Should a Broker be Used in Maryland When Buying Pharmacies

By Brad MacLiver
Authorship and profile at Google


When deciding between using a MD pharmacy broker, or pursuing the acquisition of a pharmacy in Maryland 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 Maryland 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 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 Maryland pharmacies will save a pharmacy buyer 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 MD 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 pharmacy buyer in Maryland requires, is the pharmacy seller both cooperative with the buyer and knowledgeable about the transaction process?

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

After a pharmacy has met the buyer’s preliminary requirements, a current market pharmacy business valuation based on a sound financial and market analysis, and not just a simple accounting or multiple formula, needs to be completed to verify the current value of the pharmacy. In today’s market, Maryland 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 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 MD 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 pharmacy industry expert is involved in the transaction. A pharmacy broker in Maryland 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 Maryland pharmacy acquisition. A broker who works solely in the pharmacy industry will have sources of funding who understand the industry and will fund pharmacy acquisitions.

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

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

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Using Tax Strategies When Selling a Maryland Pharmacy

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. MD pharmacy buyers participate in the pharmacy industry roll-up to achieve economies of scale in purchasing, marketing, information systems, logistics, distribution, and top management. Maryland 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 Maryland pharmacy it is considered a capital asset. The difference in money between the amount an asset is sold for and the amount spent to either purchase or start it is known as a capital gain or a capital loss. All capital gains in the United States must be reported and the appropriate tax paid.

Specific tax strategies can be used to help offset the tax liabilities when selling a 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 Maryland pharmacy owner.

Many Business Brokers, CPA’s, attorneys, and other professional advisors inform their clients that selling a pharmacy will result in tax consequences. However, most of these professionals do not handle the buying and selling of Maryland pharmacies on a daily basis and may not realize the different aspects of structuring a 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 MD 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 MD 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 Maryland pharmacy seller is nearing a retirement age, or will be working as a pharmacist for another company, instead of being an owner, then estate planning should also be considered.

As reimbursements are cut, more regulations are applied, and pharmacy profits continue to slip, more independent pharmacy owners along with small and regional Maryland pharmacy chains will be considering selling their pharmacies and drug stores. Tax considerations should be a paramount part of the decision process.

MD pharmacy owners should consult with a pharmacy industry expert for advice on structuring the sale of their pharmacy. Someone with extensive experience in Maryland 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 Maryland pharmacy owners when a pharmacy is sold.

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

EBITDA is calculated by:
I. Calculating net income by obtaining total income and subtract total expenses.
II. Determining the total amount of taxes paid to federal, state, and local governments.
III. Computing interest fees paid to companies or individuals for the use of credit, or capital.
IV. Establishing the cost of depreciation.  Depreciation is the expense recorded to allocate a tangible asset's cost over its useful life).
V. Determining the cost of amortization.  Amortization is the expense for consumption of the value of intangible assets like as goodwill, patents, and copyrights over either a specific period of time or the asset's expected life.
VI. Add #1 through #5.

EBITDA calculation example:
I. Net Income              1,900
II. + Taxes paid             560
III. + Interest Expenses     380
IV. + Depreciation           195
V. + Amortization             98
VI. = EBITDA               3,133

Hindering Aspects of EBITDA:
I. Can be misleading number when it is confused with cash flow.
II. Can make even completely unprofitable firms appear to be financially healthy.
III. Numbers are easy to manipulate.
IV. Can overlook cash requirements for growth in accounts receivable.
V. Can miss cash requirements for growth in inventories.
VI. Not factual when valuing small companies.
VII. Not effective for companies with few assets, small amounts of debt, or low depreciation or amortization schedules.

EBITDA has been used in leveraged buyouts to calculate whether 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 pharmacy specialists performing Maryland pharmacy business valuations will use EBITDA in 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 Maryland pharmacy acquisitions.

