The Wyoming Pharmacy Industry Roll-Up

By Brad MacLiver
Authorship and profile at Google


WY Industry Roll-Ups are where an industry’s many players are consolidated into smaller groups for economic benefits. Recessions, new government regulations, or other aspects of the industry that may be stifling profits end up providing incentives to consolidate

A principal reason for an industry roll-up is to achieve economies of scale in purchasing, marketing, information systems, logistics, distribution, and top management. Consolidated businesses also have less risk from the impact of an unsatisfied customer and have the reward of being able to recruit, or keep, key employees.

An example of an industry roll-up can be seen with the pharmacy industry in Wyoming. It is a well established industry and is still experiencing sales growth. However, pharmacies and drug stores have seen a steady decline in their profit margins due mainly to government regulations, even as sales increase. There has also been a shortage of pharmacists in Wyoming - a required key employee.

Industry roll-ups are often initiated by investors seeking investment opportunities. However, in the case of WY pharmacies, the roll-up is a necessity due to declining net profits ratios. Companies that are acquired in a roll-up are usually small independently-owned businesses whose owners believe in the economic benefits of combining forces with a larger organization, or simply need an exit strategy. In the pharmacy industry roll-up, independents have been a majority of the acquisitions, but there has also been a consolidation of a number of the larger pharmacy chains in Wyoming.

During the Wyoming pharmacy industry roll-up pharmacies with better financial wherewithal are acquiring their local competition and combining two or more stores into a single location. This results in more customer traffic through a single location and reduces the expenses that come with multiple locations. This can dramatically drive up total sales while driving down the administrative and overhead costs per customer.

To help fund pharmacy acquisitions during the roll-up in Wyoming, specific funding programs have been developed. These pharmacy chain funding programs are backed by major financial institutions that provide the funding for pharmacy acquisitions. These pharmacy funding programs allow an individual pharmacy business, or an investment group, the capital to acquire and combine Wyoming pharmacies in geographic areas.

Funders are willing to provide the capital for the pharmacy roll-up because they recognize that combining the individual pharmacy businesses provides a greater total business value than if each individual Wyoming pharmacy value were added together. This synergistic value reduces the risk of funding the individual acquisition.

When considering the buying, selling, or financing a WY pharmacy, whether an independent drug store, or multiple pharmacy locations,  due diligence and understanding of all aspects of the transaction should be considered. Using the services of a pharmacy industry expert to guide a pharmacy owner in WY through the maze of details will benefit the Wyoming pharmacy owner in making the best business decision.

All transactions involved in the pharmacy roll-up need to have the business valued at the current market value. Business valuations for the Wyoming pharmacy industry should be calculated by a company that has in-depth knowledge of the pharmacy in WY. Simple accounting formulas used by many to estimate a value do not provide an accurate picture because the simple formulas do not take into account the aspects that are causing the pharmacy industry roll-up.

The aspects of the market which are stimulating the roll-up are also having downward pressure on the Wyoming pharmacy business valuations. Pharmacy owners have been watching what has been occurring in the pharmacy industry. While profit margins slip, new regulations are being enforced.  Also, as reimbursements are pared down, there is wide expectation that the business values in the WY pharmacy industry will continue to slide to lower levels.  This means the pharmacy industry roll-up will continue.

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Pharmacy Acquisition Finance in Wyoming

By Brad MacLiver
Authorship and profile at Google


When a WY 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 pharmacy seller in Wyoming 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 WY 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, Wyoming pharmacies are not ice cream stores. There are many aspects of valuing a pharmacy in WY 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 Wyoming 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 and drug stores in Wyoming 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.

Pharmacies have historically been known for generating a profit and being stable businesses.  That being said, they are usually have a leased location with furniture, fixtures, and computers that will provide only $15-20,000 worth of collateral for a buyer possibly requesting a million dollar loan. Quite a lot of money is tied up in inventory, but lenders typically consider the small pills as easy to move out the door in the case 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 WY pharmacy industry.

