Words of Finance for North Dakota Pharmacies: 2011

Thursday, December 29, 2011

Is it Worth Selling Pharmacy Notes at a Discount in North Dakota?

By Brad MacLiver

Authorship and profile at Google

When a ND 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 North Dakota 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 method of discounting. Rather than buying pharmacy notes at face value, pharmacy notes will be discounted. This means the Investor pays less than normal 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 in North Dakota 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 pharmacy note an attractive proposition. However, deeper analysis needs to be completed before any decision can be made by weighing the discounted amount with the benefits of a lump sum of cash.

1. What is the motivation for selling the North Dakota 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 Current Fair Market Value of the pharmacy business? 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 North Dakota pharmacy industry must be considered and it is advantageous to have a pharmacy industry specialist calculate the pharmacy business valuation.

3. How much cash is immediately required by the holder of the ND pharmacy note?

4. A pharmacy note that is seasoned has more value than a “green” note that doesn’t have a payment history. Are you willing to hold the note for a certain amount of time to allow the business buyer time to prove to an Note Investor the capability of the payor making the payments?

5. Are you willing to sell only a portion of the Note (this is called a “Partial Sell”)? The discount rate can be a more attractive proposition when only a portion of the note is sold and the Pharmacy Note Investor is not holding all the risk.

Understanding the Risk for the Note Buyer:

1. Pharmacy Buyer Competency in ND - 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. North Dakota Pharmacy Industry Changes - Changes caused by influences either within the industry, or regulations governing the industry, can make it increasingly difficult for the 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 North Dakota pharmacy business note you may be creating financing where there is a “negative loan to value.” Example: the pharmacy business note is for $425,000, but there is only $115,000 of tangible assets for collateral.

5. Title Insurance – Pharmacy business notes in ND 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 North Dakota 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 before the Purchase and Sale Agreement is finalized for the acquisition of the North Dakota pharmacy. This provides the 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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Wednesday, December 21, 2011

Using Business Notes for Financing a Pharmacy Acquisition in North Dakota

By Brad MacLiver

Authorship and profile at Google

When acquiring or selling a ND pharmacy or drug store, one alternative is to have the seller originate the financing and carry back a business note. At first glance many pharmacy owners will not want to take this approach. They want their cash and their exit. When a pharmacy owner in North Dakota is considering selling their drug store, looking at the benefits of originating a business note and not just the perceived costs, they may find that offering Private Finance in the form of a Pharmacy Business Note will provide them an alternative course of action.

Advantages of Creating and Selling a North Dakota Pharmacy Business Note

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

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

3. When a 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 in North Dakota to meet current financial needs and keeping the remainder for future income.

4. Selling either a portion, or the entire pharmacy business note in ND, frees up capital that can be used for new ventures, or paying off old debt.

5. When a North Dakota pharmacy business note is created and sold, with the proper professional guidance, a transaction can be structured that allows the pharmacy business seller the biggest advantage in achieving the seller’s goals.

When originating a pharmacy business, take note that the terms and interest rate are set and agreed upon by both the seller and buyer of the business. The business seller will accept the promissory note, which is secured by including any inventory and equipment by the the business that belongs to them. The pharmacy business seller sells the business note to an Investor who is willing to hold the pharmacy note in exchange for compensation. Since Investor can’t go back to the North Dakota 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 ND 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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Saturday, November 26, 2011

Using Tax Strategies in North Dakota When Selling Pharmacies

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. ND pharmacy buyers participate in the pharmacy industry roll-up in ND to achieve economies of scale in purchasing, marketing, information systems, logistics, distribution, and top management. North Dakota 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 in ND sell their pharmacy it is considered a capital asset. The difference between the amounts it is sold for and the amount spent to either purchase or start the 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. Unless a professional is handling a large number of North Dakota 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 pharmacy will result in tax consequences. However, most of these professionals do not handle the buying and selling of pharmacies in ND 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 in North Dakota. When a drug store owner is considering selling their pharmacy in ND 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 North Dakota pharmacy should also be a consideration. Specific federal regulations allow an asset to be converted to an income stream, provide a tax deduction, increase asset diversification, and provide risk reduction, along with offering effective retirement and estate planning. If the pharmacy seller 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 North Dakota pharmacy profits continue to slip, more independent pharmacy owners along with small and regional pharmacy chains will be considering selling their pharmacies and drug stores in ND. Tax considerations should be a paramount part of the decision process.

