Should a Broker be Used in Massachusetts When Buying Pharmacies

By Brad MacLiver
Authorship and profile at Google


When deciding between using a MA pharmacy broker, or pursuing the acquisition of a pharmacy yourself, buyers of Massachusetts pharmacies and drug stores need to weigh several factors including skills, knowledge, and time.

Many pharmacy buyers are experts behind the counter, but many who have never bought a Massachusetts pharmacy in the past, don’t have the complete understanding of all the variables including State and Federal Regulations, negotiating the best price, structuring the deal, and the best options for financing the acquisition. These are skills that several pharmacy buyers think they possess, but pharmacy buyers need to recognize how many times they have actually purchased a pharmacy compared to a MA pharmacy industry expert.

Knowledge is power and using a pharmacy broker with extensive know how in valuing and transferring pharmacies will save a Massachusetts pharmacy buyer considerable time and headaches resulting in a more cost efficient transaction. The cost of acquisition must be taken into account in the analysis of Return on Investment (ROI). If the acquisition benefits the buyer, any additional time spent with a stagnant transaction results in benefits lost.

Transactions are definitely time consuming. When handling a transaction yourself, how many additional hours will you need to work to complete the Massachusetts pharmacy acquisition and then still not be certain if all the details were done correctly?

Just finding the appropriate pharmacy to buy can be an expensive, laborious, and time consuming process. If the pharmacy’s numbers appear to provide the ROI the pharmacy buyer requires, is the pharmacy seller in MA both cooperative with the buyer and knowledgeable about the transaction process?

Massachusetts pharmacy sellers, their attorney, their CPA, and even their families can slow the process. Pharmacy buyers need to understand this and have the credentials that all of the various parties can have faith in while undergoing the many steps of the acquisition.

After a pharmacy has met the buyer’s preliminary requirements, a current market pharmacy business valuation based on a sound financial and market analysis, and not just a simple accounting or multiple formula, needs to be completed to verify the current value of the pharmacy. In today’s market, pharmacy sellers usually want a higher acquisition price for their family owned pharmacies, than what the current market is willing to pay. A certified valuation completed by a third party who possesses extensive experience in the MA pharmacy industry will help guide the buyer and seller in their negotiations.

Buying a Massachusetts pharmacy business is not like buying a used car. There are many steps that must be taken. Pharmacy buyers who are not discussing an acquisition with a pharmacy seller who will actually move forward with providing all the documentation and financial statements will be losing valuable time in their acquisition search. Both the seller and buyer need to have a meeting of the minds and provide a collective effort in pursuing the closing of the pharmacy acquisition. By the time a closing occurs and all aspects of the transaction have been completed, substantial cash and time will have been invested.

When inexperienced parties are undergoing the acquisition process it can be a draining experience full of headaches and worries. A smoother and more confident process can be accomplished when a Massachusetts pharmacy industry expert is involved in the transaction. A pharmacy broker will take steps to pre qualify the buyer. This allows the seller the knowledge they are working with a real buyer and not a tire kicker.

If the buyer will need financing to complete the deal they will find many banks will not finance a pharmacy acquisition. A broker working exclusively in the pharmacy industry in Massachusetts will have sources of funding who understand the industry and will fund pharmacy acquisitions.

In pharmacy mergers in MA and acquisitions it is important to understand confidentiality, and how the perceived changes may affect employees and customers. A broker acting as the middle man between the buyer and seller can assist the confidentiality of the transaction.

There are many things to consider when purchasing a pharmacy. Using a Massachusetts pharmacy business broker who specializes in the pharmacy industry will benefit both parties involved in the buying and selling of a pharmacy.

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Using Tax Strategies in Massachusetts When Selling 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. MA pharmacy buyers participate in the pharmacy industry roll-up to achieve economies of scale in purchasing, marketing, information systems, logistics, distribution, and top management. Massachusetts 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 MA 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 Massachusetts 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 pharmacy owner in MA.

Many Business Brokers, CPA’s, attorneys, and other professional advisors inform their clients that selling a Massachusetts pharmacy will result in tax consequences. However, most of these professionals do not handle the buying and selling of pharmacies 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 pharmacy in Massachusetts. 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 MA 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 in MA is nearing a retirement age, or if they will be working as a pharmacist for another company instead of being an owner, they should then also consider estate planning.

As reimbursements are cut, more regulations are applied, and Massachusetts pharmacy profits continue to slip, more independent pharmacy owners in MA along with small and regional pharmacy chains will be considering selling their pharmacies and drug stores. Tax considerations should be a paramount part of the decision process.

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

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Pharmacy Acquisitions and EBITDA in Massachusetts

By Brad MacLiver
Authorship and profile at Google


EBITDA stands for earnings before interest, taxes, depreciation and amortization and is often used to measure the value of some businesses. It can also be used in the comparison of similar companies.

