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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Estate Planning for California drug store owners

By Brad MacLiver
Authorship and profile at Google


With the current market many California drug store owners are experiencing lower profit margins, and have considered selling. A drug store industry roll-up has been going for years, consolidating the drug store seller's customer traffic into fewer drug store locations. There are however a number of pharmacies that are not in a geographical location with other nearby pharmacies, such consolidation can not take place. Some California drug store and drug store owners, despite their location or what is happening in the industry, has taken a stand and will not consider selling. But like paying taxes, an exit of the company is ultimately inevitable.

Estate Planning is a subject that many people, in all industries, timid. The California drug store owner who works 6 days a week, taking very few vacations, fill scripts all day, then mops the floor and makes the books at night, it usually is not much time to consider additional things like estate planning. But, knowing that it will be a transfer of business, it is critical for drug store owners to consider a proper succession plan for the drug store business.

Develop a plan to transfer operations will be time consuming, but done correctly allows the company to be successfully transferred in an acceptable manner. An estate plan for a drug store owner need not be immutable process. Fine-tuning, updating, and changes recommended by government regulation, economic conditions and personal expectations change.

Estate planning allows a drug store owner to anticipate and provide for the transfer of the store. The plan will be formatted in an attempt to eliminate uncertainty, to assist the transfer by trimming costs and cutting taxes.

Process may involve Trusts, wills, living wills, Power of Attorney, Medical Power of Attorney, Business Valuation, Life Insurance, a charitable remainder Trusts, Buy-Sell Agreements and other legal documents. All aspects of estate planning for the drug store owners coordinated guidelines.

If there are non-family members as partners in the drug store business, it is critical that estate planning include a Purchase-Sale Agreement. A buy-sell agreement, governs the transfer of business between the drug store partners. The agreement may also be known as a partner buyout agreement, or a company wants. To protect the family in the event of death of a partner, buy-sell agreement funded with life insurance.

Estate planning, buy-sell agreements, and transfer of the drug store to a drug store valuation completed by a third party expertise in the pharmaceutical industry to take a large number of pharmaceutical companies perform annual appraisals, and the current industry data as a basis for conclusions. Using simple accounting formulas, multipliers, and valuator inexperienced in pharmacies will not provide an accurate business valuation.

Most drug store owners spend a large part of their lives to build the business. The effort should not disappear because the drug store owner refuses to accept their mortality, and plan accordingly. The only pharmacist in a small town may be drug store's owner. If the script can not be filled by a licensed pharmacist since the law the client files must be transferred to another drug store. Because of this, a drug store business value fall to a negligible figure in just a few days after the death of the owner. Contingencies outlined in an estate plan should address this issue. Unfortunately, due to not having an effective plan in place, each year a number of drug store owners die and their families are left with an asset with very little value.

Tips:

1. When the family drug store is the only means of income for many families it becomes more critical to have a set plan in place.

2. To avoid disputes should estate plans should be developed with clear directives.

3. Minimize tax liabilities is an critical goal for most people to complete an estate plan should be an expert tax advice should be sought.

4 Many online documents and books are available that provide advice and documents to develop an estate plan. When you go to self-help route, it is advisable to have a paid expert review the completed documentation to ensure that it can be legally respected when the time comes.

5. While developing the farm plan, it is critical to talk with children and other family members of the drug store market owner especially if there are any family members who work in business and others do not.

Pharmacy Transactions in California and Capital Gains Tax

By Brad MacLiver
Authorship and profile at Google


Virtually everything you own or use for personal of business purposes is a capital asset of some kind.  When a pharmacy owner in California sells a capital asset, the difference in the amount they sell it for and the amount they initially paid for it (known as the basis) is a capital gain or loss.

To alleviate the capital gains tax burden in California, one possible strategy out of many is to use a Charitable Remainder Trust (CRT).  CRT's are legally regarded as Split Interest Trusts, which is a term used to specify a blend of philanthropic motivations as well as personal financial aspects.  CRT's can increase a business owner's financial wealth, decrease some tax liabilities, and also 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 (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.

CRT’s are a tax-planning tool and professional financial planners are using CRT’s to maximize their clients’ financial position, and at the same time increasing charitable donations.

Either third party appraisals or pharmacy business valuations must be performed in order to determine the asset or California business' value.  For charitable deductions, the donated value is limited to the asset's cost basis and not its current fair market value.  As a concept, CRT's are very straight-forward, but strict, complex tax rules decide how and when CRT's can be set up.

As a tool for reducing capital gain taxes, CRT’s are often used when a business, or other highly appreciated asset, is going to be sold. In accordance to the IRS codes, assets must be transferred to the CRT before there is any obligation to sale the asset. Since CRT’s are irrevocable trusts, the assets cannot be taken back out of the CRT once donated. An owner of an asset, whose sole purpose it to attempt to reduce capital gain taxes on the sale of an asset, must be warned that if after the transfer of the asset to the CRT, and the sale of the asset does not happen for any reason, the asset cannot be returned. Strict, complex, and specific procedures must be followed in order to take advantage of the CRT benefits in California. Only someone who has advanced knowledge in these matters should be retained to guide the donor through the process of setting up a CRT.

