin on the inventory.

Since customers participating in a 340B program can only purchase the designated medications from a pharmacy contracted with a 340B entity, this allows a pharmacy to have a market niche. A contracted pharmacy servicing 340B customers benefit from additional customer traffic visiting the store.
 
With the current economic situation and high unemployment, many people have lost their insurance benefits. This will likely expand the need for 340B pharmacy programs and provide additional 340B customers to a participating MT pharmacy.

However, when a pharmacy owner starts to weigh the potential benefits of a 340B program, they should also look into the current market conditions of the Montana pharmacy industry and other aspects of their business. What are the goals of the pharmacy over the next few years?  Younger pharmacy owners with long term objectives benefit from the added customers for many years. However, a pharmacy owners who consider to sell their business in the next couple years should be aware that acquisition values are based on customer files, and buyers are often currently unwilling to include 340B customer files in their offers. Despite the volume of business, this results in a reduced MT pharmacy business valuation and market price for the pharmacy. 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 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 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 MT pharmacy industry expert.


 

Montana Bridge Loans and Pharmacy Acquisitions

By Brad MacLiver
Authorship and profile at Google


With the changes in the MT pharmacy industry independent drug store owners, small and regional Montana pharmacy chains, and pharmacy equity investment groups are purchasing pharmacies so they can obtain a larger competitive footprint in a geographic area. During the acquisition phase of business expansion there may be opportunities that require immediate action and require quicker financing than what is traditionally provided.
                
Bridge Loans are one short-term financing option that can be while either waiting for permanent financing or waiting for the next stage of financing to be obtained. Bridge loans can be used to provide funding to "bridge" the gap between a company’s current needs and their long term financing requirements.  Permanent financing is typically used to pay back or "take out" 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 Montana Pharmacy Transactions:

1. An independent pharmacy owner learns of health issues and decides to quickly sell the family owned MT pharmacy to an employee or local competitor. Traditional financing for the Montana 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 pharmacy chain needs $1 million to expand their business. The chain has 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 Montana 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 Montana 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 pharmacy group developing new Montana 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 Montana 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. Real estate, or equipment bought at auction may have a narrow window for closing the deal and timing of traditional financing would keep the buyer from proceeding with the opportunity. Benefits of a bridge loan will permit the Montana pharmacy owner to quickly respond to the opportunity.

When there are business opportunities, buying pharmacies, selling pharmacies, quick deadlines, an old loan maturing before a new loan can be put in place, funding needs during the permit, planning, or evaluating stages, etc., bridge loans can be an essential financial tool.

Tips regarding Montana pharmacy bridge loans:                        

1. Bridge loans are quick to obtain, but quick to expire.

2. A bridge loan is similar to a hard money loan and the terms are often used interchangeably in conversations. Both are short-term, higher interest rate, non-standard loans, but in some circles hard money refers to the lending source and a bridge loan refers to the duration of the loan.

3. Because bridge loans usually come with higher interest rates than traditional financing a larger down payment, meaning a lower Loan to Value (LTV) and a lower level of risk and provides an opportunity for lower interest rates.

4. With the shorter time period of bridge loans borrowers will need to be aware that fees for valuations, legal, dues diligence, etc., will be amortized over a shorter period than traditional financing transactions.

It is important to note that the types of deals that require bridge loans may be considered speculative in nature.  They also tend to have higher risk factors, which in turns means many banks do not offer bridge loans.  Because banks must meet government regulations, they need to justify their lending practices. Riskier bridge loans do not usually meet lending parameters of many banks.  The majority of bridge loans tend to come from private investment firms, and it is best to consult a company that has access to a number of funding sources who provide these bridge loans.

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Acceleration Clauses in Montana Commercial Leases and Pharmacy Business Loans

By Brad MacLiver
Authorship and profile at Google


A provision of many MT pharmacy business loans and commercial leases is an acceleration clause. The acceleration clause in the loan/lease agreements permits lenders to accelerate their collection of payments should an event occur. Events may include: failure of payment by the borrower, neglecting to keep the property adequately insured, unpaid pay tax assessments, poor maintenance for the property, sale 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 pharmacy business loan or lease documents provided to the Montana pharmacy owner will describe the rights, conditions, and obligations relevant to the acceleration clause. When the pharmacy owner (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, MT pharmacy business loans and commercial lease documents should be thoroughly read and understood before signing.

Tips:
1. If a pharmacy’s slowing cash flow is going to cause a business loan default, but the pharmacy owner in Montana has additional unencumbered assets they may be able to negotiate with the lender by offering additional collateral.

2. If a Montana pharmacy can catch up on their payments they can reinstate the business loan before the acceleration starts.

3. States have different rules requiring notification of an acceleration clause being exercised. Pharmacy owners should understand the laws in the state where they operate. 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, MT pharmacy owners 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 pharmacy buyer in Montana 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 Montana 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 to finance a pharmacy in MT for acquisition or expansion, understanding of and due diligence regarding all aspects of the transaction should be considered. Using the services of a Montana pharmacy industry expert to guide a pharmacy owner through the maze of details will benefit the pharmacy owner in making the best business decision.

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Current Market Conditions: Pharmacy Industry in Montana

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. These factors are affecting the pharmacy business valuations of pharmacies in MT and drug stores all across the U.S.

Local demographics:

The valuation process also 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 in a lower pharmacy business value.

Pharmacists Shortage in Montana:

Pharmacies across the country have had difficulties in finding pharmacists.  This shortage of pharmacists in Montana 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 Montana pharmacy chains have been purchased and consolidated in the pharmacy industry roll up. Many smaller chains have run into financial difficulties and have stopped their expansion. It is more difficult to drive a price higher when there are fewer willing, or capable, to purchase.