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 effective use of EBITDA, these larger companies should possess significant assets, have heavy amortization schedules, or bear substantial amounts of debt. Considering independent Massachusetts pharmacies don’t meet that criteria, this formula is not a useful measure as the sole means for valuing MA pharmacies for acquisition purposes.

To Calculate EBITDA, Use These Steps: 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:
(Net Income)            2,100
(Taxes paid)            + 620
(Interest Expenses)     + 390
(Depreciation)          + 205
(Amortization)           + 90
(EBITDA)              = 3,405

Seven Things to Watch For When Using 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 has been used as an estimator for 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 Massachusetts pharmacy business valuations will use EBITDA in pharmacy valuations, but only as part of a larger formula when computing values for specialty MA 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.

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

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Massachusetts Pharmacy Industry Roll-Up

By Brad MacLiver
Authorship and profile at Google


MA 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 Massachusetts pharmacy industry. 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 - a required key employee.

Industry roll-ups are often initiated by investors seeking investment opportunities. However, in the case of Massachusetts 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 MA 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.

During the pharmacy industry roll-up Massachusetts 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, 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 in Massachusetts, or an investment group, the capital to acquire and combine MA pharmacies in geographic areas.

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

When considering to buy, sell, or finance a pharmacy, whether it is an independent drug store or multiple pharmacy locations, consider due diligence and understanding of all aspects of the transaction. Using the services of a Massachusetts pharmacy industry expert to guide a MA pharmacy owner through the maze of details will benefit the pharmacy owner in making the best business decision.

Every transaction involved with the pharmacy roll-up must have the business valued at the current market value. Business valuations for the pharmacy industry in Massachusetts should be calculated by a company that has in-depth knowledge of the pharmacy. 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 Massachusetts pharmacy industry roll-up.

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

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Massachusetts Pharmacy Transactions and Capital Gains Tax

By Brad MacLiver
Authorship and profile at Google


Virtually everything you own and use for business or personal purposes is a capital asset in Massachusetts. When a pharmacy owner sells a capital asset, the difference between the amount you sell it for and the amount that you paid (the basis) is called either a capital gain or a capital loss.

One possible type of capital gain is "investment income" that increases due to real assets such as financial assets, property, and intangible assets like goodwill.  In Massachusetts and the U.S., you must report all capital gains and pay the appropriate tax.

When selling a drug store or pharmacy in Massachusetts, there are several tax strategies one can use to help offset the tax liabilities.  However, unless the large number of pharmacy acquisitions are handled by professionals, most people do not know the federal regulations which allow for reduction of tax liability for the pharmacy owner.

During this era where it can be difficult to finance a business, pharmacy sellers may be forced to lower their asking price so pharmacy buyers are able to qualify for the financing required.  In addition to the reduced offers, they are also required to pay higher percentages in taxes.

For pharmacy sellers that would like as much possible money out of a deal, this is a dilemma.  For most pharmacy owners in Massachusetts, the largest asset they will ever own is their business, and selling their business at a specific dollar amount has been key to their retirement and estate planning.  The knowledge that they will need to cut out a sizable chunk of the process in taxes may cause some pharmacy owners to reconsider their plans for retirement.  The good news is that there are strategies and financial tools which allow pharmacy owners to proceed with their plans anyway.

One strategy that is currently available to help with capital gains taxes in Massachusetts are Family Foundations.  Family Foundations are tax exempt-nonprofit organizations that grant tax advantages and provide control over philanthropic activities.  Typically, Family Foundations are private entities that do not conduct widespread fund-raising activities and get funding from a small number of sources.  They may receive gifts from limited sources or friends.  Family members serve as trustees, directors, and officers. As private foundations they can make grants, or donations to other organizations. Having a Family Foundation provides a number of benefits including, income tax deductions, exemptions from estate and gift taxes, along with the reduction or elimination of other taxes.

One strategy, but not the only one, that is currently available to assist the capital gains tax burden is the Charitable Remainder Trust (CRT). CRT’s are legally described as Split Interest Trusts. The term is used because of the blend of philanthropic motivations and personal financial aspects. CRT’s can decrease tax liabilities, increase a business owner financial wealth, and at the same time provide a vehicle for charitable giving.

CRT’s are formed when a person donates assets to this special type of Trust. Assets can be cash, stocks, real estate, etc. The CRT is set up for a set period of time, or until the donor’s (pharmacy owners) death. An individual (pharmacy owner or family member) can receive income from the Trust’s assets. Upon the donor’s death the assets go to a designated charity. Part of the income from the Trust can be used to purchase life insurance on the donor. The proceeds of the life insurance go to a designated heir(s) who receive the money without incurring any estate tax liability.

