Should a Broker be Used When Buying a Washington Pharmacy

By Brad MacLiver
Authorship and profile at Google


When deciding between using a pharmacy broker, or pursuing the acquisition of a Washington pharmacy yourself, buyers of pharmacies and drug stores need to weigh several factors including skills, knowledge, and time.
            
Many pharmacy buyers are experts behind the counter, but many who have never bought a pharmacy in the past, don’t have the complete understanding of all the variables including State and Federal Regulations, negotiating the best price, structuring the deal, and the best options for financing the acquisition. These are skills that many Washington pharmacy buyers believe they possess, but pharmacy buyers need to recognize how many times they have actually purchased a pharmacy compared to a pharmacy industry expert.

Knowledge is power and using a pharmacy broker with extensive know how in valuing and transferring pharmacies will save a pharmacy buyer in Washington considerable time and headaches resulting in a more cost efficient transaction. The cost of acquisition must be considered in the analysis of Return on Investment (ROI). If the acquisition will benefit the buyer, then any additional time spent with a stagnant transaction will be benefits lost.

Transactions are definitely time consuming. When handling a transaction yourself, how many additional hours will you need to work to complete the Washington pharmacy acquisition and then still not be certain if all the details were done correctly?

Just finding the appropriate pharmacy to buy can be an expensive, laborious, and time consuming process. If the pharmacy’s numbers appear to provide the ROI the WA pharmacy buyer requires, is the pharmacy seller both cooperative with the buyer and knowledgeable about the transaction process?

Pharmacy sellers in Washington, their attorney, their CPA, and even their families can slow the process. Pharmacy buyers should understand this and possess the credentials that all of the various parties can have faith in while undergoing the many steps of acquisition.

After a pharmacy has met the preliminary requirements of the buyer, a current market pharmacy business valuation is necessary to verify the current value of the WA pharmacy.  It should be based on a sound financial and market analysis and not just a simple accounting or multiple formula.  In today’s market, pharmacy sellers usually want a higher acquisition price for their family owned pharmacies, than what the current market is willing to pay. A certified valuation completed by a third party who possesses extensive experience in the pharmacy industry will help guide the buyer and seller in their negotiations.

Buying a pharmacy business is not like buying a used car. There are many steps that must be taken. Pharmacy buyers who are not discussing an acquisition with a Washington pharmacy seller who will actually move forward with providing all the documentation and financial statements will be losing valuable time in their acquisition search. Both the seller and buyer need to have a meeting of the minds and provide a collective effort in pursuing the closing of the pharmacy acquisition. By the time a closing occurs and all aspects of the transaction have been completed, substantial cash and time will have been invested.

When inexperienced parties are undergoing the acquisition process it can be a draining experience full of headaches and worries. A smoother and more confident process can be accomplished when a Washington pharmacy industry expert is involved in the transaction. A pharmacy broker will take steps to pre qualify the buyer. This allows the seller the knowledge they are working with a real buyer and not a tire kicker.

If the buyer will need financing to complete the deal they will find many banks will not finance a pharmacy acquisition. A broker working exclusively in the pharmacy industry will have sources of funding who understand the industry and will fund pharmacy acquisitions in WA.

In Washington pharmacy mergers and acquisitions it is important to understand confidentiality, and how the perceived changes may affect employees and customers. A broker acting as the middle man between the buyer and seller can assist the confidentiality of the transaction.

There are many things to consider when purchasing a pharmacy. Using a pharmacy business broker who specializes in the Washington pharmacy industry will benefit both parties involved in the buying and selling of a pharmacy.

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Using Tax Strategies When Selling Pharmacies in Washington

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. Washington (WA) pharmacy buyers participate in the pharmacy industry roll-up to achieve economies of scale in purchasing, marketing, information systems, logistics, distribution, and top management. Washington 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 sell their pharmacy in Washington 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 Washington pharmacy 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 pharmacy owner in WA.

Many Business Brokers, CPA’s, attorneys, and other professional advisors inform their clients that selling a Washington pharmacy 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 WA 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 Washington pharmacy. When a drug store owner is considering selling their pharmacy 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 WA 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 in Washington is nearing a retirement age, or will be working as a WA 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 pharmacy profits continue to slip, more independent pharmacy owners along with small and regional pharmacy chains in Washington will be considering selling their pharmacies and drug stores. 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 Washington 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 WA pharmacy owners when a pharmacy is sold.

