California Pharmacy Owners - Merry Christmas

To all of the pharmacy and drug store owners in California - have a very Merry Christmas.
The coming year be bring new challenges. When you need to make decisions based on realistic information contact us for a free current market pharmacy business valuation.

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Eleven Questions to Consider When You Are Thinking of Selling Your CA Pharmacy Business This Year And 8 Tips When You Have Made the Decision to Sell Your Drug Store

By Brad MacLiver
Authorship & Profile at Google

1. Government regulations continue to be imposed at increasing depths for all businesses. Will increased regulations affect your independently owned pharmacy over the next few years and sour the milk for a future pharmacy buyer?

2. There are a larger number of uncertainties that are coming with the new healthcare reform. How will the changes affect the profitability of your California pharmacy business, and should you sell before any negative affects arrive?

3. New taxes, or cuts in deductions, are going to happen. If changes in the tax code will negatively affect the cash flow of your pharmacy, or the cash flow of your customers, should you sell sooner than later?

4. Pharmacy financing is available for financially sound transactions. However, many potential acquisitions, partner buy-outs, and franchise buy-outs are not completed due to a lack of knowing where to find pharmacy financing for California drug stores. Are you familiar with the lenders who will consider financing your pharmacy transaction?

5. Tax for capital gains is currently at 15%. When the Bush tax cuts expire the rate will move to 20%. There is discussions the rate could be moved to 30%. This could mean as much as $150,000 in additional taxes for a $1 million transaction. Since a pharmacy buyer will not offer a purchase price for the current business value + your increased tax liabilities, should you sell your CA pharmacy before taxes are increased?

6. An optimal employment rate, and insured customers, that would increase demand for pharmacy services will not occur for a number of years. Can you really wait for the economy to fully recover and the demand to increase – before deciding to sell your California pharmacy location?

7. Thousands of baby boomers are retiring each day and many of these have businesses they will be selling. Will an influx of businesses for sale reduce the chances of selling your CA pharmacy at top dollar?

8. Included in the new healthcare act is a new property tax. If you are considering selling your pharmacy business so you can retire, or invest in other opportunities, what is the total effective tax you can pay and still net enough cash out of the business to meet your desires?

9. Many pharmacy buyers, who are not properly financed, will request that you carry part of the financing if they offer to purchase your California pharmacy. Are you familiar with carrying and selling a pharmacy business note?

10. In a good economy you should expect that selling your pharmacy business to take 6-12 months. How long will it take to sell your pharmacy in the current economic conditions?

11. Is selling now, or waiting to see what happens, the best strategy to maximize the purchase price of your CA drug store?

8 Tips for Preparing to Sell Your Pharmacy:

1. Be prepared. It is amazing how many pharmacy owners don’t have their monthly financial statements and other reports up-to-date. Have at least 2 years of tax returns and monthly financial statements, along with 2 years of your monthly prescription reports copied and ready so that a package can be prepared for a qualified pharmacy buyer.

2. Work with a pharmacy valuation company that is an expert in the pharmacy industry, to determine the current value of your business. Don’t use simple valuation formulas that might not realistically present the current value of your CA pharmacy, or the competitive pressures of the geographic area where your drug store is located.

3. A quality pharmacy business broker will also be able to bring in a higher purchase price than you can get by yourself. When you attend to the day to day activities of running the pharmacy business and maintaining profits, while not diluting your time with attempting to broker the business yourself, you should net more money even after paying the pharmacy broker commissions.

4. Since most CA pharmacy acquisitions are financed, if you have received any type of pharmacy financing in the past, reconnect with the lender so that you can direct a pharmacy buyer to a lender that knows your business.

5. You can’t sell your California pharmacy business if the buyer doesn’t have an avenue to finance the transaction. If you don’t have a previous lender to direct a pharmacy buyer toward, start working with finance consultants who have funding sources that have experience in providing business loans in the pharmacy industry.

6. You know “curb appeal” works for selling a home. Make sure your business property, equipment, and work areas provide an appearance that will attract the pharmacy buyer.

7. The various taxes you will be required to pay will have a huge impact on how much you are able to deposit from the purchase price of your pharmacy. Work with a knowledgeable tax advisor to assist in the development of your best tax strategy when considering the impacts and affects in how you structure the transaction.