Pharmacy owners should consult with a pharmacy industry expert for advice on structuring the sale of their North Dakota pharmacy. Somebody who has extensive experience in pharmacy and drug store acquisitions should have the knowledge and expertise to structure the transaction for tax considerations. However, just like with all other tax planning issues, procrastinating until the very end of the year is not the best strategy. Following this advice can place larger sums of money in the bank of North Dakota pharmacy owners when a pharmacy is sold in ND.

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Monday, November 21, 2011

EBITDA and Pharmacy Acquisitions in North Dakota

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 pharmacies in North Dakota don’t meet that criteria, this formula is not a useful measure as the sole means for valuing pharmacies for acquisition purposes.

EBITDA is derived by: 1. First calculating net income by obtaining total income and subtract total expenses.
2. Determining the total amount of taxes paid to local, federal, and state governments.
3. Establishing interest fees paid to individuals or companies for the use of credit or capital.
4. Determining depreciation expenses, which are expenses recorded to allocate a tangible asset's cost over its useful life.
5. Calculating amortization expenses, which are expenses for the consumption of the value of intangible assets over a specific period of time or the asset's expected life. These assets include goodwill, copyrights, and patents.
6. Add the values from #1 through #5.

EBITDA calculation example:
1. Net Income            2,050
2. + Taxes paid            610
3. + Interest Expenses     407
4. + Depreciation          240
5. + Amortization          102
6. = EBITDA              3,409

There are some drawbacks to EBITDA: 1. The number can be misleading when it is confused with cash flow.
2. It can also make even completely unprofitable firms appear to be financially healthy.
3. It it too easy to manipulate the numbers.
4. This value can overlook cash requirements for growth in accounts receivable.
5. It can also miss cash requirements for growth in inventories.
6. When valuing small companies, EBITDA is not factual number.
7. This number is ineffective for companies with few assets, small amounts of debt, or low depreciation or amortization schedules.

In the past, EBITDA was used as a proxy for cash flow in leveraged buyouts to calculate whether companies could service their debt. 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 North Dakota pharmacy specialists performing pharmacy business valuations will use EBITDA in pharmacy valuations, but only as part of a larger formula when computing values for specialty pharmacies in North Dakota 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 pharmacy acquisitions.

The EBITDA number for a specific existing North Dakota pharmacy 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 pharmacy in North Dakota. Instead of the EBITDA number, ND pharmacy buyers should be focusing on sales, gross profit, cash flow, and customer mix.

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Monday, November 14, 2011

Pharmacy Industry Roll-Up in North Dakota

By Brad MacLiver

Authorship and profile at Google

ND Industry Roll-Ups are where an industry’s many players are consolidated into smaller groups for economic benefits. There are aspects of the industry, such as recessions and new government regulations, that may be stifling profits. This ends up providing incentives to consolidate.

One of the main reasons 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 North Dakota. It is a well established industry and is still experiencing sales growth. However, 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 in ND - a required key employee.

Industry roll-ups are often initiated by investors seeking investment opportunities. However, in the case of pharmacies in North Dakota, 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, independents have been a majority of the acquisitions, but there has also been a consolidation of a number of the larger North Dakota pharmacy chains.

