Using Business Notes for Financing Maine Pharmacy Acquisitions

By Brad MacLiver
Authorship and profile at Google


When acquiring or selling a ME pharmacy or drug store, an alternative method to traditional financing is to have the seller originate the financing and carry back a business note. At a glance, many pharmacy owners will choose to avoid this approach because they want their cash and their exit.  However, when a Maine pharmacy owner is considering selling their drug store, if they look at the benefits of originating a business note rather than just looking at the perceived costs, they will notice that offering Private Finance in the form of a Pharmacy Business Note provides them an alternative course of action.

Advantages of Creating and Selling a Pharmacy Business Note in ME

1.  The process of selling a Maine pharmacy or drug store to an individual can be easier and less time consuming when the 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 pharmacy business owner in Maine 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 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 Maine pharmacy business note to meet current financial needs and keeping the remainder for future income.

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

5. When a pharmacy business note in Maine is created and sold, with the proper professional guidance, a transaction can be structured that allows the pharmacy business seller the biggest advantage in achieving the seller’s goals.

When originating a Maine pharmacy business note the terms and interest rate are set and agreed upon between the seller and buyer of the business. 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 then sells the note to an Investor who is willing to hold the Maine 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 ME 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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EBITDA and Maine Pharmacy Acquisitions

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 including some in the pharmacy industry. EBITDA can also be used in the comparison of similar companies. Drug store and pharmacy owners in Maine who are considering either buying a pharmacy or selling their drug store should have an understanding of EBITDA and how it affects pharmacy valuations.

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. Many in the pharmacy industry also use the EBITDA method.

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 pharmacies in Maine (ME) don’t meet that criteria, this formula is not a useful measure as the sole means for valuing pharmacies for acquisition purposes.

Six easy steps for Maine pharmacy owners wishing to calculate their store's EBITDA:

1. Calculate net income by obtaining total income and subtract total expenses.
2. Determine the total amount of taxes paid to federal, state, and local governments.
3. Compute interest fees paid to companies or individuals for the use of credit, or capital.
4. Establish the cost of depreciation (the expense recorded to allocate a tangible asset's cost over its useful life).
5. Determine the cost of amortization (the 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.
6. Add #1 through #5.

EBITDA calculation example:
1. Net Income            3,000
2. + Taxes paid            900
3. + Interest Expenses     600
4. + Depreciation          300
5. + Amortization          150
6. = EBITDA              4,950

EBITDA Drawbacks:
1. It can be a misleading number when it is confused with cash flow.
2. It can make even completely unprofitable firms appear financially healthy.
3. The numbers are easily manipulatable.
4. They can overlook cash requirements for growth in accounts receivable.
5. They can miss cash requirements for growth in inventories.
6. They are not factual when valuing small companies.
7. They are ineffective for companies with few assets, small amounts of debt, or low depreciation or amortization schedules.

An example of the drawbacks of EBITDA:
During the 80s, EBITDA was used as a way to look at cash flow during due diligence for an acquisition. This was used to calculate whether or not a company had the ability to service their debt. By factoring out interest, taxes, depreciation, and amortization, they can allow an unprofitable business to appear financially healthy. This method of valuation was used quite often during the dotcom era to value unprofitable businesses with few assets and little earnings. The results from this method caused many to go bust, a blaring example of misapplying EBITDA.

Pharmacy business consultants, who are knowledgeable about performing pharmacy business valuations, will use EBITDA during ME specialty pharmacy valuations, but this is 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. EBITDA should not be used, however, as part of the usual formula for standard retail pharmacy valuations for acquisitions.

The EBITDA number for a specific existing pharmacy in ME is, for  most purposes, important when the existing ownership is establishing their store value for the purposes such as establishing a line of credit, borrowing, creating a Trust, and stock values.  EBITDA does not, however, have the same importance when selling a Maine pharmacy. This is because the buyer will not have the same expenses as the seller.

Buyers may not have the same tax base, interest expense, or depreciation schedule. It is thusly 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 Maine pharmacy. Instead of the EBITDA number, pharmacy buyers should be focusing on sales, gross profit, cash flow, and customer mix.

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Estate Planning for Maine Drug Store Owners

By Brad MacLiver
Authorship and profile at Google


With the current market many Maine drug store owners are experiencing lower profit margins, and have considered selling. A drug store industry roll-up has been going for years, consolidating the drug store seller's customer traffic into fewer drug store locations. There are however a number of pharmacies that are not in a geographical location with other nearby pharmacies, such consolidation can not take place. Some Maine drug store and drug store owners, despite their location or what is happening in the industry, has taken a stand and will not consider selling. But like paying taxes, an exit of the company is ultimately inevitable.

Estate Planning is a subject that many people, in all industries, timid. The Maine drug store owner who works 6 days a week, taking very few vacations, fill scripts all day, then mops the floor and makes the books at night, it usually is not much time to consider additional things like estate planning. But, knowing that it will be a transfer of business, it is essential for drug store owners to consider a proper succession plan for the Maine drug store business.

Develop a plan to transfer operations will be time consuming, but done correctly allows the company to be successfully transferred in an acceptable manner. An estate plan for a drug store owner need not be immutable process. Fine-tuning, updating, and changes recommended by government regulation, economic conditions and personal expectations change.

Estate planning allows a Maine drug store owner to anticipate and provide for the transfer of the store. The plan will be formatted in an attempt to eliminate uncertainty, to assist the transfer by trimming costs and cutting taxes.

Process may involve Trusts, wills, living wills, Power of Attorney, Medical Power of Attorney, Business Valuation, Life Insurance, a charitable remainder Trusts, Buy-Sell Agreements and other legal documents. All aspects of estate planning for the drug store owners coordinated guidelines.

If there are non-family members as partners in the Maine drug store business, it is essential that estate planning include a Purchase-Sale Agreement. A buy-sell agreement, governs the transfer of business between the drug store partners. The agreement may also be known as a partner buyout agreement, or a company wants. To protect the family in the event of death of a partner, buy-sell agreement funded with life insurance.

Estate planning, buy-sell agreements, and transfer of the drug store should include a drug store valuation completed by a third party expertise in the pharmaceutical industry to take a large number of pharmaceutical companies perform annual appraisals, and the current industry data as a basis for conclusions. Using simple accounting formulas, multipliers, and valuator inexperienced in pharmacies will not provide an accurate business valuation.

Most Maine drug store owners spend a large part of their lives to build the business. The effort should not disappear because the drug store owner refuses to accept their mortality, and plan accordingly. The only pharmacist in a small town is often drug store's owner. If the script can not be filled by a licensed pharmacist since the law the client files must be transferred to another drug store. Because of this, a drug store business value fall to a negligible figure in just a few days after the death of the owner. 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 drug store owners die and their families are left with an asset with very little value.

Tips:

1. When the family drug store is the only means of income for many families it becomes more essential to have a set plan in place.

2. To avoid disputes should estate plans should be developed with clear directives.

3. Minimize tax liabilities is an essential goal for most people to complete an estate plan should be an expert tax advice should be sought.

4 Many online documents and books are available that provide advice and documents to develop an estate plan. When you go to self-help route, it is advisable to have a paid expert review the completed documentation to ensure that it can be legally respected when the time comes.

5. While developing the farm plan, it is essential to talk with children and other family members of the drug store market owner especially if there are any family members who work in business and others do not.