Montana Pharmacies - Merry Christmas!

Merry Christmas to all of the pharmacy and rug store owners in Montana (MT).

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

With the new year, pharmacy owners all across the U.S. may be faced with new hurdles. If your pharmacy business is a typical retail location or a closed door shop, or whether you are located in a hospital, grocery store, or provide mail order services, you will want to keep an eye on the value of your business. The pharmacy industry experts at www.PharmacyValuations.com will be happy to provide you a free business valuation to assist you keeping track of your business value.

Estate Planning for Pharmacy Owners in Montana

By Brad MacLiver
Authorship and profile at Google


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

Estate Planning is a topic many people, in all industries, shy away from. For the pharmacy owner in Montana 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 pharmacy business.

It will be time consuming to develop a plan to transfer the business, but it will allow the business to be successfully transferred in an acceptable manner when done correctly. An estate plan for a Montana pharmacy owner does not need to be changeless process. As government regulations, economic conditions, and personal expectations change, it is recommended to fine-tune, update, and make amendments.

Estate planning will allow a pharmacy owner to both anticipate and arrange for the transfer of the drug store. The estate plan will be formatted to attempt to eliminate any uncertainties, assist transfer by trimming expenses, and reduce taxes.

It is a possibility that the process will 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 documentation.  The various aspects of estate planning are aimed to provide the Montana pharmacy owners with coordinated directives.

When the drug store business has non-family members as partners, it is necessary that the estate planning incorporate a Buy-Sell Agreement. A buy-sell agreement will govern the transfer of the business between MT pharmacy partners.  This agreement is also known as a partner buyout agreement or a business will. By funding it with a life insurance policy, the buy-sell agreement helps protect the family in the event of a partner’s death.

Estate planning, buy-sell agreements, and the transfer of the pharmacy should incorporate a pharmacy business valuation completed by a third party that has expertise in the pharmacy industry, performs a large number of pharmacy business valuations each year, and has current industry data as a basis for the conclusions. Using simple accounting formulas, multipliers, and valuators inexperienced in pharmacy will not provide an accurate business valuation.

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

Tips:        
1. When the family drug store is the sole means of income for several family members it becomes even more crucial to have a succession plan in place.
2. To avoid disputes, estate plans should be developed with clear directives.
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 MT pharmacy owner especially if there are some family that work in the business and others that don’t.


 

Montana Pharmacy Franchise Financing

By Brad MacLiver
Authorship and profile at Google


A MT 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 Pharmacy Franchisee, purchases a franchise license from the Montana 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 and will be considered more risky.

Traditional Bank Financing used in funding a Montana 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 typically have very little traditional assets to offer as security. Lenders for the pharmacy in Montana will use traditional methods for analyzing the cash flow available to service to the debt, and they will also need to understand the nontraditional collateral that will secure the loan.

As a borrower, even when incorporated, the independent drug store owner’s personal credit rating will be a factor, along with 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.

MT Pharmacy Franchise Funding Tips:

1. Because there are many Montana pharmacy franchise financing options available, pharmacy owners should perform proper due diligence then 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 to review the pharmacy business loan documents.

3. There are pharmacy consulting services in Montana and franchise associations who can help guide a prospective pharmacy franchisee or borrower or a drug store loan.

4. It is important that new pharmacy owners make sure their funding request is enough to get the pharmacy running and profitable. Insufficient funding for the initial stages puts the drug store in a position where they require additional funding. Smaller working capital loans that would be in a subordinated position will then be harder to obtain at a later date.

Pharmacy owners with questions who need information regarding pharmacy franchise business loans, or any other type of funding for pharmacies and community drug stores, should contact a Montana pharmacy industry specialist who can provide quality answers and sound advice.

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Types of Pharmacy Financing Available in Montana

By Brad MacLiver
Authorship and profile at Google


There are a number of different options available for funding MT pharmacy franchises, specialty pharmacies, and traditional community drug stores.

SBA Financing for Montana 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 pharmacy franchise entry fees, real estate where the pharmacy in Montana will be located, property improvements, working capital, and pharmacy related equipment.

Borrowers for the pharmacy franchise 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 for loans can range from 5 up to 20 years, and within SBA standards, interest rates can be either adjustable or fixed.  They will also be negotiated by the lender, which depends on the financial strength of the pharmacy transaction in Montana.

There are also SBA fees for guaranteeing pharmacy business loans. These fees, not kept by the bank but rather paid to the government, can be rolled into the pharmacy financing.

Patriot Express Business Loan Program

This is another SBA loan program that can be used for Montana 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.

