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.