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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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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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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