The EBITDA number for a specific existing pharmacy in MD is important, for the most part, when the existing ownership is establishing their store value for the purpose of a line of credit, borrowing, creating a Trust, stock values, etc., but EBITDA does not have the same importance when selling a pharmacy. This is due to the fact the buyer will not have the same expenses as the seller.

Buyers 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 Maryland pharmacy. Instead of the EBITDA number, pharmacy buyers in MD should be focusing on sales, gross profit, cash flow, and customer mix.

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Pharmacy Acquisitions and Maryland Bridge Loans

By Brad MacLiver
Authorship and profile at Google


With the changes in the MD pharmacy industry independent drug store owners, small and regional pharmacy chains, and Maryland pharmacy equity investment groups are acquiring pharmacies to obtain a larger competitive footprint in a geographic area. During the business expansion's acquisition phase, opportunities that require action faster than the traditional funding process may present themselves.

Bridge Loans are an option for short-term financing which can be used while waiting for permanent financing, or used while the next stage of financing to be obtained. Bridge loans provide funding that "bridges" the gap between a company’s current financial needs and their long term requirements.  Permanent financing is generally used to "take out," or pay back, the bridge loan.

One of the characteristics of a bridge loan is that they can close quickly, which in turn allows a company to capitalize on a timely business opportunity, or acquisition. The quick access to money can also allow a business the chance to avoid penalties, bankruptcy, or other temporary problems. If longer term issues need to be dealt with, this “transitional financing” provides the company time until longer term financing can be secured.

Another characteristic of bridge loans is that the process usually requires less documentation than conventional financing. Bridge loan lenders don’t usually have the same government regulations to adhere to, so they tend to have more flexibility in their lending criteria and the documentation they require. However, less documentation does not mean they won’t perform due diligence to have a comfort level with the transaction before they fund.

Examples of using Bridge Loans in Pharmacy Transactions in Maryland:

1. An independent MD pharmacy owner learns of health issues and decides to quickly sell the family owned pharmacy to an employee or local competitor. Traditional financing for the pharmacy buyer may require a time line that is not acceptable when considering the circumstances. A bridge loan can be used to quickly accomplish the transaction.

2. A small pharmacy chain in Maryland needs $1 million to expand their business. They have 3 new equity investors who will be investing in the firm over the next 6 months, but at different intervals. However, the business has opportunities which require action sooner than 6 months. The quick closing bridge loan allows the pharmacy chain access to the needed funds so they can complete their expansion and increase profits. Money from the 3 new equity investors will pay off the bridge loan.

3. A pharmacy owner in a leased location has an opportunity to quickly acquire a commercial property that would be a great MD pharmacy location, but the property is in disrepair. A bridge loan provides the needed funds to acquire and rehab of the property and once that is complete conventional long term financing can be obtained.

4. A pharmacy group developing new Maryland pharmacy locations can receive bridge loan funding to get through the permitting process of a project when conventional financing isn’t available at this early stage due to there is still too much risk. A bridge loan allows the project to move into the construction phase and then qualify for other forms of financing.

5. When a Maryland pharmacy is owned by two or more partners and one of the partners is ready to exit the business, a bridge loan can help ensure the cash flow and uninterrupted operation of the business during the partner buyout.

6. Real estate, or equipment bought at auction may have a narrow window for closing the deal and timing of traditional financing would keep the buyer from proceeding with the opportunity. Benefits of a bridge loan will permit the pharmacy owner in Maryland to quickly respond to the opportunity.

When there are business opportunities, buying MD pharmacies, selling pharmacies, quick deadlines, an old loan maturing before a new loan can be put in place, funding needs during the permit, planning, or evaluating stages, etc., bridge loans can be an essential financial tool.

Tips regarding Maryland pharmacy bridge loans:                        

1. Bridge loans are quick to obtain, but quick to expire.

2. A bridge loan is similar to a hard money loan and the terms are often used interchangeably in conversations. Both are short-term, higher interest rate, non-standard loans, but in some circles hard money refers to the lending source and a bridge loan refers to the duration of the loan.

