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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Acceleration Clauses in Pharmacy Business Loans and Commercial Leases in Maine

By Brad MacLiver
Authorship and profile at Google


A provision of many Maine ME) 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 pharmacy business loan or lease documents provided to the pharmacy owner in Maine will describe the rights, conditions, and obligations relevant to the acceleration clause. When the ME 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, pharmacy business loans and commercial lease documents should be thoroughly read and understood before signing.

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

2. If a 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 understand the laws in the state where they operate. Lack of knowledge is not an excuse.
                                 
4. When exercising an acceleration clause on 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, Maine pharmacy owners should help the process by assisting the landlord to re-lease the property. Take precaution that if the ME pharmacy are in the process of being sold and the files and inventory are moved to a competitor’s location, the pharmacy buyer will have restrictions in the Purchase and Sale Agreement that forbids the new tenant from being another pharmacy.

5. A lender will prefer to avoid going through the foreclosure process, so if your pharmacy in Maine is headed in that direction, begin talking with the lender about finding a solution. Communicating with the lender is always a good idea.

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

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Pharmacy Industry: Current Market Conditions in Maine

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 in ME. These factors are affecting the pharmacy business valuations of pharmacies in Maine and drug stores all across the U.S. Any pharmacy owner considering either buying a pharmacy or selling the drug store should take the following points into consideration.

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.

Fewer Buyers:

There are also fewer corporate buyers. Some of the largest pharmacy chains 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 pharmacy values and there is not any expectation of a turn around. Pharmacy owners in Maine should not be fooled by inexperienced Brokers claiming grand outcomes and over stating pharmacy business values not based on realistic market conditions.

The consolidation of the pharmacy industry has been happening for several years, and many new brokers have entered the market to broker pharmacy acquisitions. Most brokers do not have any pharmacy experience and they do not rely on current market conditions when they value a pharmacy. Most use simple accounting formulas that hold no sound reasoning for value when faced with current Maine pharmacy market conditions. Because of this, many brokers will value 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, but that does not mean the over inflated asking price is what the business will actually sell for.

Mail Order:

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

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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.