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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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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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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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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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.