3. Because bridge loans usually come with higher interest rates than traditional financing a larger down payment, meaning a lower Loan to Value (LTV) and a lower level of risk and provides an opportunity for lower interest rates.

4. Due to the shorter time period of bridge loans, borrowers should keep in mind that fees for valuations, legal, dues diligence, etc., will be amortized over a shorter period of time when compared to traditional financing transactions.

Take note that the types of deals that require a bridge loan may be considered speculative or high-risk in nature. This in turns means that many banks do not offer bridge loans. Banks are required to meet government regulations as well as justify their lending practices. Bridge loans, which are riskier, usually do not fall within the lending parameters of many banks, so a majority of the bridge loans will originate from private investment firms. It is best to consult with a company who has access to a number of funding sources who provide bridge loans.

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Acceleration Clauses for Pharmacy Business Loans and Commercial Leases in Maryland

By Brad MacLiver
Authorship and profile at Google


A provision of many MD pharmacy business loans and commercial leases is an acceleration clause. The acceleration clause in the loan/lease agreements allows the lender to accelerate their collection of payments contingent on an event occurring. These events may include lack of payment by the borrower, failure to keep the property adequately insured, failing to pay tax assessments, not maintaining the property, selling the property/asset, etc.

Lenders view the acceleration clause as an important tool in their business loan and commercial lease programs. Loan and lease documents might not specifically address the foreclosure of a property, or repossession of an asset, but this is where the acceleration clause comes into effect. Without the clause the lender would only be able to foreclose on one missed payment at a time. With the acceleration clause, despite whatever event kicks the clause into gear, the lender can demand immediate and full payment of all remaining balances and fees.

The pharmacy business loan or lease documents provided to the pharmacy owner in Maryland will describe the rights, conditions, and obligations relevant to the acceleration clause. When the pharmacy owner (the borrower) doesn’t meet their obligations then the loan or lease goes into default. A payment that is even one day late can cause a default. Due to this, Maryland pharmacy business loans and commercial lease documents should be thoroughly read and understood before signing.

Tips:
1. If a MD pharmacy’s slowing cash flow is going to cause a business loan default, but the pharmacy owner has additional unencumbered assets they may be able to negotiate with the lender by offering additional collateral.

2. If a pharmacy can catch up on their payments they can reinstate the business loan before the acceleration starts.

3. States have different rules requiring notification of an acceleration clause being exercised. Maryland Pharmacy owners should understand the laws in the state where they operate. Lack of knowledge is not an excuse.
                                 
4. When an acceleration clause is exercised on a commercial lease, there is the possibility the landlord cannot collect rent from both the defaulting tenant and a new tenant at the same time. To save themselves some money, pharmacy owners should help the process by assisting the landlord re-lease the property. However, take note that should the MD pharmacy be in the process of being sold and the files and inventory moved to a competitor’s location, the pharmacy buyer will then require restrictions in the Purchase and Sale Agreement that states the new tenant cannot be another pharmacy in Maryland.

5. Lenders tend to prefer not to have to go through the foreclosure process, so if it looks like your pharmacy is headed in that direction, start talking with the lender to find a solution. Communication with the lender is always positive.

6. Some of the pharmacy business loans and commercial leases require a “personal” guarantee from the business owner, which means that the business owner’s personal assets and credit then become involved in the event of a default. The corporate status of the business does not keep the lender from seizing the personal assets.

When considering financing a pharmacy in Maryland for acquisition, or expansion, due diligence and understanding of all aspects of the transaction should be considered. Using the services of a pharmacy industry expert to guide a MD pharmacy owner through the maze of details will benefit the pharmacy owner in making the best business decision.

