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.

Pharmacy Funding Types Available in Nebraska

By Brad MacLiver
Authorship and profile at Google


There are a number of different options available for funding Nebraska (NE) pharmacy franchises, specialty pharmacies, and traditional community drug stores. These options may be used during the process of buying /selling or expanding a single drug store or a small pharmacy chain.

SBA Financing for Pharmacy Business Loans

The U.S. Small Business Administration (SBA) partially guarantees loans for pharmacy franchise lenders reducing the risk exposure for the lender. A loan program called 7(a) is a standard for funding Nebraska pharmacy franchises. These loans can provide funds for pharmacy franchise entry fees, real estate where the pharmacy will be located, property improvements, working capital, and pharmacy related equipment.

Borrowers for the Nebraska pharmacy franchise must be creditworthy, without any bankruptcies, have ample down payment, but there are variations here, and the business must be able to repay the loan from the cash flow of the pharmacy.

Terms can range from 5 to 20 years. Within SBA standards interest rates may be adjustable or fixed and will be negotiated by the lender dependent on the financial strength of the Nebraska pharmacy transaction.

There are fees for guaranteeing pharmacy business SBA loans.  Those fees, which are paid to the government and not kept by the bank, can be rolled into the pharmacy financing.

Patriot Express Business Loan Program

This is another SBA loan program that can be used for pharmacy franchise business loans in Nebraska and is reserved for military veterans, active service members, their spouses, and survivors. The Department of Veterans Affairs would be involved in the pharmacy loan process.

Funding for Nebraska pharmacy from the Patriot Express program typically has relatively fast approval times, and they may also accept a smaller down payment from borrowers than traditional business loans as well as having lower acceptable credit scores. Patriot Express business loans have benefits for lower interest rate pharmacy business loans.

Funding for Pharmacists Who Are Veterans in NE

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

Pharmacy Financing From the Franchisor

Financing a pharmacy franchisee is a usual topic in discussions with a pharmacy franchisor. Franchisors should be able to direct potential drug store franchisees toward funding programs that have previously been successful for their other Nebraska pharmacy franchisees. Preferred lenders will already be familiar with the pharmacy franchisor and their systems.

Pharmacy franchisors in Nebraska may also provide some funding internally. Lower collateral will be offset by higher interest rates. This may help with qualifying for a pharmacy acquisition of a franchise, but may hurt the franchisee’s long term cash flow. Due diligence of pharmacy franchisor funding should be completed before any final decisions are made.

Personal Assets Used in NE Pharmacy Finance

Not all prospective Nebraska pharmacy franchise owners have enough cash on hand. Part of the drug store business financing may require the borrower to liquidate personal stocks, provide personal assets as collateral, refinance their home, or use their 401k to assist the lenders security for making the pharmacy business loan.

If the borrower still does not have enough personal assets then a family member or a friend may be required as a partner in the pharmacy in Nebraska. Since the NE pharmacy partner’s cash and assets will also be at risk of loss, these partners may require some controlling interest in the drug store.

Retirement Accounts Used in Pharmacy Finance

Retirement Plans can be self-directed and used to invest into a pharmacy franchise. The retirement plan can purchase stock in the Nebraska pharmacy franchise. This is similar to how the retirement plan currently may be investing in publicly traded stocks and mutual funds. Lower debt service and higher profit potential may result when incorporating this option that uses less external financing in funding the franchise.

The downside is, if the Nebraska pharmacy crashes, so does the retirement fund. The method of providing less expensive financing for the pharmacy needs to be weighed against the risk of failure.

Because of the factors involved such as deferred taxes, early or improper distributions, and IRS involvement, funding a pharmacy transaction with a retirement account should be handled by a company who has expertise in this arena. Nebraska pharmacists and investors interested in using this financing structure should research the Employee Retirement Income Security Act of 1974 (ERISA).

Pharmacy Franchise Agreement Buyout Funding in Nebraska

Understand that pharmacy situations are changing, economic factors are a concern, mail order pharmacy is growing, and market shares are shifting. All of these can have a negative impact on the cash flow of a pharmacy franchise. Drug store owners paying franchise royalty payments may not survive the tightening profit ratios. Due to this, these pharmacy franchises may only have the options of bankruptcy, or buying out the franchise agreement when allowable.

Buying out the franchisor allows the pharmacy to remove the franchisor from the equation. This in turn allows the pharmacy owner in Nebraska more flexibility in their business decisions. The pharmacy franchisor sold the drug store franchise with expectations of earning income from the cash flow their pharmacy franchisees. Due to their long term plan, Franchisors may not be willing to allow the Nebraska pharmacy franchisee to remove itself from the franchisor. However if a Franchise Agreement Buyout can be negotiated, the buy-out transaction can also be financed.

Unfortunately many banks don’t understand the dynamics of the pharmacy industry. This lack of pharmacy knowledge results in the banks looking at the funding request and all they see is a business that has very little collateral compared to amount of financing the Nebraska pharmacy is requesting. To assist the successful funding process a pharmacy owner is advised to use a pharmacy industry specialist to capitalize on the funding opportunities that are available.

********************

Pharmacy Acquisition Finance in Nebraska

By Brad MacLiver
Authorship and profile at Google


When a NE pharmacy or drug store is being sold, the buyer will typically not use “out of pocket” cash for their acquisition, even if they have cash available.  Pharmacy acquisition strategies in Nebraska usually involve financing the transaction.

A typical acquisition will take 6-9 months to complete.  This means the Nebraska pharmacy seller will need the buyer to provide some proof up front about their ability to close the transaction.  Because the acquisition process will require many hours of due diligence and negotiation, 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 acquisition process starts with determining the value of the business. Many companies are out there who offer valuation services, pharmacies are special businesses, not ice cream stores. There are quite a few aspects to valuing pharmacies that are unique to the industry, which means either generic valuations or simple accounting formulas should be avoided. An industry specialist should be used for valuing the Nebraska 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.

NE 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 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.

Pharmacies in Nebraska 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. A successful transaction takes a lender that understands the pharmacy industry.

Tips regarding Nebraska pharmacy acquisitions and finance:
1. Attorneys and CPAs who have been representing the pharmacy seller for many years may see the transaction as putting themselves in a position of losing a client when the business is sold. Make sure they are working diligently on the transaction and are not slowing or undermining the process

2. Since pharmacy acquisitions in NE involve 6-9 months of work to complete, all parties involved need to be aware of time tables. Much too often, items of importance end up sitting on the desk of someone that is outside of the control of the buyer or seller.

3. All financial information needs to be current. Over the lengthy process the data supplied to both the buyer and the lender will need to be updated on a continuous basis. Things can change drastically during a nine month period and the Nebraska pharmacy seller will need to continually prove the financial condition of the company.

When pursuing “pharmacy acquisition finance,” for the best chance of success, make sure the valuation company and the lender have expertise in that industry. Choose a company that has the Nebraska pharmacy experience and expertise, and is a direct correspondent with lenders who understand pharmacy.

************************