During the pharmacy industry roll-up pharmacies in ND 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 ND pharmacy acquisitions during the roll-up, specific funding programs have been developed. These pharmacy chain funding programs are backed by major financial institutions that provide the funding for pharmacy acquisitions. These North Dakota pharmacy funding programs allow an individual pharmacy business, or an investment group, the capital to acquire and combine 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 pharmacy value were added together. This synergistic value reduces the risk of funding the individual acquisition.

When considering the buying, selling, or financing a pharmacy, whether an independent drug store, or multiple pharmacy locations, due diligence and understanding of all aspects of the transaction should be considered. Using the services of a pharmacy industry expert to guide a North Dakota pharmacy owner through the maze of details will benefit the ND 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 in North Dakota 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 North Dakota pharmacy industry roll-up.

The aspects of the market which are stimulating the roll-up are also having downward pressure on the pharmacy business valuations. Pharmacy owners in ND 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 pharmacy industry will continue to slide to lower levels, and thus the North Dakota pharmacy industry roll-up will continue.

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Friday, November 4, 2011

North Dakota Pharmacy Acquisition Finance

By Brad MacLiver

Authorship and profile at Google

When a ND 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 North Dakota 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.

Along with the buyer and seller the acquisition will involve attorneys, accountants, lenders, valuation companies, industry specialists, along with others. No one wants to pursue 6-9 months of work involving a variety of highly paid professionals without having some confidence of the pharmacy buyer’s ability to close the deal.

The process will begin with determining the value of the business. There are many companies that offer valuation services. However, pharmacies in North Dakota are not ice cream stores. There are many aspects of valuing a pharmacy that are unique to the industry, so generic valuations or simple accounting formulas should not be used. An industry specialist should be used for valuing the 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 North Dakota pharmacy 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.

ND 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. For a transaction to be a successful one, it takes a lender who understands how the pharmacy industry works.

Tips regarding North Dakota pharmacy acquisitions and finance:

1. An attorneys or CPAs who has been representing the pharmacy seller in ND for many years may see the transaction as putting themselves in a position of losing a client when the business is sold over. Be certain that they are working diligently on the transaction instead of slowing or hindering the process.

2. Because the pharmacy acquisitions process takes 6-9 months worth of work to finish, each party involved should stick to their time tables. Important items will much too often end up sitting on the desk of someone that is outside of the control of the buyer or seller.

3. All financial information has to be current and the data supplied to both the buyer and the lender will need to be updated on a continuous basis over the lengthy acquisition process. The situation can change dramatically during a period of nine months, so the North Dakota pharmacy seller needs to continually prove the company's financial condition.

When working on “pharmacy acquisition finance,” make sure the lender and the valuation company are experts in that industry for the highest chance of success. Make sure you are working with company that has the ND pharmacy expertise, experience, and is a direct correspondent with lenders who understand how pharmacy works.

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Tuesday, November 1, 2011

340B Pharmacy Discount Programs in North Dakota

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 ND 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 uninsured and indigent populations with access to very discounted medications. Because the program exists to assist certain populations, there are various restrictions and regulations dictating how the program operates and who the medications can be dispensed to.

North Dakota Pharmacies can be contracted by a FQHC or similar 340B qualified entities to both manage and dispense the medications. Patients belonging to these entities provide increased traffic to the pharmacies, allowing them the opportunity for additional front end sales along with the Rx sales.

Pharmacy owners who participate in a 340B pharmacy program are obligated to manage their business consistent with customary business practices. In the event of an audit the pharmacy in Wyoming 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 ND pharmacy owner will need employees who understand the various state and federal rules and regulations, which govern the 340B program. The pharmacy will also need to have a location for the 340B inventory, which is separate from their normal inventory, or have a software management system to track the separate inventories.

A system of separating the inventory is required due to the drug inventory used for the 340B pharmacy program is owned by entity that contracted the North Dakota pharmacy. 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 pharmacy.