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Maryland Pharmacy Acquisition Finance

By Brad MacLiver
Authorship and profile at Google


When a MD pharmacy or drug store is being sold, seldom does the buyer pay “out of pocket” cash for the acquisition. Even when cash is available, pharmacy acquisition strategies usually involve financing the transaction.

Typical acquisitions take 6-9 months to complete, so the Maryland pharmacy seller will need the buyer to provide some proof up front about their ability to close the transaction. Acquisitions will involve many hours of due diligence and negotiation, so the process should involve qualified parties.

Along with the buyer and seller the acquisition will involve attorneys, accountants, lenders, valuation companies, industry specialists, along with others. No one wants to pursue 6-9 months of work involving a variety of highly paid professionals without having some confidence of the pharmacy buyer’s ability to close the deal.

The process will begin with determining the value of the business. There are many companies that offer valuation services. However, pharmacies are not ice cream stores. There are many aspects of valuing a pharmacy in MD that are unique to the industry, so generic valuations or simple accounting formulas should not be used. An industry specialist should be used for valuing the pharmacies instead of a valuation company that has a broader spectrum.

In order to complete a valuation the selling company needs to provide up-to-date data. Lenders will not accept old data, or a sellers “gut feeling.” Lenders need to make a decision to finance based on sound and verifiable information.                

Structuring the transaction is extremely important. The seller of course wants as much money as possible and wants cash. The buyer needs to spread out the debt service and wants to have as little cash as possible invested in the acquisition.

Pharmacies in MD and drug stores are in an industry where it is more difficult to obtain business loan due to the majority of the value in a pharmacy is the customer files and not hard assets. Therefore, for the acquisition to be financed a lender will need a strong understanding of the industry and what, beyond the collateralized assets, the company offers to reduce the perceived risk.

Maryland Pharmacies have typically been known for generating profits and to be stable businesses. However, they are usually in leased locations, and their furniture, fixtures, and computers will only provide $15-20,000 of collateral for a buyer possibly requesting a million dollar loan. A lot of money is tied up in inventory, but the small pills are considered by a lender to easy to move out the door in the event of default. Due to these circumstances many lenders will not loan money to these traditional money making businesses. A successful transaction takes a lender that understands the pharmacy industry.

Advice regarding MD pharmacy acquisitions and finance:

1. Attorneys and CPAs who have been representing the Maryland pharmacy seller for many years may see the transaction as potentially losing their client when the business is sold. Check to see if they are working diligently on the transaction instead of slowing, at worst, or undermining the process

2. Since pharmacy acquisitions in MD take roughly 6-9 months of work to complete, each party involved should follow a time table because items of importance will much too often end up sitting on the desk of someone that is outside of the control of the buyer or seller.

3. It is essential that all financial information be current. Data supplied to both the buyer and the lender will need to be updated on a continuous basis over the lengthy process. In the course of a nine month period, things can change drastically, which means the Maryland pharmacy seller will need to continually prove the financial condition of the company.

For the best odds of success when pursuing “pharmacy acquisition finance,” make sure the valuation company and the lender have expertise in that industry. Choose a company that has the MD pharmacy experience and expertise, and is a direct correspondent with lenders who understand pharmacy.

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Current Market Conditions: Maryland Pharmacy Industry

By Brad MacLiver
Authorship and profile at Google


Currently there are a number of factors that are impacting the current market conditions of the U.S. pharmacy industry. These factors are affecting the pharmacy business valuations of pharmacies in MD and drug stores all across the U.S.

Local demographics:

The valuation process also includes local market conditions and local demographics. Smaller communities have less growth potential and with the declining profits a buyer will need to purchase at a lower value because they will have to service the debt from a business loan and still try to make a living. The same is true for communities that have lost population due to economic conditions, or have a high rate of unemployment. Fewer people, or fewer customers with the ability to purchase, will mean fewer sales and less chance of any substantial improvement in the near term. This results in a lower pharmacy business value.

