Estate Planning in Wyoming for Pharmacy Owners

By Brad MacLiver
Authorship and profile at Google


Given the current market conditions, many WY pharmacy owners are experiencing reduced profit margins and are considering to sell.  For a number of years, a Wyoming pharmacy industry roll-up has been happening, consolidating the pharmacy seller’s customer traffic into fewer pharmacy locations. However, there are a number of pharmacies that are not in a geographic location with other nearby pharmacies, so consolidation can’t take place. Some pharmacy and drug store owners, despite where they are located or what is happening in the industry, have taken a stance and won’t consider selling. However, just like paying taxes, an exit of the business, is eventually inevitable.

Estate Planning is a topic many people, in all industries, shy away from. For the pharmacy owner who works 6 days a week, takes very few vacations, fills scripts all day, then mops the floor and does the books at night, there usually isn’t much time to consider additional things such as estate planning. However, knowing that there will eventually be a transfer of the business, it is important for the Wyoming pharmacy owner to consider a proper succession plan for the pharmacy business.

Developing a plan to transfer the business will be time consuming, but done correctly will allow the business to be successfully transferred in an acceptable manner. An estate plan for a pharmacy owner in Wyoming does not need to be changeless process. Fine-tuning, updating, and amendments are recommended as government regulations, economic conditions, and personal expectations change.

Estate planning allows a pharmacy owner in Wyoming to anticipate and arrange for the transfer of the drug store. The plan will be formatted in attempts to eliminate uncertainties, assist the transfer by trimming expenses, and reduce taxes.

The process may involve Trusts, Wills, Living Wills, Power of Attorney, Medical Power of Attorney, Business Valuations, Life Insurance, Charitable Remainder Trusts, Buy-Sell Agreements, and other legal documents. All of the different aspects of the estate planning are to provide the pharmacy owners coordinated directives.

When there are non-family members as partners in the drug store business, it is essential that the estate planning incorporate a Buy-Sell Agreement. A buy-sell agreement, governs the transfer of the business between pharmacy partners. The agreement may also be known as a partner buyout agreement, or a business will. To help protect the family in the event of a partner’s death, the buy-sell agreement may be funded with a life insurance policy.

Estate planning, buy-sell agreements, and the transfer of Wyoming pharmacies should incorporate a pharmacy business valuation executed by a third party that has expertise in the pharmacy industry, performs a large amount of pharmacy business valuations every year, and has current industry data as a solid foundation for their conclusions. Applying simple accounting formulas or multipliers or using valuators inexperienced in pharmacy will not provide an accurate business valuation.

Pharmacy owners typically spend a major part of their life building the business. Their efforts should not be in vain because they refuses to accept their mortality and plan accordingly. The only pharmacist in some small pharmacies is often the owner. If their scripts cannot be filled by a licensed pharmacist then the customer files must be transferred to another pharmacy according to law.  A pharmacy’s business value potentially drops to a negligible figure in just a few days after the passing of the owner because of this.  The 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 WY pharmacy owners die and their family is left with an asset with very little value.

Tips:        
1. When the family drug store is the sole means of income for several family members it becomes even more crucial to have a succession plan in place.
2. To avoid disputes, estate plans should be developed with clear directives.
3. A major objective for most completing an estate plan is to reduce tax liabilities as much as possible.  Expert tax advice should be sought.
4. There are many online sites and books available to provide advice and documents when developing an estate plan.  It is advisable to have a paid expert review the completed documentation when going the self-help route to ensure that it can be legally complied with when the time comes.
5. It is essential to talk with children and other family members of the pharmacy owner in WY while developing the estate plan, especially if there are some family who work in the business while others don’t.


 

Wyoming EBITDA and Pharmacy Acquisitions

By Brad MacLiver
Authorship and profile at Google


EBITDA is an acronym that stands for Earnings Before:
* Interest
* Taxes
* Depreciation
* Amortization
                 
This is often used to measure some businesses' value and used for the comparison of similar companies as well.

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 most effective use of EBITDA, larger companies should possess significant assets, have heavy schedules for amortization, or bear a significant amount of debt. Considering independent Wyoming pharmacies don’t meet that criteria, so this formula is not a useful measure as the sole means for valuing pharmacies in WY for acquisition purposes.

To Calculate EBITDA:
First calculate net income by obtaining total income and subtract total expenses. Then, determine the total amount of taxes paid to local, state, and federal governments. Compute interest fees paid to companies or individuals for the use of credit, or capital.  Establish the cost of depreciation, which is the expense recorded to allocate a tangible asset's cost over its useful life.  Next, determine the cost of amortization. This is expense for consumption of the value of intangible assets, such as goodwill, patents, and copyrights, over a specific period of time, or the asset's expected life.  Finally, add all of these numbers to calculate EBITDA.

EBITDA calculation example: 1. Net Income                 1,333
2. + Tax Expenses               362
3. + Interest Fees Paid         281
4. + Amount of Depreciation     163
5. + Amount of Amortization      71
6. = EBITDA                   2,210

7 Drawbacks of EBITDA: 1. Can be misleading number when it is confused with cash flow.
2. Can make even completely unprofitable firms appear to be financially healthy.
3. Numbers are easy to manipulate.
4. Can overlook cash requirements for growth in accounts receivable.
5. Can miss cash requirements for growth in inventories.
6. Not factual when valuing small companies.
7. Not effective for companies with few assets, small amounts of debt, or low depreciation or amortization schedules.

EBITDA, in the past, was being used as a way to determine the "cash flow" 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 Wyoming pharmacy business valuations will use EBITDA in pharmacy valuations, but only as part of a larger formula when computing values for specialty WY 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 pharmacy acquisitions in Wyoming.

The EBITDA number for a specific existing pharmacy in Wyoming 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 Wyoming pharmacy. Instead of the EBITDA number, pharmacy buyers should be focusing on sales, gross profit, cash flow, and customer mix.

************************