8. Confidentiality can be a concern when pharmacy sellers don’t want their employees and customers to be in a position where they will fear the coming change. Use a pharmacy business broker that has both Pharmacy Purchase & Sale Agreement experience and contacts with qualified pharmacy buyers. A broker with California pharmacy expertise should be able to bring qualified buyers to the table without running public advertisements.

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 Discover tips and resources for selling, buying, financing, and valuing pharmacies by visiting www.BuyingAndSellingPharmacies.com. For a free pharmacy business valuation visit www.PharmacyValuations.com and click on either Retail or Specialty.

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Financing California Pharmacy Franchises

By Brad MacLiver
Authorship and profile at Google


A pharmacy franchise in CA is a contractual relationship between two parties. One, the Pharmacy Franchisor is the party that developed their drug store business model, branded the pharmacy related products, and produced the system the pharmacy franchisees will operate under. The second party, the Pharmacy Franchisee, purchases a franchise license from the Pharmacy Franchisor, and usually pays an ongoing pharmacy franchise fee, or royalty fees, to use the name, products, systems, trade secrets, etc., created by the Pharmacy Franchisor.

There are a number of options for financing a pharmacy franchise business. All California pharmacy franchise funding sources, for drug stores, prefer lending to a pharmacy franchisee who will be working with a nationally recognized name and long track records. Newer pharmacy franchise models won’t possess these two traits and will be considered more risky.

Traditional Bank Financing used in funding a pharmacy franchise is available when a pharmacy franchise has the track record and pharmacy name recognition. Many of the banks will show interest in this type of funding opportunity. Unfortunately once the bank reviews the loan documents, many of these banks decline the funding request because they don’t understand the security provided for the California pharmacy loan. Community drug stores typically have very little traditional assets to offer as security. Pharmacy lenders will use traditional methods for analyzing the cash flow needed to service to the debt, but they also will need to know about nontraditional collateral that will secure the loan.

As a borrower, even an incorporated one, the personal credit rating of the independent drug store owner will be a factor along with financial statements and tax returns. The amount of actual cash on hand and verification of the down payment's source will be critical factor in qualifying for a pharmacy business loan in California.

CA Pharmacy Franchise Funding Tips:

1. There are several pharmacy franchise financing options available, so pharmacy owners should engage in proper due diligence, then obtain the pharmacy funding that best fits their situation.

2. It is advisable to have an accountant or attorney that is familiar with pharmacy franchise financing to review the California pharmacy business loan documents.

3. There are pharmacy consulting services and franchise associations who can help guide a prospective pharmacy franchisee or borrower or a drug store loan.

4. New pharmacy owners need to make sure their funding request is enough to get the pharmacy running and profitable. Less than ample funding for the initial stages may put the drug store in a position of needing additional funding. Smaller working capital loans that would be in a subordinated position will be more difficult to obtain at a later date.

When pharmacy owners have questions and need information regarding pharmacy franchise business loans, or any types of funding for community drug stores and California pharmacies, they should contact a pharmacy industry specialist who can provide quality answers and sound advice.

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Available Pharmacy Financing Types in California

By Brad MacLiver
Authorship and profile at Google


There are a number of different options available for funding CA pharmacy franchises, specialty pharmacies, and traditional community drug stores.

SBA Financing for Pharmacy Business Loans

The U.S. Small Business Administration (SBA) partially guarantees loans for California pharmacy franchise lenders reducing the risk exposure for the lender. A loan program called 7(a) is a standard for funding 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 pharmacy franchise in California 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 for a loan can range from 5 to 20 years. Interest rates within SBA standards can be adjustable or fixed and they will be negotiated by the lender dependent on the financial strength of the California pharmacy transaction.

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

Patriot Express Business Loan Program

This is yet another SBA loan program that may be used for pharmacy franchise business loans.  It is a loan reserved for military veterans, survivors, active service members, and spouses.  With this loan, the Department of Veterans Affairs would be involved in the pharmacy loan process.

Pharmacy funding from the Patriot Express program can furnish relatively fast approval times, may accept a smaller down payment from the borrower than traditional business loans, and lower credit scores may also be accepted. Patriot Express business loans provide opportunities for lower interest rate pharmacy business loans.