Maryland Pharmacists Shortage:

Pharmacies in Maryland and across the country have had difficulties in finding pharmacists.  This shortage not only affects employee opportunities but it also affects the number of potential independent buyers. 

Reduced Buyers:

There is also a reduced number of corporate buyers. Some of the largest pharmacy chains in Maryland have been both purchased and consolidated into the pharmacy industry roll-up, and many smaller chains have run into financial difficulties and have thus stopped their expansion. It is much harder to drive a pharmacy price higher when there are fewer willing, or capable, to purchase.

Current Market Conditions Necessitate Industry Roll-up:

The consolidation of the pharmacy industry is necessary in order to get additional traffic into a single store.  Simple economics states that whenever any business has a reduction in profits, they are less attractive to a buyer.  Pharmacy business values will then drop. There are many factors contributing to the downward pressure of pharmacy values and there is not any expectation of a turn around. Pharmacy owners should not be fooled by inexperienced Brokers claiming grand outcomes and over stating Maryland pharmacy business values not based on realistic market conditions.

With the consolidation of the MD pharmacy industry that has been happening for several years, many new brokers have entered the market to broker pharmacy acquisitions. Most brokers do not have pharmacy related experience, nor do they use current market conditions when they value a pharmacy. Most are using simple accounting formulas that hold no sound reasoning for the value when faced with current pharmacy market conditions. Due to this many brokers are valuing pharmacies 2 to 3 times more than what the market is really willing to pay. Any inexperienced person can quote a high value to capture a listing.  However, that does not mean the over inflated asking price is what the business will actually sell for.

Mail Order:

Some insurance companies are designating a noticeable amount of pharmacy patients as “long-term medications” and require they only purchase the medications from mail order pharmacy companies who provide products at lower prices. This results in local pharmacies not only missing out on prescription sales, but front-end sales will also decline since the customer is not entering the store. Pharmacy mail order sales have now surpassed sales from independent retail pharmacies in Maryland.

Choose a firm that provides pharmacy business valuations based on real market conditions and does not use a simple formula for calculating the value of a Maryland pharmacy. Complex methods are used to derive the value of a pharmacy.

It is best to use a company that specializes in pharmacy and has extensive and current industry data.  Choose pharmacy specialists who have been working in the MD pharmacy industry long enough to have extensive pharmacy experience and an excellent reputation.  A company with good credentials possesses large amounts of national data.  The largest financial institutions, national chain pharmacies, regional pharmacy chains, independently owned drug stores, and pharmacy equity investment groups use the services of companies fitting this description.

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Using Multiples for Pharmacy Business Valuations in Maryland

By Brad MacLiver
Authorship and profile at Google


Anyone who has purchased a residence should be familiar with real estate appraisals. With a MD pharmacy business there are times when both the real estate the business itself needs to be appraised. The Maryland pharmacy business appraisal does not include the real estate and is more commonly called a Pharmacy Business Valuation.

MD Pharmacy Business Valuations are part of the due diligence that will be conducted when there is a possible acquisition of the pharmacy business, or it is necessary to have pharmacy financing. Pharmacy Business Valuations set a reasonable market value on the drug store after various factors have been considered, such as (but not limited to): assets, financial statements, tax returns, goodwill, customer lists, licensing, competitive advantages, regulatory concerns, management team, inventories, and industry comparisons.

There are a number of acceptable methods when valuing a retail drug store business and each method has its own advantages.  The business owner should have a decent understanding of the method being used.

One simple method involves using “multipliers”. This is when net profit, gross sales, or some other figure from the financial statements are multiplied that number by 3, 5, 7 times or whatever the case may necessitate. However, if using such simple methods such as multipliers it is important to understand a few points:

1. Financial statements are typically prepared to justify the lowest possible taxes.

2. Stated profits are not usually the actual cash flow of the company.

3. Due to tax reasons company assets probably have a different value than what is on the books.

Understanding the above points, you can understand that a simple pharmacy valuation in Maryland based on multiples may not reflect the true market value of the drug store.

