Should a Broker be Used When Buying an Oregon Pharmacy

By Brad MacLiver
Authorship and profile at Google


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

Many Oregon pharmacy buyers are experts behind the counter, but many who have never bought a 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 many pharmacy buyers believe they possess, but pharmacy buyers need to recognize how many times they have actually purchased a pharmacy compared to a pharmacy industry expert.

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

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

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

Oregon 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 an Oregon 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 pharmacy industry will help guide the buyer and seller in their negotiations.

Buying a pharmacy business in Oregon 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 an Oregon 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 an OR pharmacy acquisition. A broker working exclusively in the pharmacy industry will have sources of funding who understand the industry and will fund pharmacy acquisitions.

In Oregon pharmacy mergers 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 in OR. Using a 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 When Selling an Oregon Pharmacy

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. OR pharmacy buyers participate in the pharmacy industry roll-up to achieve economies of scale in purchasing, marketing, information systems, logistics, distribution, and top management. Oregon pharmacy sellers both independent owners and drug store chains must consider their current market value, narrowing of profit margins, and what their tax consequences will be if they sell.

When pharmacy owners in Oregon sell their pharmacy it is considered a capital asset. The difference between the selling amount and the purchasing or starting amount of 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.

Specific tax strategies can be used to help offset the tax liabilities when selling a Oregon 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.

Many Business Brokers, CPA’s, attorneys, and other professional advisors inform their clients that selling a pharmacy in Oregon 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 OK 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 an Oregon 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 OR 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 pharmacy profits continue to slip, more independent Oregon pharmacy owners along with small and regional pharmacy chains will be considering selling their pharmacies and drug stores in OR. Tax considerations should be a paramount part of the decision process.

Oregon pharmacy owners should consult with a pharmacy industry expert for advice on structuring the sale of their pharmacy. Someone with extensive experience in Oregon 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 pharmacy owners when an Oregon pharmacy is sold.


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Pharmacy Acquisitions and Oregon EBITDA

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

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

EBITDA calculation example: (OR Pharmacy Reps, change these numbers as part of the changes you do.)
Step 1) Net Income            1,700
Step 2) + Taxes paid            380
Step 3) + Interest Expenses     310
Step 4) + Depreciation          170
Step 5) + Amortization           85
Step 6) = EBITDA              2,645

Seven drawbacks to using EBITDA:
* Can be misleading number when it is confused with cash flow.
* Can make even completely unprofitable firms appear to be financially healthy.
* Numbers are easy to manipulate.
* Can overlook cash requirements for growth in accounts receivable.
* Can miss cash requirements for growth in inventories.
* Not factual when valuing small companies.
* Not effective for companies with few assets, small amounts of debt, or low depreciation or amortization schedules.

During the 1980s EBITDA was being used as a proxy 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 Oregon pharmacy business valuations will use EBITDA in pharmacy valuations, but only as part of a larger formula when computing values for specialty OR 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 pharmacy in Oregon 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 Oregon 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 Oregon pharmacy. Instead of the EBITDA number, OR pharmacy buyers should be focusing on sales, gross profit, cash flow, and customer mix.


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The Pharmacy Industry Roll-Up in Oregon

By Brad MacLiver
Authorship and profile at Google


Oregon (OR) 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 Oregon 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 in Oregon - a required key employee.

Industry roll-ups are often initiated by investors seeking investment opportunities. However, in the case of Oregon 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 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 pharmacies in OR 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 Oregon 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 OR pharmacy acquisitions. These pharmacy funding programs allow an individual pharmacy business, or an investment group, the capital to acquire and combine Oregon pharmacies in geographic areas.

Funders are willing to provide the capital for the pharmacy roll-up because they recognize that combining the individual 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 the buying, selling, or financing a pharmacy, whether an independent drug store, or multiple OR pharmacy locations,  due diligence and understanding of all aspects of the transaction should be considered. Using the services of a pharmacy industry expert to guide an Oregon pharmacy owner through the maze of details will benefit the pharmacy owner in Oregon in making the best business decision.

All transactions involved in the pharmacy roll-up need to have the business valued at the current market value. Business valuations for the pharmacy industry should be performed by a company with in-depth knowledge of the Oregon pharmacy. Simple formulas for accounting 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 pharmacy industry roll-up in OR.

The various aspects of the market which are stimulating the roll-up are also having downward pressure on pharmacy business valuations. Pharmacy owners have been watching what has been occurring in the pharmacy industry in Oregon. While profit margins drop and 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 pharmacy industry roll-up will continue in OR.


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340B Discount Programs for Oregon Pharmacies

By Brad MacLiver
Authorship and profile at Google


The U.S. Department of Health and Human Services provides a program for discounted prescription drugs to qualified Federally Qualified Health Centers (FQHC), Disproportionate Share Hospitals (DSH), and other qualified entities. When these facilities don’t have their own pharmacies they are allowed to contract with a local OR pharmacy. The drug pricing program is often referred to as 340B, named after the section of the law that established the program.