Tips regarding pharmacy acquisitions and finance:

1. Attorneys and CPAs who have been representing the Wyoming pharmacy seller for many years may see the transaction as putting themselves in a position of losing a client when the business is sold. Make sure they are working diligently on the transaction and are not slowing or undermining the process

2. Since pharmacy acquisitions in WY involve 6-9 months of work to complete , all parties involved need to be aware of time tables. Much too often, items of importance end up sitting on the desk of someone that is outside of the control of the buyer or seller.

3. All financial information needs to be current. Over the lengthy process the data supplied to both the buyer and the lender will need to be updated on a continuous basis. Things can change drastically during a nine month period and the Wyoming pharmacy seller will need to continually prove the financial condition of the company.

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

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Wyoming 340B Pharmacy Discount Programs

By Brad MacLiver
Authorship and profile at Google


The United States 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 entities that qualify. When these facilities do not possess their own pharmacies, they are able to contract with a local WY pharmacy. The drug pricing program used is often referred to as 340B, named after the section of law that has established the program.
             
Section 340B legislation was enacted to assist indigent and uninsured populations with access to deeply discounted medications. Because the program was enacted to provide for certain populations, there are restrictions and regulations in how the program operates and who the medications can be dispensed to.

Pharmacies in Wyoming 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 Wyoming 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 pharmacy owner will need employees who understand the various state and federal rules and regulations, which govern the 340B program. The pharmacy in WY 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 of separating the inventory is required due to the drug inventory used for the 340B pharmacy program is owned by entity that contracted the pharmacy. Since the 340B inventory is not “owned” by the Wyoming pharmacy this inventory will be treated differently for tax purposes. The pharmacy generates income from dispensing fees they are paid instead of a mark-up or profit margin on the inventory.

Since customers participating in a 340B program can only purchase the designated medications from a pharmacy contracted with a 340B entity, this allows a pharmacy to have a market niche. A contracted pharmacy servicing 340B customers benefit 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.

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



 

Pharmacy Acquisitions and Wyoming Bridge Loans

By Brad MacLiver
Authorship and profile at Google


With the changes in the WY pharmacy industry independent drug store owners, regional or small pharmacy chains and pharmacy equity investment groups are acquiring Wyoming pharmacies to obtain a larger competitive footprint in a geographic area. During the acquisition phase of the business expansion, opportunities may exist which require quick action that is faster than the traditional funding process.

Bridge Loans are a type of short-term financing  used while waiting for either permanent financing or the next stage of financing to be obtained.  These loans provide funding necessary to "bridge" the gap between a company’s current needs and their long term financing requirements.  Permanent financing is utilized used to "take out," or pay back, the bridge loan.

One particular characteristic of bridge loans is that they can close quickly, which in turn permits companies to capitalize on a timely business opportunities or acquisitions. This fast access to money can also allow a business the chance to avoid penalties, bankruptcy, or other problems that are temporary. If there are more longterm issues to be dealt with, this form of “transitional financing” provides the company time until longer term financing can be secured.

Another characteristic of a bridge loan is that the process usually doesn't require as much documentation as conventional financing. Typically, bridge loan lenders also don’t have the same government regulations to adhere to.  This allows them to have more flexibility in their lending criteria and the documentation they require. However, reduced 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 WY:

1. An independent pharmacy owner learns of health issues and decides to quickly sell the family owned Wyoming 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 WY pharmacy chain 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 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 Wyoming 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 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 to quickly respond to the opportunity.

When there are business opportunities, buying pharmacies in Wyoming, selling pharmacies in WY, 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 Wyoming 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. With the shorter time period of bridge loans borrowers will need to be aware that fees for valuations, legal, dues diligence, etc., will be amortized over a shorter period than traditional financing transactions.

Understand the types of deals that require a bridge loan may be considered speculative in nature, or have higher risk factors. Due to this many banks do not offer bridge loans. Banks must meet government regulations and need to justify their lending practices. Riskier bridge loans do not usually fall within the lending parameters of many banks. Therefore a majority of the bridge loans will come from private investment firms.  It is best to consult a company that has access to a number of funding sources who provide bridge loans.