When financing is involved simple multiplier methods will not be acceptable. Banks and finance companies will require a third party unbiased pharmacy valuation completed using advanced calculations, knowledge of the industry, and sound financial reasoning.

When a company specializes in a specific industry, that company will be able to offer a more precise and credible valuation. Specialists usually have more industry data than someone who does not normally value businesses in that industry. The results of not having the proper industry data will result in a more ambiguous valuation.

Due to the aging population sales are increasing as the older generations are purchasing more prescriptions. However at the same time, government and insurance reimbursements have been drastically reduced causing a major decline in nets profits for the Maryland pharmacy industry. Lower profits means it is harder for the business to service debt. That in turn means it is harder to obtain funding, and when there is funding it will be in lower amounts. Someone who is not a MD pharmacy specialist and used a gross sales multiplier would be way off in their calculation compared to other pharmacy valuations. A banker that sees valuations that are not within realistic industry comparisons is not going to fund the deal and fees paid for the business valuation will have been wasted.

When it is necessary to have a pharmacy business valuation completed, it is strongly advised to pay more for a specialist that can provide a banker realistic and current information. Don’t try and save a few bucks by cutting corners, and then end up wasting time, money, and possibly even ruin a chance of obtaining funding that either the Maryland pharmacy business owner, or pharmacy buyer was seeking.

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Maryland 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 other qualified entities. When these facilities do not have their own pharmacies, they are allowed to contract with a local MD 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. Since the program was enacted to assist certain populations there are restrictions and regulations in how the program operates and who the medications can be dispensed to.

Maryland 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 pharmacies allowing the pharmacies the opportunity for additional front end sales along with the Rx sales.

Pharmacy owners participating in a 340B pharmacy program need to manage their business consistent with customary business practices. In the event of an audit the pharmacy should have dispensing and inventory records, billing statements, etc. Business records should show that drugs purchased by customers, under the 340B Drug Pricing Program, were not diverted to people who are not part of the program.

Along with the additional record keeping a Maryland pharmacy owner will need employees who understand the various state and federal rules and regulations, which govern the 340B program. The pharmacy in Maryland 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 for separating inventory is required because drug inventory used for the 340B pharmacy program is owned by the entity that contracted the pharmacy. Since the pharmacy does not "own" the 340B inventory, this inventory will be treated differently for tax purposes.  Instead of a mark-up or profit margin on the inventory, the pharmacy generates income from dispensing fees they are paid.

Because customers who participate in 340B programs can only purchase the designated medications from a Maryland pharmacy contracted with a 340B entity, this lets a pharmacy to have a market niche. A contracted pharmacy that services 340B customers benefits 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 pharmacy in Maryland.

However, when a pharmacy owner in MD 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 Maryland 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 MD pharmacy owner is considering the benefits of participating in a 340B program, or is considering selling the pharmacy in the couple years, it is advisable to discuss the options with the pharmacy industry expert.

 

Maryland Pharmacy Transactions 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 MD 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 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 Maryland pharmacy acquisitions, they usually do not know these federal regulations that allow for reducing the tax liability for the Maryland pharmacy owner.

During this period of history where it is more difficult to finance a business, MD pharmacy sellers may already be required to lower their asking price, so a pharmacy buyer can qualify for the financing required. On top of the lower offers they will be required to pay higher percentages in taxes.

This is a dilemma for the pharmacy seller who wants as much money out of the deal as possible. For most pharmacy owners their business is the largest asset they will ever own and selling the business at a certain dollar amount has been part of their retirement and estate planning. Knowing they will need to cut out a larger chunk of the proceeds to give to the government will cause some pharmacy owners to reconsider their retirement plans. The good news is there are financial tools and strategies that allow the pharmacy owner in Maryland to proceed with their plans.