Montana pharmacy funding 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 MT

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

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 Montana pharmacy franchisees. Preferred lenders will already be familiar with the 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 MT 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 Montana 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 Montana pharmacy. Since the MT 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 pharmacy franchise. The retirement plan can purchase stock in the Montana 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 in Montana crashes, so does the retirement fund. The method of providing less expensive financing for the 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. Pharmacists in Montana 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 Montana pharmacy situations are changing, economic factors are a concern, mail order pharmacy is growing, and market shares are shifting. All of these can have a negative impact on the cash flow of a pharmacy franchise. Drug store owners paying franchise royalty payments may not survive the tightening profit ratios. Due to this, these pharmacy franchises may only have the options of bankruptcy, or buying out the franchise agreement when allowable.

Buying out the franchisor allows the pharmacy in Montana to remove the franchisor from the equation. This in turn allows the pharmacy owner more flexibility in their business decisions. The pharmacy franchisor sold the drug store franchise with expectations of earning income from the cash flow their pharmacy franchisees. Due to their long term plan, Franchisors may not be willing to allow the Montana 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.

It is unfortunate that many banks do not know the dynamics of the Montana pharmacy industry.  The result of this lack of pharmacy knowledge is that the banks who look at the funding request only see a business with very little collateral compared to the amount of financing the pharmacy is requesting. To make the funding process successful, a pharmacy owner is advised to use a MT pharmacy industry specialist to capitalize on all available funding opportunities.

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Financial Discount Rates for Montana Pharmacy Cash Flow Instruments

By Brad MacLiver
Authorship and profile at Google


When a MT pharmacy is considering selling a cash flow instrument such as the pharmacy’s receivables, or a pharmacy business note, the price the pharmacy owner in Montana receives will reflect how much time is involved before the Buyer/Investor/Funder of the cash flow instrument will recoup his principal investment and the desired rate of return the Investor needs to make it desirable to take the risk of buying the pharmacies cash flow instrument.

To entice an Investor to shift the risk of holding the cash flow instrument from the Montana pharmacy owner to the Investor, there are typically financial incentives for the Investor like the rate of return, which is something required to compensate for the Investors perceived risk. This risk is founded upon the credit of the cash flow instrument’s Payor, any previous payment history, interest rates, seasoning, and additional variables. Discount rates may change depending on the circumstances of the cash flow instrument, the economy, etc.

If the MT pharmacy owner or an investor could take the cash flow instrument to the bank and cash it in at face value, the asset would hold more value. However, since this can’t happen the risk of holding the cash flow instrument makes it worth less than face value.

Time Value of Money:
The concept of cash being more valuable to have a dollar today instead of tomorrow is based on the Time Value of Money (TVM). Most business people are aware of the TVM and how it is fundamental to both personal and corporate decision making, but to make sure we are on the same page, we will cover the basics of TVM.

TVM assumes that money earns interest over time. Therefore, as the cliché says time is money, and because of this we can compare money at different points in time that have different values and call them equal.

An example: If $20.00 today earns 10% interest, it will be worth $22.00 at the same time next year. Therefore, $20.00 today = $22.00 next year = $51.87 ten years from now.

Within the same reasoning the reverse is true. An investor will not pay $1.00 today for a dollar that won’t be collected until next year, or 10 years from now. Today’s dollar will be discounted to reflect risk, inflation, the strength of the economy, etc.

Along with interest rates and principal amounts, a cash flow instruments such as MT Pharmacy Business Notes, are originated with a certain time period. The TVM can be looked at, as if it were on a sliding scale. The earlier in time the Note is paid off, the smaller the amount becomes. When the Note is paid early, you don’t get to collect the compounded interest amount, which would have accumulated if you had waited the full time period. The Note has already been written and the terms set. Unlike a loan where the rate of return needed to cover the risk is added to the loan amount. An investor cannot go back to the buyer of your business and change the terms of the note. Therefore, the investor looks at the portion of the note, which is going to be purchased and subtracts the rate of return needed to justify the risk. This is called Discounting. The amount of the discount is contingent on the risk.

Example:

If you sell something for a $20.00 with 14% interest, equal payments received over a 16 year period, you would expect to receive $162.74. However, should the note be paid in full in 8 years you will only have collected $57.05. You are not collecting the other $105.69 because you are no longer risking anything (you are not earning it). If you want an investor to advance you the $162.74, you will no longer have any risk because you have transferred it to the Investor. To compensate the Investor for accepting the risk of holding the note, the Investor will discount the note, and pay you an amount equivalent to the time and risk involved.

The price you receive when selling your note will be the discounted rate according to the basic TVM principals minus the amount that allows an investor to justify the risk.                               

If a note is a length of 3, or more years, it may be beneficial for you to sell only a portion of the note. Because the payments from a month in the 5th year will hold less value than payments collected this year, it is beneficial to you to only sell the number of months that you need to obtain the cash that meets your current financial needs. You can always sell more payments at a later date if you need additional funds. Determine what cash you really need and we will calculate the number of months we will purchase to meet your needs.

Although it will involve a much briefer period of time, understanding how discount rates work is the same when selling a pharmacy’s accounts receivables in Montana.


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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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