Financing Pharmacy Franchises in North Dakota

By Brad MacLiver

Authorship and profile at Google

A ND 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 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 in North Dakota. 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 North Dakota 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. However, many of these banks decline the funding request once they review the loan documents 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 pharmacy 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 a buyer that has incorporated, the personal credit rating of an independent drug store owner is a factor, as well as their 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 North Dakota pharmacy business loan.

ND Pharmacy Franchise Funding Tips:

1. Because there are many pharmacy franchise financing options available, pharmacy owners in ND 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 and franchise associations who can help guide a prospective North Dakota pharmacy franchisee or borrower or a drug store loan.

4. New pharmacy owners need to make sure their funding request is enough to get the pharmacy running and profitable. Less than ample funding for the initial stages may put the drug store in a position of needing additional funding. Smaller working capital loans that would be in a subordinated position will be more difficult to obtain at a later date.

When pharmacy owners have questions and need information regarding North Dakota pharmacy franchise business loans, or any types of funding for community drug stores and pharmacies, they should contact a pharmacy industry specialist who can provide quality answers and sound advice.

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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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