       
Section 340B legislation was enacted to provide indigent and uninsured populations access to deeply discounted medications. Since the program was enacted to assist certain populations there are restrictions and regulations in how the program operates and who the medications can be dispensed to.

Pharmacies in Oregon can be contracted by a FQHC, or similar 340B qualified entity, to manage and dispense the medications. Patients from these entities provide additional traffic in the pharmacies allowing the pharmacies the opportunity for additional front end sales along with the Rx sales.

Oregon independent drug store owners participating in a 340B pharmacy program need to manage their business consistent with customary business practices. In the event of an audit the pharmacy should have dispensing and inventory records, billing statements, etc. Business records should show that drugs purchased by customers, under the 340B Drug Pricing Program, were not diverted to people who are not part of the program.

Along with the additional record keeping a pharmacy owner will need employees who understand the various state and federal rules and regulations, which govern the 340B program. The pharmacy will also need to have a location for the 340B inventory, which is separate from their normal inventory, or have a software management system to track the separate inventories.

A system of separating inventory is required because the drug inventory used for the 340B pharmacy program is owned by entity who contracted the pharmacy.  The 340B inventory is not “owned” by the pharmacy, so, for tax purposes, this inventory will be treated differently. The Oregon pharmacy generates income from dispensing fees they are paid instead of a mark-up or profit margin on the inventory.

Since customers who participate in a 340B program can purchase only the designated medications from a pharmacy contracted with a 340B entity, this permits an Oregon pharmacy to have a market niche. Contracted pharmacies servicing 340B customers benefit from additional customer traffic visiting the store.

Given the current economic situation and high unemployment, many people no longer have their insurance benefits. This will likely expand the need for 340B pharmacy programs and provide additional 340B customers to a participating pharmacy in Oregon.

However, when a pharmacy owner is weighing the potential benefits of a 340B program, they should also consider other aspects of their business and the current market conditions of the pharmacy industry. What are the pharmacy’s goals over the next couple years? A younger Oregon pharmacy owner with long term objectives can benefit for many years from the added customers. However, a pharmacy owner considering selling the business in the next couple years should be aware that acquisition values are based on the customer files, and many buyers are not currently willing to include 340B customer files in their offers. This results in a lower pharmacy business valuation and market price for the pharmacy despite the volume of business. Also, due to the current economic conditions there are some 340B customers who despite the deeply discounted prices, have chosen not to purchase medications. Pharmacy owners need to consider the added costs and time of 340B inventory and customer tracking and reporting, may not be offset by the fees received.

If an OR pharmacy owner is considering the benefits of participating in a 340B program, or is considering selling the pharmacy in the couple years, it is advisable to discuss the options with the pharmacy industry expert.

 

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Pharmacy Transactions and Capital Gains Tax in Oregon

By Brad MacLiver
Authorship and profile at Google


Nearly everything that you own or use for personal or business purposes are capital assets.  When an Oregon pharmacy owner sells a capital asset, the difference in the amount sold and the amount paid is called a capital gain (or loss).

Capital gains also include investment income that occurs because of real assets such as property, financial assets, and intangible assets like goodwill.  In Oregon and all of the U.S., all capital gains must be reported to the IRS and the appropriate taxes must be paid.

When selling a drug store or pharmacy in Oregon, there are a few tax strategies that can be utilized to help offset tax liabilities.  Unless a professional has handled a large amount of pharmacy acquisitions, they typically will not know the federal regulations that allow for reduction of tax liability for the pharmacy owner.

In an era where financing a business in Oregon is more difficult, pharmacy sellers might be required to reduce their asking price so a pharmacy buyer can quality for financing.  To make matters worse, in addition to lower offers they will be required to pay a greater percentage in taxes.

This is troubling for pharmacy sellers who want as much money as possible out of the deal.  For most pharmacy owners in Oregon, their business is the biggest asset they will ever have, and selling the business for a certain price has been part of their plan for retirement and their estate.  Knowing they will need reduce the size of the proceeds in taxes will cause some pharmacy owners in Oregon to reevaluate their retirement plans.  Fortunately, there are several financial tools and strategies which allow the pharmacy owner to stick to their plans.

Family Foundations are tax exempt/nonprofit organizations, which provide tax advantages and control over philanthropic activities. Family foundations are typically private foundations that are funded by a small number of sources, and do not conduct widespread fund-raising activities. They may receive gifts from friends and limited sources. 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 for Oregon businesses 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 in Oregon 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 the business of acquiring pharmacies and drug stores in Oregon.  Pharmacy consulting firms like Washburn & Associates have the knowledge and experience structuring these transactions appropriately and can save a pharmacy owner large amounts of cash from taxes when selling a pharmacy.

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