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 MT pharmacy business values drop. There are various factors which contribute to the downward pressure of pharmacy values a turnaround is not expected. Pharmacy owners should be careful to avoid inexperienced Brokers who claim grand outcomes and overstate pharmacy business values that are not based on realistic market conditions.

The consolidation of the pharmacy industry in Montana that has been happening for several years, and many new brokers have entered the market to broker pharmacy acquisitions because of it. Most brokers are inexperienced with the pharmacy industry and they use current market conditions when they value a pharmacy. Most are using simple accounting formulas that inaccurately determine for the value when faced with current pharmacy market conditions. Many brokers are erroneously valuing pharmacies 2 to 3 times more than what the market is really willing to pay because of these methods. Any person without experience can quote a high value to capture a listing.  However, that does not guarantee the over inflated asking price is what the business is actually going to sell for.

Mail Order:

Some insurance companies are designating a noticeable amount of Montana pharmacy patients as “long-term medications” and require they only purchase the medications from mail order pharmacy companies who provide products at lower prices. This results in local pharmacies not only missing out on prescription sales, but front-end sales will also decline since the customer is not entering the store. Pharmacy mail order sales have now surpassed sales from independent retail pharmacies.

Choose a firm that provides 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 used to derive the value of a pharmacy.

It is best to use a company that specializes in Montana pharmacy and has extensive and current industry data.  Choose pharmacy specialists who have 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.  The largest financial institutions, national chain pharmacies, regional pharmacy chains, independently owned drug stores, and pharmacy equity investment groups use the services of companies fitting this description.

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Pharmacy Transactions and Capital Gains Tax in Montana

By Brad MacLiver
Authorship and profile at Google


Virtually everything you own and use for personal, or business, purposes is a capital asset. When MT 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 Montana 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 MT 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 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 in Montana 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 Montana pharmacy owners to reconsider their retirement plans. The good news is there are financial tools and strategies that allow the 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 then set up for a period of time that is predetermined or until the donor’s (the Montana pharmacy owners') death.  An individual (the MT pharmacy owner or family member) can then receive income from the Trust’s assets, and upon the donor’s death, those assets will go to a designated charity. A portion of the income from the Trust can be utilized to purchase life insurance for the donor. The proceeds of this life insurance then to designated heir(s) who will receive the money without incurring any estate tax liability.

These various tax strategies like the use of CRTs are not widely known.  It is recommended that pharmacy business owners 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.  Failure to follow the strict IRS guidelines could cause increased taxes, penalties, and criminal charges in some cases.

Throughout the years, there have been some unscrupulous individuals who have attempted to use CRTs and similar financial tools in illegal scams.  Because of the increase in capital gains taxes, there is an expectation that more scams will be floating around out there.  Pay attention to that possibility and make sure to be confident that 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 pharmacy is sold in Montana.

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Buy-Sell Agreements for Pharmacy Owners in Montana

By Brad MacLiver
Authorship and profile at Google


When a MT pharmacy is owned by at least two people, the stockholders or partners should have what's known as a Buy-Sell Agreement. This agreement is a written document that specifies the procedures for and governs the future sale of the pharmacy business.
               
The pharmacy buy-sell Agreement in Montana protects the interest of the parties who own the pharmacy and specifies the actions triggered by a stockholder leaving the business due to their death, disability, dissolution, retirement, or divorce.  It governs how and when shares of the pharmacy business can be transferred or sold and it also provides guidance as to how the pharmacy will be valued.  It also outlines the obligations of the remaining shareholders of the Montana pharmacy.

These agreements are important because the elements of a future sell will be predetermined and there will be no need for negotiation during a heated dispute or grieving period. It provides a level of comfort and assurance that the process was thoroughly planned to both the stockholder and the family when the inevitable time comes for an exit strategy.

There are disadvantages to not having a buy-sell agreement between pharmacy owners.  A disability potentially leaves one partner working more while another is not adding any productivity.  In the case of a death and there is no agreement, one partner may be stuck with a non-productive heir, or a new partner may be inserted who has a conflicting personality with the remaining partner.  An incompatible partner could be disastrous for the pharmacy business in MT.

Buy-sell agreements come in several forms, 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 Montana Buy-Sell Agreement:
1. Stockholders names and the number of shares and voting rights of each. 
2. Guidance for the certified MT 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.
12. Enforceability of the agreement, the binding effects, and arbitration procedures for disputes.
13. Process for dissolution, or liquidation, of the corporation.
14. Maintaining the premises during a transition.
15. Preserving representations and warranties.
16. The terms of transfer.
17. Bill of Sale.

To ensure that the money required is available, buy-sell agreements are often funded with a life insurance policy. Should the death of one of Montana pharmacy owners occur, the life insurance settlement will provide the funds for the remaining pharmacy owner to buyout the partners shares from the estate.

Life insurance coverage for each partner needs to be in place, because without a way to accomplish the purchase of the Montana pharmacy shares the buy-sell agreement will not be functional. As the business grows and develops the amount of insurance need to be adjusted to provide an adequate coverage. Without the insurance the surviving stockholder may not have enough cash to satisfy the amount required to buy out the estate - leaving the survivor with an unwanted partner.

To have the adequate insurance coverage and to determine the specifics of the buy-out terms, a certified pharmacy business valuation is needed in Montana. There are a large number of companies that provide business valuations. Due to the dynamics and current market conditions of the pharmacy industry a valuation firm should have extensive Montana pharmacy experience. Simple accounting formulas and multipliers will not provide an adequate, or realistic, valuation for a MT pharmacy business.

Pharmacy buy-sell agreements are extremely important documents that need to be completed with seriousness and care. Even with a long standing partnership, it is only too late to create a buy-sell agreement when an event has already occurred....that would require 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 Montana pharmacy valuation is performed by an established MT pharmacy industry expert.