Family Foundations are tax exempt/nonprofit organizations, which provide tax advantages and control over philanthropic activities. Family foundations are typically private foundations that are funded by a small number of sources, and do not conduct widespread fund-raising activities. They may receive gifts from friends and limited sources. Family members serve as trustees, directors, and officers. As private foundations they can make grants, or donations to other organizations. Creating a Family Foundation provides a variety of benefits, including income tax deductions, exemptions from gift and estate taxes, and the reduction or elimination of other taxes.

Another strategy that is currently available to assist with the burden of capital gains tax is the Charitable Remainder Trust (CRT). These are legally described as Split Interest Trusts, a term that is used due to the blend of philanthropic motivations and personal financial aspects. CRT’s are capable of decreasing tax liabilities, increasing a business owner financial wealth, and simultaneously provide for a vehicle give to charity.

CRT’s are created when a person donates assets into this unique type of Trust. These assets can be stocks, cash, 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.

Some tax strategies including the use of CRTs are not widely known. It would be advisable for MD pharmacy business owners 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 in Maryland. Firms that 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 in MD is sold.

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Buy-Sell Agreements for Maryland Pharmacy Owners

By Brad MacLiver
Authorship and profile at Google


When a MD 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 pharmacy business.
               
Maryland pharmacy buy-sell Agreements protect the interest of the parties who own the pharmacy in MD and directs the actions triggered by a stockholder leaving the business due to death, disability, divorce, dissolution, or retirement. The agreement will govern how and when the shares of the pharmacy business can be sold, or transferred. It will also provide guidance as to how the pharmacy will be valued along with the obligations of the remaining shareholders of the Maryland pharmacy.

It is important to establish buy-sell agreements because the different elements of a future sale would be predetermined and won’t need to be negotiated during a heated dispute or grieving period. It also provides both the stockholder and the family a level of comfort that when the inevitable time for an exit strategy comes, the process was thoroughly thought out in advance.

The down-sides of not having a buy-sell agreement between pharmacy owners are that a disability potentially leaves one partner working more while the other is not adding to the productivity.  Should a death occur without an agreement, one partner could be left with a non-productive heir, or a new partner may be inserted that who a conflicting personality with the surviving partner.  Having the wrong partner is a potentially devastating scenario for the Maryland 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 components of a Buy-Sell Agreement:
1. The names of stockholders and the number of shares and voting rights of each. 
2. Guidance for the certified pharmacy valuation in Maryland 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.
12. Enforceability of the agreement, the binding effects, and arbitration procedures for disputes.
13. Process for dissolution, or liquidation, of the corporation.
14. Maintaining the premises during a transition.
15. Preserving representations and warranties.
16. The terms of transfer.
17. Bill of Sale.

Buy-sell agreements are often funded with a life insurance policy in order to ensure the required funding is available. Should one of pharmacy owners in Maryland die, the life insurance settlement provides the funds to buyout the partners shares from the estate for the remaining pharmacy owner.

Life insurance coverage for each partner needs to be in place, because without a way to accomplish the purchase of the MD 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 acquire the adequate insurance coverage and determine the specifics of the buy-out terms, it is necessary to perform a certified pharmacy business valuation. There are a large number of companies that provide business valuations. Due to the dynamics and current market conditions of the Maryland pharmacy industry a valuation firm should have extensive pharmacy experience. Realistic or even adequate valuations for a pharmacy business in MD cannot be achieved with simple accounting formulas and multipliers.

Because pharmacy buy-sell agreements are such extremely important documents, they need to be completed with utmost 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.

Tips:
1. Buy-Sell Agreements are critical documents that should not be taken lightly. Consult a licensed professional.
2. Documents must address the proper laws and regulations which vary from state to state. Seek the proper guidance.
3. Premiums for insurance that will fund the buy-sell agreement might be deductible.
4. Ensure that the Maryland pharmacy valuation is performed by an established MD pharmacy industry expert.