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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