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Washington Pharmacy Acquisitions and EBITDA

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

To Calculate EBITDA:
* Calculate net income by obtaining total income and subtract total expenses.
* Determine the total amount of taxes paid to federal, state, and local governments.
* Compute interest fees paid to companies or individuals for the use of credit, or capital.
* Establish the cost of depreciation (the expense recorded to allocate a tangible asset's cost over its useful life).
* 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.
* Add #1 through #5.

EBITDA calculation example: 
  Net Income          800
+ Taxes paid          240
+ Interest Expenses   160
+ Depreciation         80
+ Amortization         40
= EBITDA            1,320

Some things to watch out for when using EBITDA:
1. They can be misleading number when it is confused with cash flow.
2. They can make even completely unprofitable firms appear to be financially healthy.
3. The numbers are very easy to manipulate.
4. Overlooking cash requirements for growth in accounts receivable is easy to do.
5. Cash requirements for growth in inventories may be missed.
6. The resulting value is not factual when valuing small companies.
7. This method is ineffective for companies without many assets, a small amount of debt, and low amounts of depreciation or amortization schedules.

Cash flow was estimated by using EBITDA to determine whether or not 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 Washington pharmacy experts performing pharmacy business valuations will use EBITDA in WA specialty pharmacy valuations, but only as part of a larger formula when computing values for specialty pharmacies 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 Washington pharmacy acquisitions.

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

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The Washington Pharmacy Industry Roll-Up

By Brad MacLiver
Authorship and profile at Google


The Washington state Pharmacy Industry Roll-Up is where an industry’s many players are consolidated into smaller groups for economic benefits. Industry aspects like recessions or new government regulations that may be stifling profits can end up providing incentives to consolidate.
           
A principal reason for an industry roll-up is to create economies of scale when it comes to purchasing, marketing, information systems, logistics, distribution, and top management. Consolidated businesses also have reduced risk from the impact of unsatisfied customers 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 Washington (WA) pharmacy industry. 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 WA pharmacists - a required key employee.

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

During the Washington pharmacy industry roll-up pharmacies 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 in WA 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 Washington 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 Washington 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 in WA, 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 Washington pharmacy owner through the maze of details will benefit the 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 should be calculated by a company that has in-depth knowledge of the Washington 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 pharmacy industry roll-up in WA.

The aspects of the market which are stimulating the roll-up are also having downward pressure on the pharmacy business valuations. 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 Washington pharmacy industry roll-up will continue.

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Washington pharmacy owners - discover tips and resources about buying, selling, financing, and valuing pharmacies at www.BuyingAndSellingPharmacies.com.
For a free pharmacy business valuation visit www.PharmacyValuations.com and click on either Retail or Specialty.
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Washington 340B Pharmacy Discount Programs

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 various other qualified entities. When these facilities don’t have their own pharmacies they are allowed to contract with a local WA 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 indigent and uninsured populations access to deeply discounted medications. Because the program was enacted to assist specific populations, there are restrictions and regulations as to how the program operates and who the medications can be dispensed to.

Pharmacies can be contracted by a FQHC, or similar 340B qualified entity, to manage and dispense the medications. Patients from these entities provide additional traffic in the Washington pharmacies allowing the WA pharmacies the opportunity for additional front end sales along with the Rx sales.

Pharmacy owners who participate in a 340B pharmacy program must manage their business in a way consistent with customary business practices. Should an audit occur, the pharmacy should have inventory and dispensing records, billing statements, etc. Business records should show that drugs purchased by customers who are under the 340B Drug Pricing Program were not diverted to people who do not belong to the program.

In addition to additional record keeping a pharmacy owner will need employees who understand the various state and federal rules and regulations that govern the 340B program. The pharmacy in Washington 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 Washington 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 Washington pharmacy.

However, when a WA 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 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 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 WA pharmacy in the couple years, it is advisable to discuss the options with the pharmacy industry expert.

Pharmacy Transactions in Washington and Capital Gains Tax

By Brad MacLiver
Authorship and profile at Google


Almost everything you own and use for personal, or business, purposes is a capital asset. When WA 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 Washington 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, 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 have already been required to lower their asking price so pharmacy buyers can qualify for the financing required.  In addition to having lower offers, they are also required to pay a higher percentage in taxes.

