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. NH pharmacy buyers participate in the pharmacy industry roll-up to achieve economies of scale in purchasing, marketing, information systems, logistics, distribution, and top management. New Hampshire 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 in New Hampshire 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 pharmacy is a capital gain, or a capital loss. In the U.S., all capital gains must be reported and the appropriate tax paid.
Tax strategies can be used to help offset of specific tax liabilities when selling a pharmacy or a drug store. Unless consulting with a professional who handles a large number of pharmacy acquisitions, you will find that they usually do not know these federal regulations that allow for reducing the tax liability for the pharmacy owner in NH.
Many Business Brokers, CPA’s, attorneys, and other professional advisors inform their clients that selling a New Hampshire 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 NH pharmacy owner.
There are some capital gain tax strategies that must be implemented before any obligation to sell the New Hampshire 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 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 NH pharmacy seller is nearing a retirement age, or will be working as a 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 NH pharmacy profits continue to slip, more independent pharmacy owners along with small and regional pharmacy chains will be considering selling their pharmacies and drug stores in New Hampshire. Tax considerations should be a paramount part of the decision process.
Pharmacy owners in NH should consult with a pharmacy industry expert for advice on structuring the sale of their pharmacy. Someone with extensive experience in NH 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 New Hampshire pharmacy owners when a pharmacy is sold.
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By Brad MacLiver
Authorship and profile at Google
EBITDA is an acronym that stands for: Earnings before interest, taxes, depreciation, and amortization. It is often utilized to measure the value of some businesses as well as used in the comparison of similar companies.
EBITDA generally makes it easier to evaluate various companies and to compare them against industry averages by removing the non-core and irregular operating costs like interest, which varies depending on the management’s choice of financing, as well as taxes, which fluctuates depending on acquisitions or losses from prior years. Arbitrary factors of depreciation and amortization also effect EBITDA.
The formula for EBITDA can be used as a guideline when valuing larger companies or comparing the profitability of large similar companies in the same industry.
In order to use EBITDA effectively, these larger companies need to possess significant assets, have heavy amortization schedules, or have substantial amounts of debt. Considering independent New Hampshire pharmacies don’t meet that criteria, this formula is not a very useful measuring tool as the sole means for valuing pharmacies for acquisition purposes.
The Formula To Calculate 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 1,200
2) + Taxes paid 350
3) + Interest Expenses 220
4) + Depreciation 110
5) + Amortization 60
6) = EBITDA 1,940
Factors of EBITDA to watch out for:
1. It can be misleading number when it is confused with cash flow.
2. It can make even completely unprofitable firms appear to be financially healthy.
3. Numbers are easy to manipulate.
4. It can overlook cash requirements for growth in accounts receivable.
5. It can miss cash requirements for growth in inventories.
6. It is not factual when valuing small companies.
7. It is not effective for companies with few assets, small amounts of debt, or low depreciation or amortization schedules.
As a means of estimating, EBITDA has been used to gauge cash flow in leveraged buyouts to estimate if 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 valuation experts performing New Hampshire pharmacy business valuations will use EBITDA in pharmacy valuations, but only as part of a larger formula when computing values for specialty pharmacies in NH 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 valuations used in acquisitions.
The EBITDA number for a specific existing New Hampshire 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 pharmacy in NH. 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 New Hampshire pharmacy. Instead of the EBITDA number, pharmacy buyers should be focusing on sales, gross profit, cash flow, and customer mix.
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By Brad MacLiver
Authorship and profile at Google
A provision of many New Hampshire (NH) pharmacy business loans and commercial leases is an acceleration clause. In the loan/lease agreements, the acceleration clause permits the lender to accelerate their collection of payments contingent on an event occurring. Such events include lack of payments by the borrower, failure to keep the property insured, a failure to pay tax assessments, lack of maintenance on 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 will describe the rights, conditions, and obligations relevant to the acceleration clause. When the New Hampshire 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’s slowing cash flow is going to cause a business loan default, but the NH 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. New Hampshire pharmacy owners should understand the laws in the state where they operate. Lack of knowledge is not an excuse.
4. When an acceleration clause is exercised on a commercial lease, there is the possibility the landlord cannot collect rent from both the defaulting tenant and a new tenant at the same time. To save themselves some money, pharmacy owners should help the process by assisting the landlord re-lease the property. However, please note, should the New Hampshire pharmacy be in the process of being sold and the files and inventory moved to a competitor’s location, the pharmacy buyer will require restrictions in the Purchase and Sale Agreement that the new tenant cannot be another pharmacy in New Hampshire.
5. Lenders prefer not to have to go through the foreclosure process, so if your pharmacy is headed in that direction start talking with the lender about finding a solution. Communication with the lender is a good thing.
6. There are some pharmacy business loans and commercial leases that require a “personal” guarantee from the business owner, which means that the business owner’s credit and personal assets will become involved in the event of a default. The “corporate” status of the business will prevent the lender from seizing their personal assets.
When considering financing a pharmacy for either acquisition or expansion, understanding of all ascepts of the transaction as well as due diligence should be considered. Taking advantage of the services of a NH pharmacy industry expert to guide a New Hampshire pharmacy owner through the maze of details will benefit the pharmacy owner in making the best business decision.
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