Some tax strategies including the use of CRTs are not widely known. It would be advisable for pharmacy business owners to be aware of the different tools that are available in structuring a business transaction. They should also be aware that only a professional with vast experience in CRTs should be used to setup a Charitable Remainder Trust. Not following the strict IRS guidelines could be cause for increased taxes, penalties, and in some cases criminal charges.

Over the years there have been unscrupulous individuals who have tried using CRTs and similar financial tools in illegal scams. With the increase in capital gains taxes there are expectations more scams will be floating around out there. Be knowledgeable about the possibilities, but be confident you are working with experts in your industry.

Washburn & Associates has extensive experience in pharmacy and drug store acquisitions. This pharmacy consulting firm and others who have the knowledge and expertise to structure the transaction appropriately, for tax considerations, can save a pharmacy owner large sums of money when a pharmacy is sold.

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Buy-Sell Agreement for Massachusetts Pharmacy owners

By Brad MacLiver
Authorship and profile at Google


When a Massachusetts pharmacy is owned by two or more shareholders partners should have a Purchase-Sale Agreement. A buy-sell agreement is a written document that contains procedures and controls the future sale of the Massachusetts pharmacy business.

      
Pharmaceuticals buy-sell agreements cover the interest of the parties who own a Massachusetts pharmacy and control the actions triggered by a shareholder to leave the business because of death, disability, divorce, dissolution, or retirement. Agreement will control how and when the shares of the pharmacy business is sold or transferred. It will also provide guidance on how the pharmacy will be evaluated together with the obligations of the remaining shareholders in the Massachusetts pharmacy.

Buy-sell agreements are important because the various elements of a future sell is predetermined, and does not need to be negotiated during a heated conflict, or during a grieving period. It offers both the shareholder and the family a comfort level that when the inevitable time comes for an exit strategy that the process was carefully considered in advance.

Disadvantages of not having a buy-sell agreement between Massachusetts pharmacy owners is that a disability can leave a partner who works more and another does not add to productivity. In the event of a death, without an agreement, one party will have a nonproductive heir, or a new partner can be inserted that has personality conflicts with the surviving partner. The wrong partner can be debilitating for the Massachusetts pharmacy business.

There are various types of buy-sell agreements: Entity Buy-Sell Agreement, Cross-Purchase Buy-Sell Agreement, wait and see Buy-Sell Agreement, Disability Buy-Sell Agreement. Buy-sale agreements are also known as a company will or a buyout agreement.

Possible elements of a buy-sell agreement in Massachusetts:

1. Shareholders name and number of shares and voting rights of each.

2 Guide for certified pharmacy valuation and purchase of shares a shareholder.

3 Mutual covenants and considerations.

4. Restrictions on the transfer, purchase or encumber the company stock.

5. Protocol in case of a shareholder's divorce or termination of a shareholders' agreement of employment.

6. Obligation to purchase   sale of shares from an estate.

7 Purchase of insurance to ensure the ability to meet obligations.

8. Purchase of shares paid in lump sum or in installments.

9 Remedies for breach of contract or non-payment.

10 Until the transfer is complete, the right to inspect books and records.

11. Amendments and notices of promotions or legal issues.

12. Enforcement of the agreement, the binding effects and arbitration procedures for disputes.

13. Process for the dissolution or liquidation of the company.

14. Maintenance of the property for a transitional period.

15. Preserve the representations and warranties.

16. The conditions for transfer.

17. Bill of Sale.

To ensure that the necessary funds available, buy-sell agreements are often funded with life insurance. If the death of one of the Massachusetts pharmacy owners occurs, the life insurance settlement provides funding for the remainder of the pharmacy owner to buyout partners share of the estate.

Life insurance for each partner must be in place, because without a way to gain purchase of the pharmacy's share buy-sell agreement will not be functional. As the business grows and develops how much insurance must be adapted to provide adequate coverage. Without insurance, the surviving shareholders may not have enough money to buy the required amount of the estate to meet - leaving the survivor with an unwanted partner.

To have adequate insurance coverage and to determine the details of the buy-out terms, is a certified Massachusetts pharmacy business valuation necessary. There are a large number of companies offering business valuations. Because of the dynamics and the current market of the pharmacy industry, a valuation firm should have extensive pharmacy experience. Accounting Simple formulas and multipliers will be adequate or realistic valuation does not provide for a Massachusetts pharmacy business.

Pharmacy buy-sell agreements are very important documents that must be completed with care and seriousness. Even with a long term partnership, it's just too late to create a buy-sell agreement, when an event has already happened that would require the document.

Tips:

1 Buy-sell agreements are important documents that should not be taken lightly. Consult a licensed professional.

2 Documents must take the appropriate laws and regulations that vary from state to state. Search the right guidance.

3. Premiums for insurance that the buy-sell agreement, the Fund will be deductible.

4 Ensure that the pharmacy valuation performed by an established pharmaceutical industry expert.