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.

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Pharmacy Cash Flow Instruments and Nebraska Financial Discount Rates

By Brad MacLiver
Authorship and profile at Google


When a NE pharmacy is considering selling a cash flow instrument such as the pharmacy’s receivables, or a pharmacy business note, the price the Nebraska pharmacy owner receives will reflect how much time is involved before the Buyer/Investor/Funder of the cash flow instrument will recoup his principal investment and the desired rate of return the Investor needs to make it desirable to take the risk of buying the pharmacies cash flow instrument.
                       
To entice an Investor to shift the risk of holding the cash flow instrument from the Nebraska pharmacy owner to the Investor, there is typically a financial incentive for the Investor. The incentive is the rate of return, which is required to compensate for the Investors perceived risk. The risk is based on the credit of the cash flow instrument’s Payor, previous payment history, seasoning, interest rate, and other variables. Discount rates may change depending on the circumstances of the cash flow instrument, the economy, etc.

If the pharmacy owner in Nebraska or an investor could take the cash flow instrument to the bank and cash it in at face value, the asset would hold more value. However, since this can’t happen the risk of holding the cash flow instrument makes it worth less than face value.

Time Value of Money:
The concept of cash being more valuable to have a dollar today instead of tomorrow is based on the Time Value of Money (TVM). Most business people are aware of the TVM and how it is fundamental to both personal and corporate decision making, but to make sure we are on the same page, we will cover the basics of TVM.

TVM assumes that money earns interest over time. Therefore, as the cliché says time is money, and because of this we can compare money at different points in time that have different values and call them equal.

An example: If $10.00 today earns 7% interest, it will be worth $10.70 at the same time next year. Therefore, $10.00 today = $10.70 next year = $19.67 ten years from now.

Within the same reasoning the reverse is true. An investor will not pay $1.00 today for a dollar that won’t be collected until next year, or 10 years from now. Today’s dollar will be discounted to reflect risk, inflation, the strength of the economy, etc.

Including interest rates and principal amounts, cash flow instruments such as NE Pharmacy Business Notes are originated with a specified time period. The TVM can also be looked at as if it were on a sliding scale, so the earlier the Note is paid off, the smaller the accumulated interest becomes. When the Note is paid early, you don’t get to collect the compounded interest amount, which would have accumulated if you had waited the full time period. The Note has already been written and the terms set. Unlike a loan where the rate of return needed to cover the risk is added to the loan amount. An investor cannot go back to the buyer of your business and change the terms of the note. Therefore, the investor looks at the portion of the note, which is going to be purchased and subtracts the rate of return needed to justify the risk. This is called Discounting. The amount of the discount is contingent on the risk.

Example:

If you sell something for a $25.00 with 12% interest, equal payments received over a 5 year period, you would expect to receive $44.06. However, should the note be paid in full in one year you will only have collected $28.00. You are not collecting the other $16.06 because you are no longer risking anything (you are not earning it). If you want an investor to advance you the $44.06, you will no longer have any risk because you have transferred it to the Investor. To compensate the Investor for accepting the risk of holding the note, the Investor will discount the note, and pay you an amount equivalent to the time and risk involved.

The price you receive when selling your note will be the discounted rate according to the basic TVM principals minus the amount that allows an investor to justify the risk.                               

If a note is a length of 3, or more years, it may be beneficial for you to sell only a portion of the note. Because the payments from a month in the 5th year will hold less value than payments collected this year, it is beneficial to you to only sell the number of months that you need to obtain the cash that meets your current financial needs. You can always sell more payments at a later date if you need additional funds. Determine what cash you really need and we will calculate the number of months we will purchase to meet your needs.

Although it involves a much shorter period of time, understanding discount rates is the same when selling a Nebraska pharmacy’s accounts receivables.


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Is it Worth Selling Pharmacy Notes in Nebraska at a Discount?

By Brad MacLiver
Authorship and profile at Google


When a NE 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 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 discounting method. Instead of buying a pharmacy note at its face value, the pharmacy note will be discounted. Meaning the Investor will pay less than face value 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 Nebraska 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, further analysis needs to be completed before a final decision is made by weighing the discounted amount with the benefits of a lump sum of cash.

1. What are the primary motivations behind selling the pharmacy note? What are your desired goals? Is it worth considering to reduce exposure to risk? Are there any financial necessities 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 NE 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 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 Nebraska pharmacy note?

4. A NE 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 - There is the risk that the pharmacy buyer may not run the business as efficiently as you have, sales drop, and the Nebraska pharmacy business buyer cannot meet the payment obligations. Incompetency could lead to late payments, missed payments, or bankruptcy.

2. Nebraska 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 NE pharmacy competition either building in the neighborhood or through mail order.

