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Pharmacy Cash Flow Instruments New Hampshire and Financial Discount Rates

By Brad MacLiver
Authorship and profile at Google


When a pharmacy is considering selling a cash flow instrument such as the pharmacy’s receivables, or a pharmacy business note, the price the New Hampshire (NH) 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 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 NH 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 being more valuable to have a dollar today instead of tomorrow is based on the Time Value of Money (TVM). Most business people are aware of the TVM and how it is fundamental to both personal and corporate decision making, but to make sure we are on the same page, we will cover the basics of TVM.

TVM assumes that money earns interest over time. Therefore, as the cliché says time is money, and because of this we can compare money at different points in time that have different values and call them equal.

Along with interest rates and principal amounts, a cash flow instruments such as New Hampshire Pharmacy Business Notes in New Hampshire, 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. If the Note is paid off too soon, you won’t get to collect the amount in compounded interest. 

The interest would normally have accumulated if you had waited the full time period. The Note was already written and the terms were set. Unlike a loan in which the rate of return is needed to cover the risk is added to the loan amount. Investors are unable to go back to the buyer of your business and change the note's terms. The investor must therefore look at the portion of the note that is going to be purchased and then subtract the rate of return needed to justify the risk. This is called Discounting. The amount of the discount is contingent on the risk.

If you want an investor to advance you a lump sum of cash, 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 New Hampshire pharmacy’s accounts receivables.


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Is it Worth Selling Pharmacy Notes in New Hampshire at a Discount?

By Brad MacLiver
Authorship and profile at Google


When a New Hampshire (NH) 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 in New Hampshire can be sold by using a discounting method. Instead of buying a pharmacy note at its face value, the 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 only look at the discount rate and quickly calculate in their head that they are giving up too much money to make the selling of the New Hampshire pharmacy note an attractive proposition. However, further analysis needs to be completed 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 New Hampshire pharmacy note? 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 accomplish these goals? What are the opportunity costs if you don’t have the lump sum of cash to achieve your goals, or invest in something that pays a higher return? Determine investment and family priorities.

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 New Hampshire pharmacy industry must be considered and it is advantageous to have a pharmacy industry specialist calculate the pharmacy business valuation.

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

4. A New Hampshire 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 discounted rate can be more attractive when only a portion of the note is sold and the Pharmacy Note Investor is not holding all the risk.

Understanding Risks for the Note Buyer:

1. Pharmacy Buyer Competency - There is the chance that the pharmacy buyer may not run the business as efficiently as you have.  Sales could drop and the New Hampshire pharmacy business buyer cannot meet the payment obligations. Incompetency possibly leads to late payments, missed payments, or even bankruptcy.

2. Pharmacy Industry Changes - Changes caused by influences either within the pharmacy industry or regulations that govern the industry can make it more and more difficult for the pharmacy business buyer in NH to meet the contractual financial obligations.

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

4. Loan to Value - If you are originating a New Hampshire pharmacy business note, you may be creating financing where there is what's known as a “negative loan to value.” Example: the pharmacy business note is for $450,000, but there is only $150,000 of tangible assets for collateral.

5. Title Insurance – 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 NH pharmacy business note ties up capital and prevents potential financial gains from other investments.

It is beneficial to discuss the options and potential origination of a New Hampshire pharmacy note with 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 New Hampshire for Financing Pharmacy Acquisitions

By Brad MacLiver
Authorship and profile at Google


When acquiring or selling a New Hampshire (NH) 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 New Hampshire 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.
               
The Advantages to Creating and Selling a Pharmacy Business Note

1. The lengthy process of selling a pharmacy or drug store to an individual in New Hampshire can be made easier and less time consuming when the pharmacy seller agrees to carry a business note rather than a buyer pursuing more traditional financing.

2. Offering Seller Carryback Financing, which is referred to as Private Finance quite often, a NH pharmacy business owner can greatly increase the number of potential buyers for their business, which will most likely allow the business to sell at a higher price.

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

4. Selling either a part or the entire pharmacy business note in New Hampshire frees up capital that can be used for new ventures or to pay off old debt.

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

When originating a 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 pharmacy note in exchange for compensation. Since Investor can’t go back to the New Hampshire 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 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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New Hampshire Pharmacy Acquisition Finance

By Brad MacLiver
Authorship and profile at Google


When a New Hampshire (NH) pharmacy is being sold, seldom does the pharmacy buyer pay cash for the acquisition. Even when cash is available, New Hampshire pharmacy buyer strategies usually involve financing the transaction.

Typical acquisitions take 6-9 months to complete, so the pharmacy seller will need the buyer to provide some proof up front about their ability to close the transaction. Acquisitions will involve many hours of due diligence, and negotiation. Along with the buyer and seller, the acquisition will involve accountants, attorneys, money lenders, companies that perform valuations, specialists in the pharmacy industry, pharmacy brokers, and other specialists. No one wants to pursue 6-9 months of work involving a variety of highly paid professionals without having some confidence of the NH pharmacy buyer’s ability to close the deal.

The process will begin with determining the value of the drug store. There are many companies that offer valuation services. However, due to the changing circumstances of the pharmacy industry a pharmacy industry specialist should be used for valuing the company instead of a valuation company that has a broader spectrum. In order to complete a valuation the selling company needs to provide up-to-date data. Lenders funding pharmacy transactions will not accept a sellers “gut feeling” or a value based on a simple accounting formula. Lenders need to make a decision to finance a pharmacy in New Hampshire based on sound and verifiable information.

There are a number of methods to finance a New Hampshire pharmacy acquisition. Each of these methods can be customized or bundled with other forms of financing to provide the buyer with the best financing package and the greatest chance for the businesses financial success.

It is crucial that you structure the transaction because the drug store seller will naturally want as much money as possible and wants cash. However, the New Hampshire pharmacy buyer desires to spread out the debt service, wants to have as little cash as possible invested in the acquisition.

The pharmacy industry is in a market where it is more difficult to obtain funding. For the acquisition to be financed a lender will need a strong understanding of the pharmacy industry in NH and what, beyond the collateralized assets, the company offers to reduce the perceived risk.

One simple example of this is the Pharmacy Industry. New Hampshire pharmacies have typically been known for generating profits and to be stable businesses. However, they are usually in leased locations, and their furniture, fixtures, and computers typically will only provide $15-20,000 of collateral for a buyer requesting a million dollar loan. A lot of money is tied up in inventory, but the small pills are considered by a lender to easy to move out the door in the event of default. Due to these circumstances many lenders will not loan money to these traditional money making businesses.

When pursuing Pharmacy Acquisition Finance, for the best chance of success, make sure the pharmacy valuation company and the lender have expertise in the NH pharmacy industry.

Tips:

1. Attorneys and CPAs who have been representing the pharmacy or drug store for many years may see the transaction as putting themselves in a position of losing a client when the business is sold. Make sure they are working diligently on the New Hampshire pharmacy transaction and are not slowing or undermining the process.

2. Since pharmacy acquisitions involve 6-9 months and sometimes a couple years, all parties involved need to be aware of time tables. Much too often, items of importance end up sitting on the desk of someone that is outside of the control of the buyer or seller.

3. All of the pharmacy’s financial information needs to be current. Over the lengthy process the data supplied to both the buyer and the lender will need to be updated on a continuous basis. Things can change drastically during a nine month period and the NH pharmacy seller will need to continually prove the financial condition of the company.


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Using Tax Strategies When Selling Pharmacies in New Hampshire

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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New Hampshire EBITDA and Pharmacy Acquisitions

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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