Estate Planning for Nebraska Pharmacy Owners

By Brad MacLiver
Authorship and profile at Google


With the current market conditions many NE 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 Nebraska 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 Nebraska pharmacy owner 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.

Setting up a plan to transfer the business will be time consuming, but when done correctly it will allow the business to successfully be transferred in an acceptable manner.  A pharmacy owner's estate plan does not need to be process without change.  It is recommended to fine-tune, amend, and update the plan as government regulations, economic conditions, and personal expectations change.

Estate planning permits a pharmacy owner in Nebraska to anticipate and arrange for the drug store's transfer. The plan will be formatted in a way that attempts to assist the transfer by trimming expenses, eliminate uncertainties, and reduce taxes.

Planning an estate may involve Wills, Living Wills, Trusts, Power of Attorney, Medical Power of Attorney, Business Valuations, Life Insurance, Charitable Remainder Trusts, Buy-Sell Agreements, and more legal documents. The various aspects of planning an estate are designed to provide the pharmacy owners coordinated directives.

When non-family members are partners in the pharmacy business, it is crucial that a Buy-Sell Agreement is incorporated in estate planning.  Buy-Sell agreements are documents that govern transfer businesses between Nebraska pharmacy partners. The document may also be known as a partner buyout agreement or business will. To help protect the family in the event of a partner’s death, the buy-sell agreement may be funded with a life insurance policy.

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 Nebraska pharmacy will not provide an accurate business valuation.

Most pharmacy owners 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 pharmacy owners in Nebraska die and their family is left with an asset with very little value.

Tips for Drug Store Owners considering Estate Planning:        
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 Nebraska pharmacy owner especially if there are some family that work in the business and others that don’t.

EBITDA and Nebraska Pharmacy Acquisitions

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

Six Steps to Calculate EBITDA:
1. Calculate net income by obtaining total income and subtract total expenses.
2. Determine the total amount of taxes paid to federal, state, and local governments.
3. Compute interest fees paid to companies or individuals for the use of credit, or capital.
4. Establish the cost of depreciation (the expense recorded to allocate a tangible asset's cost over its useful life).
5. Determine the cost of amortization (the expense for consumption of the value of intangible assets, such as goodwill, patents, and copyrights, over a specific period of time, or the asset's expected life.
6. Add #1 through #5.

EBITDA calculation example:
1. Net Income            2,105
2. + Taxes paid            677
3. + Interest Expenses     405
4. + Depreciation          231
5. + Amortization          108
6. = EBITDA              3,526

Seven Drawbacks of EBITDA: 1. Can be misleading number when it is confused with cash flow.
2. Can make even completely unprofitable firms appear to be financially healthy.
3. Numbers are easy to manipulate.
4. Can overlook cash requirements for growth in accounts receivable.
5. Can miss cash requirements for growth in inventories.
6. Not factual when valuing small companies.
7. Not effective for companies with few assets, small amounts of debt, or low depreciation or amortization schedules.

EBITDA was utilized as a proxy for cash flow during the 1980s in leveraged buyouts to calculate whether companies could service their debt. Unprofitable businesses can appear to be financial healthy when factoring out taxes, interest, depreciation, and amortization. During the dotcom era, this method of valuation was used extensively to value unprofitable businesses that had few assets and small earnings. The results from that method caused many businesses to go bust. This was a terrible example of misapplying EBITDA.

Knowledgeable Nebraska 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 NE 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 Nebraska 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 cannot have the same tax base, interest expenses, or the same schedule for depreciation, which means it is crucial that the buyer calculate an estimated EBITDA that is specific to their operating model, business system, power to buy, operational costs, etc., and not the sellers. Take note that EBITDA assumes that the buyer will acquire all of the assets, the working capital, the accounts receivable, and the liabilities. Those assumptions do not hold true regarding an acquisition of a pharmacy in Nebraska. Instead of using an EBITDA number, NE pharmacy buyers should be focusing on their sales, their gross profit, their cash flow, and their customer mix.

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