4. Loan to Value - When originating a pharmacy business note you may be creating financing where there is a “negative loan to value.” Example: the pharmacy business note in Nebraska is for $380,000, but there is only $140,000 of tangible assets for collateral.

5. Title Insurance – Nebraska pharmacy business notes 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 Nebraska 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 NE pharmacy note with Pharmacy Business Note Investor before the Purchase and Sale Agreement is finalized for the acquisition of the pharmacy. This provides the pharmacy business seller in NE and the future note seller with valuable insight into structuring the pharmacy business note so it can be successfully purchased.

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Using Business Notes for Financing a Nebraska Pharmacy Acquisition

By Brad MacLiver
Authorship and profile at Google


When acquiring or selling a NE pharmacy or drug store, one alternative is to have the seller originate the financing and carry back a business note. At first glance many Nebraska pharmacy owners will not want to take this approach. They want their cash and their exit. When a pharmacy owner 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 NE Pharmacy Business Note

1.  The process of selling a pharmacy or drug store to an individual can be easier and less time consuming when the Nebraska 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 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 in Nebraska 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 NE pharmacy business note to meet current financial needs and keeping the remainder for future income.

4. By selling a portion or the entire pharmacy business note in Nebraska, capital is freed up that can now be used for either new ventures or paying off old debt.

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

When originating a NE pharmacy business note the terms and interest rate are set and agreed upon between the seller and buyer of the business. The seller of the business accepts the promissory note, which is secured by the business including any inventory and equipment that belongs to the business. The pharmacy business seller then sells the note to an Investor who is willing to hold the pharmacy note in exchange for compensation. Since Investor can’t go back to the pharmacy business buyer in Nebraska 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 pharmacy business note.

Here are a few tips when selling a business note in Nebraska:

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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Using Tax Strategies When Selling a Pharmacy in Nebraska

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. Nebraska (NE) pharmacy buyers participate in the pharmacy industry roll-up to achieve economies of scale in purchasing, marketing, information systems, logistics, distribution, and top management. Pharmacy sellers in Nebraska 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 sell their Nebraska 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 NE 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 in Nebraska or a drug store. Unless a professional is handling a large number of pharmacy acquisitions, they usually do not know these federal regulations that allow for reducing the tax liability for the NE pharmacy owner.

Many Business Brokers, CPA’s, attorneys, and other professional advisors inform their clients that selling a pharmacy in NE will result in tax consequences. However, most of these professionals do not handle the buying and selling of pharmacies on a daily basis and may not realize the different aspects of structuring a Nebraska 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. When a drug store owner is considering selling their Nebraska pharmacy either now, or in the next few years, it is urgent to understand the pharmacy's current valuation and the best course of action to be considered - now instead of later.

Estate planning when selling a NE 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 Nebraska pharmacy profits continue to slip, more independent pharmacy owners along with small and regional NE pharmacy chains will be considering selling their Nebraska pharmacies and drug stores. Tax considerations should be a paramount part of the decision process.

Pharmacy owners should consult with a Nebraska pharmacy industry expert for advice on structuring the sale of their pharmacy. Someone with extensive experience in pharmacy and drug store acquisitions will have the knowledge and expertise to structure the transaction for tax considerations. Like all tax planning issues, waiting until the end of the year is not always the best strategy. Following this advice can place larger sums of money in the bank of Nebraska pharmacy owners when a NE pharmacy is sold.

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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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Nebraska Pharmacy Industry Roll-Up

By Brad MacLiver
Authorship and profile at Google


NE Industry Roll-Ups are where an industry’s many players are consolidated into smaller groups for economic benefits. Recessions, new government regulations, or other aspects of the industry that may be stifling profits end up providing incentives to consolidate

A key motivation for an industry roll-up is to achieve economies of scale in purchasing, marketing, information systems, logistics, distribution, and top management. Businesses have less risk from the impact of an unsatisfied customer when they are consolidated.  They also have the reward of being able to keep or recruit key employees.

An example of an industry roll-up can be seen with the Nebraska pharmacy industry. This is a solid industry that is still experiencing sales growth, but pharmacies and drug stores have seen a steady decline in their profit margins in general due mainly to government regulations, even as sales increase. There has also been a shortage of pharmacists - a required key employee.

Industry roll-ups are often initiated by investors seeking investment opportunities. However, in the case of pharmacies, 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 Nebraska 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 pharmacy chains.

During the pharmacy industry roll-up pharmacies in Nebraska 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 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 NE 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 Nebraska 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 pharmacy owner through the maze of details will benefit the pharmacy owner in Nebraska 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 NE 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 Nebraska 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. Nebraska Pharmacy owners 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 NE pharmacy industry roll-up will continue.

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