However, when a pharmacy owner is weighing the potential benefits of a 340B program, they should also consider other aspects of their business and the current market conditions of the pharmacy industry. What are the North Dakota pharmacy’s goals over the next couple years? A younger pharmacy owner with long term objectives can benefit for many years from the added customers. However, a pharmacy owner considering selling the business in the next couple years should be aware that acquisition values are based on the customer files, and many buyers are not currently willing to include 340B customer files in their offers. This results in a lower pharmacy business valuation and market price for the pharmacy despite the volume of business. Also, due to the current economic conditions there are some 340B customers who despite the deeply discounted prices, have chosen not to purchase medications. Pharmacy owners in North Dakota 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 ND pharmacy industry expert.

Friday, October 28, 2011

North Dakota Pharmacy Acquisitions and Bridge Loans

By Brad MacLiver

Authorship and profile at Google

With the changes in the ND pharmacy industry independent drug store owners, small and regional pharmacy chains, and pharmacy equity investment groups are acquiring pharmacies in North Dakota to obtain a larger competitive footprint in a geographic area. During the acquisition phase of the business expansion there may be opportunities that require action, which is faster than the traditional funding process.

Bridge Loans are a short-term financing option and are used while waiting for permanent financing, or the next stage of financing to be obtained. Bridge loans provide funding to "bridge" the gap between a company’s current needs and their long term financing requirements. Permanent financing is generally used to "take out," or pay back, the bridge loan.

One of the characteristics of a bridge loan is that they can close quickly, which in turn allows a company to capitalize on a timely business opportunity, or acquisition. The quick access to money can also allow a business the chance to avoid penalties, bankruptcy, or other temporary problems. If longer term issues need to be dealt with, this “transitional financing” provides the company time until longer term financing can be secured.

Another characteristic of bridge loans is that the process usually requires less documentation than conventional financing. Bridge loan lenders don’t usually have the same government regulations to adhere to, so they tend to have more flexibility in their lending criteria and the documentation they require. However, less documentation does not mean they won’t perform due diligence to have a comfort level with the transaction before they fund.

Examples of using Bridge Loans in North Dakota Pharmacy Transactions:

1. An independent pharmacy owner in North Dakota learns of health issues and decides to quickly sell the family owned pharmacy to an employee or local competitor. Using traditional financing methods for the pharmacy buyer would require more time than is acceptable when considering the circumstances, so a bridge loan should be used to quickly accomplish the transaction.

2. A small ND pharmacy chain needs $1 million to expand their business. This chain has 3 new equity investors who will each invest in the firm over the next 6 months. However, they are investing at different intervals, and the business has opportunities which require action sooner than 6 months. The quick closing bridge loan allows the ND pharmacy chain access to the needed funds so they can complete their expansion and increase profits. Money gained from the 3 new equity investors will pay off the bridge loan.

3. A North Dakota 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 a state of disrepair. A bridge loan provides the requiring funding to acquire and rehabilitate the property. Once that is complete, conventional long term financing can be obtained.

4. A pharmacy group developing new pharmacy locations in North Dakota is able to 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. By taking out a bridge loan, the project is allowed to move into the construction phase and then qualify for other forms of financing.

5. When a North Dakota pharmacy is owned by two or more partners and one of the partners is ready to exit the business, bridge loans can be used to help ensure the cash flow and uninterrupted operation of the business during the partner buyout.

6. Both real estate and equipment bought at auction can have a narrow window for closing the deal. Timing of traditional financing would keep the buyer from proceeding with the opportunity, while the benefits of a bridge loan will permit the pharmacy owner to quickly respond to the opportunity.

When there are business opportunities, buying North Dakota pharmacies, selling ND 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 ND pharmacy bridge loans:

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

2. A bridge loan is like 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.

Understand the types of deals that require a bridge loan may be considered speculative in nature, or have higher risk factors. Due to this many banks do not offer bridge loans. Banks must meet government regulations and need to justify their lending practices. Riskier bridge loans do not usually fall within the lending parameters of many banks. Therefore a majority of the bridge loans will come from private investment firms. It is best to consult a company that has access to a number of funding sources who provide bridge loans.