This is a dilemma for the pharmacy seller in WA who wants as much money out of the deal as possible. For most who own a pharmacy, their business is the largest asset they will ever own and their retirement and estate plan rely on selling the business at a certain dollar amount.  With the knowledge that they will need to cut out a larger chunk of the proceeds to give to the government, this will cause some pharmacy owners to reconsider their retirement plans.  However, there is good news in that there are financial tools and strategies that allow the pharmacy owner in Washington to proceed with their plans.

One strategy is to utilize Family Foundations.  These are tax exempt/nonprofit organizations that provide tax advantages and control over philanthropic activities. Family foundations are usually private foundations funded by a small number of sources.  They do not hold widespread fund-raising events, but they may receive gifts from friends and other limited sources.  The founder's family members serve as the trustees, directors, and officers. Because they are 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.

Yet another strategy that is currently available to assist the capital gains tax burden is the Charitable Remainder Trust (CRT). CRT’s are legally described as Split Interest Trusts. The term is used because of the blend of philanthropic motivations and personal financial aspects. CRT’s can decrease tax liabilities, increase a business owner financial wealth, and at the same time provide a vehicle for charitable giving.

CRT’s are formed when a person donates assets to this special type of Trust. Assets can be cash, stocks, real estate, etc. The CRT is set up for a set period of time, or until the donor’s (pharmacy owners) death. An individual (WA pharmacy owner or family member) can receive income from the Trust’s assets. Upon the donor’s death the assets go to a designated charity. Part of the income from the Trust can be used to purchase life insurance on the donor. The proceeds of the life insurance go to a designated heir(s) who receive the money without incurring any estate tax liability.

Some tax strategies including the use of CRTs are not widely known. It would be advisable for pharmacy business owners in Washington 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. Firms that have the knowledge and expertise to structure the transaction appropriately, for tax considerations, can save a Washington pharmacy owner large sums of money when a WA pharmacy is sold.

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Buy-Sell Agreements for Pharmacy Owners in Washington

By Brad MacLiver
Authorship and profile at Google


When a WA pharmacy is owned by two or more people the stockholders/partners should have a Buy-Sell Agreement. A buy-sell agreement is a written document that provides the procedures and governs the future sale of the Washington pharmacy business.
                 
Pharmacy buy-sell Agreements are designed to protect the interest of the parties that own the WA pharmacy and direct the actions triggered by a stockholder who leaves the business due to death, disability, divorce, retirement, or dissolution. The buy-sell agreement will govern when and how the shares of the pharmacy business can be transferred or sold. It also provides guidance as to how the Washington pharmacy should be valued along with the the obligations of all remaining shareholders of the pharmacy.

Buy-sell agreements are crucial documents because the different elements of a future sell will be predetermined and won’t require heated dispute or negotiation during a grieving period. It will provide both the family and stockholder with a level of comfort that, when the inevitable time comes for an exit strategy, the process was carefully thought out in advance.

Disadvantages of not having a buy-sell agreement between Washington pharmacy owners is that a disability may leave one partner working more and another not adding to the productivity. In the event of a death, without an agreement, one partner may be left with a nonproductive heir, or a new partner may be inserted that has personality conflicts with the surviving partner. The wrong partner could be devastating for the WA pharmacy business.

There are various types of buy-sell agreements such as: 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 Buy-Sell Agreement in Washington:
1. Stockholders names and the number of shares and voting rights of each. 
2. Guidance for the certified WA 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.
15. Enforceability of the agreement, the binding effects, and arbitration procedures for disputes.
16. Process for dissolution, or liquidation, of the corporation.
17. Maintaining the premises during a transition.
18. Preserving representations and warranties.
19. The terms of transfer.
20. Bill of Sale.

To make certain that the required money is available, buy-sell agreements are typically funded with a life insurance policy. Should the death of one of Washington pharmacy owners occur, the life insurance settlement provides the necessary funds for the remaining pharmacy owner to buy the partner's 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 WA 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 Washington pharmacy industry a valuation firm should have extensive pharmacy experience. 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 in Washington 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.

Some tips regarding Buy-Sell agreements:
1. Buy-Sell Agreements are important, critical documents that should be taken very seriously. Consult a licensed professional during preparation.
2. Documents need to address the proper laws and regulations which can vary from state to state. Seek proper guidance for WA state laws.
3. Insurance premiums that will fund the buy-sell agreement could possibly be deductible.
4. Ensure that the WA pharmacy valuation is performed by an established Washington pharmacy industry expert.