Types of Available Financing for Pharmacies in Wyoming

By Brad MacLiver
Authorship and profile at Google


There are a number of different options available for funding WY pharmacy franchises, specialty pharmacies, and traditional community drug stores.

SBA Financing for Pharmacy Business Loans

Partially guarantees for loans by the U.S. Small Business Administration (SBA) for Wyoming pharmacy franchise lenders reduce the risk exposure for the lender. There is a loan program called 7(a) that is a standard for pharmacy franchise funding.  These loans provide needed funds for pharmacy franchise entry fees, real estate for the pharmacy's location, improvements to any property, working capital, and equipment the pharmacy requires.

Borrowers for the Wyoming pharmacy franchise 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 pharmacy transaction.

There are SBA fees for guaranteeing Wyoming 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 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 Wyoming pharmacy loan process.

Pharmacy funding from the Patriot Express program in Wyoming 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 WY

There are specific franchise loan programs available for honorably discharged veterans and these Vet programs can be considered for Wyoming 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 Wyoming pharmacy franchisees. Preferred lenders will already be familiar with the pharmacy franchisor and their systems.

Pharmacy franchisors may also provide some funding internally. Lower collateral will be offset by higher interest rates. This may help with qualifying for a pharmacy acquisition of a franchise, but may hurt the franchisee’s long term cash flow. Due diligence of Wyoming pharmacy franchisor funding should be completed before any final decisions are made.

Personal Assets Used in Pharmacy Finance

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

Buying out the franchisor allows the pharmacy 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 Wyoming 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. This lack of Wyoming 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 pharmacy owner is advised to use a WY pharmacy industry specialist to capitalize on the funding opportunities that are available.

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Wyoming Pharmacy Cash Flow Instruments and Financial Discount Rates

By Brad MacLiver
Authorship and profile at Google


When a WY pharmacy is considering selling a cash flow instrument such as the pharmacy’s receivables, or a pharmacy business note, the price the Wyoming pharmacy owner receives will reflect how much time is involved before the Buyer/Investor/Funder of the cash flow instrument will recoup his principal investment and the desired rate of return the Investor needs to make it desirable to take the risk of buying the pharmacies cash flow instrument.

To entice an Investor to shift the risk of holding the cash flow instrument from the pharmacy owner in Wyoming to the Investor, there is typically a financial incentive for the Investor. The incentive is the rate of return, which is required to compensate for the Investors perceived risk. The risk is based on the credit of the cash flow instrument’s Payor, previous payment history, seasoning, interest rate, and other variables. Discount rates may change depending on the circumstances of the cash flow instrument, the economy, etc.

If the WY pharmacy owner or an investor could take the cash flow instrument to the bank and cash it in at face value, the asset would hold more value. However, since this can’t happen the risk of holding the cash flow instrument makes it worth less than face value.

Time Value of Money:
The concept of cash having a greater value as a dollar today instead of tomorrow is based on the Time Value of Money (TVM). Most businessmen are aware of the TVM and how it is invaluable in both personal and corporate decision making.  However, to be perfectly clear, let's take a look at the basics of TVM.

TVM makes the assertion that money will earn interest over time. This means that time is money, as the old cliché goes. Because of this, it is possible to compare money at different points in time that have different values and call them equal.

Here is an example: If $1.00 today earns 5% interest, it will be worth $1.05 at the same time next year. This means that $1.00 today equals $1.05 the next year, equals $1.63 ten years from now.

Within the same reasoning the reverse is true. An investor will not pay $1.00 today for a dollar that won’t be collected until next year, or 10 years from now. Today’s dollar will be discounted to reflect risk, inflation, the strength of the economy, etc.

Along with interest rates and principal amounts, a cash flow instruments such as Wyoming Pharmacy Business Notes, are originated with a certain time period. The TVM can be looked at, as if it were on a sliding scale. The earlier in time the Note is paid off, the smaller the amount becomes. When the Note is paid early, you don’t get to collect the compounded interest amount, which would have accumulated if you had waited the full time period. The Note has already been written and the terms set. Unlike a loan where the rate of return needed to cover the risk is added to the loan amount. An investor cannot go back to the buyer of your business and change the terms of the note. Therefore, the investor looks at the portion of the note, which is going to be purchased and subtracts the rate of return needed to justify the risk. This is called Discounting. The amount of the discount is contingent on the risk.