To qualify as a CRT in California the trust must meet all the requirements set forth in the Internal Revenue Code 664, and must, from its creation, in every respect meet the definition of, and function exclusively as a CRT. The requirements cannot be met unless each transfer to the trust qualifies in itself as a charitable deduction under the Internal Revenue Codes.

There are issues that may affect the status of the assets ability to be donated to a CRT. Non-qualifying assets may reverse the benefits of the CRT causing the CRT to lose its tax-exempt status.

When the CRT ends at its designated time period, or with the death of the donor, the remaining assets in the Trust will pass to the charitable organization. The designated charity can be any legally formed tax-exempt organization including a family foundation.

As tax rates increase more California business owners will use tools such as the CRT to legally put more money in their pocket instead of the governments. Business owners selling a large asset, or their company, typically use the money to invest in other assets whether it is new equipment or real estate, business or personal.

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.  Use a company that has extensive experience in California pharmacy and drug store acquisitions. Knowledgeable pharmacy consulting firms who have the knowledge and expertise to structure the transaction appropriately, for tax considerations, can save a pharmacy owner large sums of money when a pharmacy is sold.

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Buy-Sell Agreement for California Pharmacy owners

By Brad MacLiver
Authorship and profile at Google


When a California pharmacy is owned by two or more shareholders partners should have a Purchase-Sale Agreement. A buy-sell agreement is a written document that contains procedures and controls the future sale of the California pharmacy business.

Pharmaceuticals buy-sell agreements look after the interest of the parties who own pharmacy and control the actions triggered by a shareholder to leave the business because of death, disability, divorce, dissolution, or retirement. Agreement will control how and when the shares of the pharmacy business is sold or transferred. It will also provide guidance on how the pharmacy will be evaluated together with the obligations of the remaining shareholders in the California pharmacy.

Buy-sell agreements are important because the various elements of a future sell is predetermined, and does not need to be negotiated during a heated conflict, or during a grieving period. It offers both the shareholder and the family a comfort level that when the inevitable time comes for an exit strategy that the process was carefully considered in advance.

Disadvantages of not having a buy-sell agreement between California pharmacy owners is that a disability can leave a partner who works more and another does not add to productivity. In the event of a death, without an agreement, one party will have a nonproductive heir, or a new partner can be inserted that has personality conflicts with the surviving partner. The wrong partner can be debilitating for the pharmacy business.

There are various types of buy-sell agreements: Entity Buy-Sell Agreement, Cross-Purchase Buy-Sell Agreement, wait and see Buy-Sell Agreement, Disability Buy-Sell Agreement. Buy-sale agreements are also known as a company will or a buyout agreement.

Possible elements of a buy-sell agreement:

1. Shareholders name and number of shares and voting rights of each.

2 Guide for certified pharmacy valuation and purchase of shares a shareholder.

3 Mutual covenants and considerations.

4. Restrictions on the transfer, purchase or encumber the company stock.

5. Protocol in case of a shareholder's divorce or termination of a shareholders' agreement of employment.

6. Obligation to purchase   sale of shares from an estate.

7 Purchase of insurance to ensure the ability to meet obligations.

8. Purchase of shares paid in lump sum or in installments.

9 Remedies for breach of contract or non-payment.

10 Until the transfer is complete, the right to inspect books and records.

11. Amendments and notices of promotions or legal issues.

12. Enforcement of the agreement, the binding effects and arbitration procedures for disputes.

13. Process for the dissolution or liquidation of the company.

14 Maintenance of the property for a transitional period.

15. Preserve the representations and warranties.

16 The conditions for transfer.

17. Bill of Sale

To ensure that the necessary funds available, buy-sell agreements are often funded with life insurance. If the death of one of the California pharmacy owners occurs, the life insurance settlement provides funding for the remainder of the pharmacy owner to buyout partners share of the estate.

Life insurance for each partner must be in place, because without a way to gain purchase of the pharmacy's share buy-sell agreement will not be functional. As the business grows and develops how much insurance must be adapted to provide adequate coverage. Without insurance, the surviving shareholders may not have enough money to buy the required amount of the estate to meet - leaving the survivor with an unwanted partner.

To have adequate insurance coverage and to determine the details of the buy-out terms, is a certified pharmacy business valuation necessary. There are a large number of companies offering business valuations. Because of the dynamics and the current market of the pharmacy industry, a valuation firm should have extensive pharmacy experience. Accounting Simple formulas and multipliers will be adequate or realistic valuation does not provide for a pharmacy business.

Pharmacy buy-sell agreements are highly important documents that must be completed with care and seriousness. Even with a long term partnership, it's just too late to create a buy-sell agreement, when an event has already happened that would require the document.

Tips:

1. Buy-sell agreements are important documents that should not be taken lightly. Consult a licensed professional.

2. Documents must take the appropriate laws and regulations that vary from state to state. Search the right guidance.

3. Premiums for insurance that the buy-sell agreement, the Fund will be deductible.

4. Ensure that the pharmacy valuation performed by an established pharmaceutical industry expert.