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Merry Christmas Maryland (MD) pharmacy and drug store owners.

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Financing Maryland Pharmacy Franchises

By Brad MacLiver
Authorship and profile at Google


A MD pharmacy franchise is a contractual relationship between two parties. One, the Maryland 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 Maryland 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 in Maryland 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 pharmacy loan. Community drug stores will typically have few traditional assets to present as security. Lenders for Maryland pharmacies will use traditional methods for analyzing available cash flow to service to the debt, but must also need to understand that nontraditional collateral will secure the loan.

For borrowers, even incorporated ones, the independent drug store owner’s personal credit rating, tax returns, and financial statements will be a factor. The amount of cash on hand as well as the verification of the source of the down payment are critical factors in qualifying for a pharmacy business loan.

MD Pharmacy Franchise Funding Tips:

1. Because there are many pharmacy franchise financing options available, pharmacy owners should perform proper due diligence then obtain the pharmacy funding that best suits their situation.

2. It is advisable to have an accountant or attorney that is familiar with Maryland pharmacy franchise financing to review the 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 MD 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 in Maryland, or any types of funding for community drug stores and pharmacies, they should contact a pharmacy industry financing specialist who can provide quality answers and sound advice.

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Maryland Pharmacy Financing Types Available

By Brad MacLiver
Authorship and profile at Google


There are a number of different options available for funding MD 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 Maryland 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 Maryland 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 can range from 5 to 20 years. Within SBA standards interest rates may be adjustable or fixed and will be negotiated by the lender dependent on the financial strength of the Maryland pharmacy transaction.

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

Patriot Express Business Loan Program

This is another SBA loan program that can be used for Maryland pharmacy franchise business loans and is reserved for military veterans, active service members, their spouses, and survivors. The Department of Veterans Affairs would be involved in the pharmacy loan process.

Maryland 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 Pharmacists Who Are Veterans in MD

There are specific franchise loan programs available for honorably discharged veterans and these Vet programs can be considered for pharmacy franchise loans.

Pharmacy Financing From the Franchisor

Financing a pharmacy franchisee is a usual topic in discussions with a 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. Their preferred lenders should be familiar with the Maryland pharmacy franchisor and their systems already.

Another option is for Maryland Pharmacy franchisors to provide some funding internally.  Reduced collateral is then offset by higher interest rates, which can help qualify the pharmacy acquisition of a franchise.  However, it may hurt the cash flow of the franchisee in the long term.  Proper due diligence of pharmacy franchisor funding should be taken before any final decisions are made.

Personal Assets Used in MD Pharmacy Finance

Not every prospective pharmacy franchise owner will 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 in Maryland. Since the MD 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 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 Maryland crashes, so does the retirement fund. The method of providing less expensive financing for the MD 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 Maryland pharmacy franchise. Drug store owners paying franchise royalty payments may not survive the tightening profit ratios. Due to this, these Maryland pharmacy franchises may only have the options of bankruptcy, or buying out the franchise agreement when allowable.

Buying out the franchisor allows the pharmacy in Maryland 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 pharmacy industry in Maryland. 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 Maryland pharmacy owner is advised to use a pharmacy industry specialist to capitalize on the funding opportunities that are available.

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Sale & Purchase Agreements in Maryland

By Brad MacLiver
Authorship and profile at Google


A Pharmacy Listing Agreement is the contract that provides a pharmacy broker the business seller’s permission to sell their Maryland drug store. While engaged in the process of presenting the business being sold to qualified drug store buyers there are negotiations and preliminary offers.

Once the preliminary stages have been negotiated it is time to put forth the details of the potential pharmacy transaction in contract form. This contract is usually called the Purchase and Sale Agreement, but it may also be referred to as an Asset Purchase and Sale Agreement, Pharmacy Asset Purchase Agreement, Asset Purchase Agreement, or variations of these contract titles. Whatever the title is on the contract, this document should be considered the “blueprint” for transferring the Maryland pharmacy business to the new owner.  

The Pharmacy Purchase and Sale Agreement details how much the buyer agrees to pay and what assets the Maryland seller is conveying to the buyer. When the agreement is put in writing, describes the transaction in some detail, and is accepted and signed by both parties, this contract becomes a legally binding agreement. Therefore, during the negotiated development of the Pharmacy Purchase and Sale Agreement proper diligence should be taken.

Due to liability issues it is seldom that a Maryland pharmacy’s corporate stock will be purchased, so these transactions almost always are only asset purchases.

Elements of the Pharmacy Purchase and Sale Agreement include, but are not limited to: assets being purchase, assets being excluded, aspects of counting and purchasing the inventory, both electronic and hard copies of pharmacy customer files, liabilities, purchase price, closing date, transferring title of the assets being purchased, pharmacy customer file conversion, representations and warranties, non compete, restrictive covenants, transferring the phone, notifying customers, signs, Board of Pharmacy notification, accounts receivables, employment of business seller and pharmacy employees, confidentiality, counting the pharmacy’s inventory, costs associated with the closing, lien searches, actions to be taken before the date of closing, along with the pharmacy’s computers, office equipment, and any automated filling machines.

Although many aspects regarding the transferring the business assets from the pharmacy seller to the new owner are covered, it should be known that the Purchase & Sale Agreement will not provide any tax and legal guidance for the Maryland seller. Those issues never pertain to the buyer of the assets, so the pharmacy seller should consult a knowledgeable pharmacy broker, an accountant, or an attorney regarding tax consequences, any restrictive covenants, and structuring the deal. From the buyer's point of view, these aspects of the deal may have no impact, but if the transaction is not considered carefully, it may affect to the seller’s financial position after the transaction has closed.

Maryland pharmacy owners that are considering to sell benefit when working with a specialist who operates exclusively in the pharmacy industry and can provide expert guidance in bringing about a transaction that provides the most benefits regarding the seller’s tax consequences, family and estate planning. Proper planning and a blueprint that structures the transaction appropriately will increase the net amount of money the seller receives for the pharmacy’s assets.

 

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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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