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Thursday, October 27, 2011

Acceleration Clauses for Commercial Leases and North Dakota Pharmacy Business Loans

By Brad MacLiver

Authorship and profile at Google

A provision of many ND pharmacy business loans and commercial leases is an acceleration clause. Acceleration clauses in loan/lease agreements allows the lender to accelerate their collection of payments contingent on an event occurring. These events may include a lack of payment by the borrower, a failure to keep the property insured adequately, a failure to pay for tax assessments, not maintaining the property, selling the property/asset, etc.

Lenders view the acceleration clause as an important tool in their business loan and commercial lease programs. Loan and lease documents might not specifically address the foreclosure of a property, or repossession of an asset, but this is where the acceleration clause comes into effect. Without the clause the lender would only be able to foreclose on one missed payment at a time. With the acceleration clause, despite whatever event kicks the clause into gear, the lender can demand immediate and full payment of all remaining balances and fees.

The pharmacy business loan or lease documents provided to the North Dakota 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, 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 ND pharmacy owner has additional unencumbered assets they may be able to negotiate with the lender by offering additional collateral.

2. If a North Dakota 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, 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 North Dakota 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 North Dakota pharmacy is headed in that direction start talking with the lender about finding a solution. Communication with the lender is a good thing.

6. There are pharmacy business loans and commercial leases that require a “personal” guarantee from the business owner, which means that the business owner’s credit and personal assets will become involved in the event of a default. A business' “corporate” status will not keep the lender from seizing the personal assets.

When considering to finance a ND pharmacy for acquisition, or expansion, understanding due diligence of every aspect of the transaction should be considered. Using the services of a pharmacy industry expert to guide a pharmacy owner in North Dakota through the maze of details will benefit the pharmacy owner in making the best business decision.

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Monday, October 3, 2011

Pharmacy Industry: Current Market Conditions in North Dakota

By Brad MacLiver

Authorship and profile at Google

There are currently there are a number of factors making an impact on the current market conditions of the U.S. pharmacy industry. These factors are affecting the pharmacy business valuations of pharmacies in ND and drug stores all across the U.S.

Local Market Conditions:

The valuation process also includes local demographics and local market conditions. There is less potential for growth in smaller communities and with the declining profits, a buyer must purchase at a lower value because they will need to service the debt from a business loan while still trying to make a living. This is also the case for a community that has lost population due to economic conditions, or currently has a high rate of unemployment. Fewer people means fewer customers with the ability to purchase, which then means reduced sales and a smaller chance of any substantial improvement in the near term. This results in a lower pharmacy business value.

North Dakota Pharmacists Shortage:

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

Fewer Buyers:

There are also fewer corporate buyers. Some of the largest pharmacy chains have been purchased and consolidated in the 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 pharmacy business values drop. There are many factors contributing to the downward pressure of pharmacy values and there is not any expectation of a turn around. Pharmacy owners should not be fooled by inexperienced Brokers claiming grand outcomes and over stating North Dakota pharmacy business values not based on realistic market conditions.

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

Mail Order:

Some insurance companies are designating a noticeable amount of pharmacy patients as “long-term medications” and require they only purchase the medications from mail order ND 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 North Dakota pharmacy. Complex methods are used to derive the value of a pharmacy.