Example:

If you sell something for a $1.25 with 10% interest, equal payments received over a 18 year period, you would expect to receive $6.95. However, should the note be paid in full in 9 years you will only have collected $2.95. You are not collecting the other $4.00 because you are no longer risking anything (you are not earning it). If you want an investor to advance you the $6.95, you will no longer have any risk because you have transferred it to the Investor. To compensate the Investor for accepting the risk of holding the note, the Investor will discount the note, and pay you an amount equivalent to the time and risk involved.

The price you receive when selling your note will be the discounted rate according to the basic TVM principals minus the amount that allows an investor to justify the risk.                                
If a note is a length of 3, or more years, it may be beneficial for you to sell only a portion of the note. Because the payments from a month in the 5th year will hold less value than payments collected this year, it is beneficial to you to only sell the number of months that you need to obtain the cash that meets your current financial needs. You can always sell more payments at a later date if you need additional funds. Determine what cash you really need and we will calculate the number of months we will purchase to meet your needs.

Although it involves a much shorter period of time, understanding discount rates is the same when selling a WY pharmacy’s accounts receivables.


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In Wyoming, is it Worth Selling a Pharmacy Note at a Discount?

By Brad MacLiver
Authorship and profile at Google


When a WY pharmacy acquisition has been accomplished by using the private financing method of a pharmacy business note, the holder of the pharmacy note has the option of selling the pharmacy business note for a lump sum of cash instead of waiting for the monthly payments and taking the risk those payments will always be made. Pharmacy business notes can be sold by using a discounting method. Instead of buying a pharmacy note at its face value, the Wyoming pharmacy note will be discounted. Meaning the Investor will pay less than face value due to the risk being transferred from the Pharmacy Note Holder (the note seller) to the Pharmacy Note Investor (the note buyer).

Most pharmacy business note sellers look at only the discount rate and then calculate in their heads that they are giving up too much money to make the selling of the Wyoming pharmacy note an attractive proposition. Further analysis must be performed before a final decision is made by weighing the discounted amount with the benefits of a lump sum of cash.

1. What is the motivation for selling the pharmacy note in Wyoming? What are the desired goals? Is reducing the exposure to risk a consideration? Is there a financial decision to pay off debt? Is capital required for a new venture? Are there dreams of exotic vacations or world travel that could be accomplished with a lump sum of cash? How important is it to you to accomplish these goals? What are the opportunity costs if you do not have the lump sum of cash available to achieve your goals? Can you invest in something that pays a higher return? Take investment and family priorities into account.

2. What is the Current Fair Market Value of the pharmacy business? This is what someone is really willing to pay for the business, and not just an “earnings times x” formula. Real aspects of what is happening in the WY pharmacy industry must be considered and it is advantageous to have a pharmacy industry specialist calculate the Wyoming pharmacy business valuation.

3. How much cash is immediately required by the holder of the pharmacy note?

4. A pharmacy note that is seasoned has more value than a “green” note that doesn’t have a payment history. Are you willing to hold the note for a certain amount of time to allow the business buyer time to prove to an Note Investor the capability of the payor making the payments?

5. Are you willing to sell only a portion of the Note (this is called a “Partial Sell”)? The discount rate can be a more attractive proposition when only a portion of the note is sold and the Wyoming Pharmacy Note Investor is not holding all the risk.

Understanding the Risk for the Note Buyer:

1. Pharmacy Buyer Competency - There is the risk that the pharmacy buyer in Wyoming may not run the business as efficiently as you have, sales drop, and the pharmacy business buyer cannot meet the payment obligations. Incompetency could lead to late payments, missed payments, or bankruptcy.

2. Pharmacy Industry Changes - Changes caused by influences either within the industry, or regulations governing the industry, can make it increasingly difficult for the WY pharmacy business buyer to meet the contractual financial obligations.

3. Future Competition - Sales and income of the store may be affected by yet unforeseen pharmacy in Wyoming competition either building in the neighborhood or through mail order.

4. Loan to Value - When originating a pharmacy business note you may be creating financing where there is a “negative loan to value.” Example: the WY pharmacy business note is for $500,000, but there is only $175,000 of tangible assets for collateral.