Funding for California Pharmacists Who Are Veterans

There are a few franchise loan programs available for honorably discharged veterans.  These Vet programs may be considered for pharmacy franchise loans.

Pharmacy Financing From the Franchisor in CA

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

Pharmacy franchisors in CA 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 Pharmacy Finance

Not all prospective pharmacy franchise owners in California 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. Since the 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 California pharmacy franchise. The retirement plan can purchase stock in the 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 pharmacy in California crashes, so does the retirement fund. The method of providing less expensive financing for the CA 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. 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

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 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 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 CA 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 pharmacy is requesting. To assist the successful funding process a pharmacy owner in California is advised to use a CA pharmacy industry specialist to capitalize on the funding opportunities that are available.

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Financial Discount Rates for Pharmacy Cash Flow Instruments in California

By Brad MacLiver
Authorship and profile at Google


When a CA pharmacy is considering selling a cash flow instrument such as the pharmacy’s receivables, or a pharmacy business note, the price the California 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 CO 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 California pharmacy owner 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 makes the assumption that money earns interest over time. Time is money, as the old saying goes, which means that we can compare money at different points in time with different values and call them equal.

For example, if $10.00 today earns 10% interest, it will be worth $11.00 at the same time next year.  So, $10.00 today = $11.00 next year = $27.00 ten years from today.

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.

Along with interest rates and principal amounts, a cash flow instruments such as Pharmacy Business Notes, are originated with a certain time period. The TVM can be looked at, as if it were on a sliding scale. The earlier in time the Note is paid off, the smaller the amount 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 $10.00 with 6% interest, equal payments received over a 12 year period, you would expect to receive $20.12. However, should the note be paid in full in 4 years you will only have collected $12.62. You are not collecting the other $7.50 because you are no longer risking anything (you are not earning it). If you want an investor to advance you the $20.12, 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 California pharmacy’s accounts receivables.


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Is it Worth Selling a California Pharmacy Note at a Discount?

By Brad MacLiver
Authorship and profile at Google


When a CA pharmacy acquisition has been accomplished by using the private financing method of a pharmacy business note, the holder of the California 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 California Pharmacy Note Investor (the note buyer).

Most pharmacy business note sellers 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 California 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 motivations are there for selling the pharmacy note in California and what are the desired goals? Is reducing any exposure to risk something worth considering? Is there financial incentive to pay off debt? Do you need to free up capital for a new venture? Do you have dreams of exotic vacations or world travel that could be accomplished with a lump sum of cash? Is it important to accomplish these goals? If you don’t have the lump sum of cash to achieve your goals, what are the opportunity costs?  Do you want to invest in something that pays a higher return? Determine investment and family priorities.

2. What is the Current Fair Market Value of the 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 CA independent drug store 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 pharmacy note in California?

4. A 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 California pharmacy buyer may not run the business as efficiently as you have, sales drop, and the pharmacy business buyer cannot meet the payment obligations. Incompetency could lead to late payments, missed payments, or bankruptcy.

2. CA 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 California pharmacy competition either building in the neighborhood or through mail order.

4. Loan to Value - When originating a CA pharmacy business note you may be creating financing where there is a “negative loan to value.” Example: the pharmacy business note is for $300,000, but there is only $100,000 of tangible assets for collateral.

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

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Using Business Notes in California for Financing a Pharmacy Acquisition

By Brad MacLiver
Authorship and profile at Google


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

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

4. Selling either a portion, or the entire California pharmacy business note, frees up capital that can be used for new ventures, or paying off old debt.

5. When pharmacy business notes are created and sold, transactions can be structured that allows the pharmacy business seller the biggest advantage in achieving the seller’s goals with the proper professional guidance.

The terms and interest rate are agreed upon and set between the seller and buyer of the business when originating a California pharmacy business note. The seller of the business will accept the promissory note, which is secured by the business.  This includes any inventory or equipment that belongs to the business. The pharmacy business seller sells the note to an Investor that is willing to hold the pharmacy note for compensation. Since Investors cannot go back to the pharmacy business buyer later and adjust the terms of their purchase agreement, the note seller must discount the note, which compensates the Investor from the difference of what the note was originated for and the discounted price paid for the pharmacy business note in CA.

Tips:

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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