It is best to use a company that specializes in pharmacy and has extensive and current industry data. Choose pharmacy specialists who have been working in the pharmacy industry long enough to have extensive pharmacy experience in North Dakota 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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Tuesday, August 16, 2011

Capital Gains Tax and Pharmacy Transactions in North Dakota

By Brad MacLiver

Authorship and profile at Google

Almost everything you own and use for personal, or business, purposes is a capital asset. When ND 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 North Dakota 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 pharmacy acquisitions in North Dakota, 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 North Dakota pharmacy seller who wants as much money out of the deal as possible. For most pharmacy owners in North Dakota, their business is the largest asset they will ever own and selling the business at a certain dollar amount has been part of their retirement and estate planning. Knowing they will need to cut out a larger chunk of the proceeds to give to the government will cause some pharmacy owners to reconsider their retirement plans. The good news is there are financial tools and strategies that allow the 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 other strategy that can be used to assist the capital gains tax burden is the Charitable Remainder Trust (CRT). These trusts are legally described as Split Interest Trusts because of their blend of both philanthropic motivations and personal financial aspects. CRT’s are capable of reducing tax liabilities, increase the financial wealth of a business owner, and provide a platform for charitable giving at the same time.

CRT’s are established when someone donates assets to this special type of Trust. These assets can be real estate, stocks, cash, and the like. The CRT will be established for a set period of time or until the death of the donor (the pharmacy owners). The pharmacy owner or a family member can receive income from the Trust’s assets, but upon the donor’s death, those assets will go to a designated charity. Part of the income received from the Trust can be used to purchase life insurance on the donor. The proceeds from the life insurance will go to designated heir(s) who receives it without incurring any estate tax liability.

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

Over the years there have been unscrupulous individuals who have tried using CRTs and similar financial tools in illegal scams. With the increase in capital gains taxes there are expectations more scams will be floating around out there. Be knowledgeable about the possibilities, but be confident you are working with experts in your industry.

You should consult a firm with extensive experience in pharmacy and drug store acquisitions in ND. Firms that have the knowledge and expertise to structure the transaction appropriately, for tax considerations, can save a North Dakota pharmacy owner large sums of money when a pharmacy is sold.

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Thursday, August 11, 2011

Buy-Sell Agreements for Pharmacy Owners in North Dakota

By Brad MacLiver
Authorship and profile at Google

When a ND pharmacy is owned by at least two people, the partners/stockholders should have a Buy-Sell Agreement. This agreement is a written document that will outline and govern the procedures for the future sale of the pharmacy business.

Pharmacy buy-sell Agreements are documents that protect the interest of the parties who own the pharmacy and direct the actions triggered by a stockholder leaving due to death, divorce, dissolution, retirement, or disability. The document will govern how and when the North Dakota pharmacy business' shares can be transferred or sold. The document will also provide guidance as to how the pharmacy will be valued as well as outline the obligations of the remaining shareholders of the ND pharmacy.

Buy-sell agreements are important documents because the differing elements of a future sell are predetermined and will not need to be negotiated during a heated dispute or grieving period. They provide both the stockholder and the family some reassurance that when the inevitable time comes for an exit strategy, the process will have been thoroughly thought out in advance.

One of the disadvantages to not having a buy-sell agreement between North Dakota pharmacy owners is that a disability leaves one partner working more than another who is not adding to the productivity. Should a partner die before an agreement is established, the remaining partner may be left with a non-productive heir or a new partner who has personality conflicts with the surviving partner may be inserted. An incompatible partner could be devastating for the pharmacy business.

Buy-Sell agreements come in many other forms: 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 North Dakota Buy-Sell Agreement:

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

2. Guidance for the certified North Dakota 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 North Dakota pharmacy owners occur, the life insurance settlement will provide the funds for the remaining pharmacy owner in ND 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 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 North Dakota pharmacy business valuation is needed. 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 pharmacy experience in ND. Simple accounting formulas and multipliers will not provide an adequate, or realistic, valuation for a 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 North Dakota pharmacy valuation is performed by an established ND pharmacy industry expert.

Thursday, December 29, 2011

Wednesday, December 21, 2011

Saturday, November 26, 2011

Monday, November 21, 2011

Monday, November 14, 2011

Friday, November 4, 2011

Tuesday, November 1, 2011

Friday, October 28, 2011

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Monday, October 3, 2011

Tuesday, August 16, 2011

Thursday, August 11, 2011

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