5. Title Insurance – Wyoming pharmacy business notes don’t have title insurance that will make good a loss arising through defects of titles, or liens.     

6. Time Value of Money - Where a dollar received today is more valuable than a dollar received in the future.

7. Opportunity Costs - When the selection of holding the pharmacy business note in Wyoming ties up capital and prevents potential financial gains from other investments.

It is beneficial to discuss the options and potential origination of a pharmacy note with Wyoming Pharmacy Business Note Investor before the Purchase and Sale Agreement is finalized for the acquisition of the pharmacy. This provides the pharmacy business seller, and future note seller, valuable insight into structuring the pharmacy business note so it can be successfully purchased.

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Using Business Notes in Wyoming for Financing Pharmacy Acquisitions

By Brad MacLiver
Authorship and profile at Google


When acquiring or selling a WY pharmacy or drug store, one alternative is to have the seller originate the financing and carry back a business note. At first glance many pharmacy owners will not want to take this approach. They want their cash and their exit. When a Wyoming pharmacy owner is considering selling their drug store, looking at the benefits of originating a business note and not just the perceived costs, they may find that offering Private Finance in the form of a Pharmacy Business Note will provide them an alternative course of action.

Advantages of Creating and Selling a Pharmacy Business Note in Wyoming

1.  The process of selling a pharmacy or drug store to an individual can be easier and less time consuming when the Wyoming pharmacy seller agrees to carry a business note, than a buyer pursuing traditional financing.

2. By offering Seller Carryback Financing, often referred to as Private Finance, a Wyoming pharmacy business owner can greatly increase the number of potential buyers for their business, and most likely sell the business at a higher price.

3. When a pharmacy business note is created in WY, there are the options of keeping it for monthly income, selling the entire pharmacy note for a large lump sum, or selling part of the Wyoming pharmacy business note to meet current financial needs and keeping the remainder for future income.

4. Selling either a portion, or the entire Wyoming pharmacy business note, frees up capital that can be used for new ventures, or paying off old debt.

5. With professional guidance, a pharmacy business note that is created and sold can have a structured transaction that allows the WY pharmacy business seller the biggest advantage in achieving the seller’s goals.

Both the terms and interest rate are set and agreed upon between the seller and buyer of the business when originating a pharmacy business note. The seller of the business accepts the promissory note, which is secured by the business including any inventory and equipment that belongs to the business. The pharmacy business seller in Wyoming then sells the note to an Investor who is willing to hold the pharmacy note in exchange for compensation. Since Investor can’t go back to the pharmacy business buyer and change the terms of his purchase agreement, the seller of the note must discount the note. The Investor is compensated from the difference of what the note was originated for and the discounted price paid for the WY pharmacy business note.

Tips:

1. Poorly structured business notes may prevent their sale, so seek professional advice before originating a financial instrument that can’t be sold.

2. Sellers of business notes need to fully understand the Investors risk in order to successful sell the business note.

3. Private Finance, in the form of a Business Note, is an alternative that should be looked at as a business financing option.

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Using Tax Strategies When Selling Wyoming Pharmacies

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. WY pharmacy buyers participate in the pharmacy industry roll-up to achieve economies of scale in purchasing, marketing, information systems, logistics, distribution, and top management. Wyoming 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 pharmacy it is considered a capital asset. The difference between the amounts it is sold for and the amount spent to either purchase or start the Wyoming pharmacy is a capital gain, or a capital loss. In the U.S., all capital gains 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 Wyoming 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 pharmacies in Wyoming 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 Wyoming 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 Wyoming 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 pharmacy seller is nearing a retirement age, or will be working as a Wyoming 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 pharmacy chains in Wyoming will be considering selling their pharmacies and drug stores. Tax considerations should be a paramount part of the decision process.

Wyoming pharmacy owners should consult with a pharmacy industry expert for advice on structuring the sale of their pharmacy in WY. Someone with extensive experience in Wyoming pharmacy and drug store acquisitions will have the knowledge and expertise to structure the transaction for tax considerations. As it is with all tax planning issues, procrastinating 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 Wyoming pharmacy owners when a pharmacy is sold.

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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.

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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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