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Acceleration Clauses in Commercial Leases and Wyoming Pharmacy Business Loans

By Brad MacLiver
Authorship and profile at Google


A provision of many WY 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 Wyoming pharmacy business loan or lease documents provided to the pharmacy owner 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, WY pharmacy business loans and commercial lease documents should be thoroughly read and understood before signing.

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

2. If a WY 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. Pharmacy owners should fully comprehend the laws in the state where they operate because a lack of knowledge will not be an excuse.
                                 
4. When an acceleration clause is applied to a commercial lease, the possibility exists that the landlord cannot collect rent from both the defaulting tenant and a new tenant at the same time. In order to save themselves some cash, pharmacy owners in Wyoming should help the process by assisting the landlord with releasing the property. However, should the 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 prevent the new tenant from being another pharmacy.

5. Lenders prefer not to have to go through with the foreclosure process, so should your pharmacy in Wyoming be headed in that direction, start talking with the lender about coming up with a solution because communication with the lender is a good thing.

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

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

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Pharmacy Industry in Wyoming: Current Market Conditions

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 WY 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.

Pharmacists Shortage in Wyoming:

Pharmacies across the United States are having difficulties in finding pharmacists.  This shortage of pharmacists in Wyoming not only affects employee opportunities it also affects the number of potential independent buyers. 

Fewer Buyers:

There are also fewer corporate buyers. Some of the largest pharmacy chains in Wyoming have been purchased and consolidated in the pharmacy industry roll up. Many smaller chains have run into financial difficulties and have stopped their expansion. It is more difficult to drive a price higher when there are fewer willing, or capable, to purchase.

Current Market Conditions Requires Industry Roll-up:

The consolidation of the pharmacy industry is required to get more traffic into a single store.  Due to simple economics, when any business has a reduction in profits they are less attractive to a buyer and pharmacy business values drop. There are many factors contributing to the downward pressure of Wyoming 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 pharmacy business values not based on realistic market conditions.

With the consolidation of the 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 WY 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 Medication:

Some insurance companies are designating a significant amount of pharmacy patients in WY as “long-term medications.”  They require that they purchase their medications only from mail order pharmacy companies who provide products at lower prices. This has the result of local pharmacies not only missing out on prescription sales, but also suffering a decline in front-end sales since the customer is not entering the store. Pharmacy mail order sales have surpassed sales from independent retail pharmacies at this point.

Use a firm that provides Wyoming pharmacy business valuations based on real market conditions and does not use simple formulas when calculating the value of a pharmacy. Experienced companies use complex methods to derive the value of a pharmacy.

It is best to use a company with a specialty in pharmacy and has current and extensive industry data.  Choose pharmacy specialists who have worked in the pharmacy industry for enough time to have extensive Wyoming pharmacy experience and an excellent reputation.  Companies that have good credentials possess a large amount 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 with Wyoming Pharmacy Business Valuations

By Brad MacLiver
Authorship and profile at Google


If you have purchased a residence, you should be familiar with real estate appraisals. With a WY pharmacy business there are times an appraisal of both the real estate the business itself is needed. The pharmacy business appraisal, which does not include the real estate, is more commonly called a Pharmacy Business Valuation.

Pharmacy Business Valuations in Wyoming are part of the due diligence that will be conducted when there is a possible acquisition of the pharmacy business, or pharmacy financing is needed. Wyoming Pharmacy Business Valuations place a reasonable market value on the drug store various factors have been examined.  These factors include, but aren't limited to: assets, financial statements, tax returns, goodwill, customer lists, licensing, competitive advantages, regulatory concerns, management team, inventories, and industry comparisons.

There are many acceptable methods for valuing a retail drug store business. Each of these methods has its own perspective and the business owner should have a clear understanding of the method they are using.

One of these methods is to use “multipliers”, which involves someone taking the net profit, gross sales, or some other figure from financial statements and then multiplying that number by 3, 5, 8, or however many times is necessary. However, when using simple methods such as multipliers you need 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 Wyoming pharmacy valuation 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 pharmacy industry in Wyoming. 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 pharmacy specialist and used a gross sales multiplier would be way off in their calculation compared to other WY 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 Wyoming pharmacy business owner, or pharmacy buyer was seeking.

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