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There will be challenges ahead in the new year and we at www.PharmacyValuations.com will be here to assist you.

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Pharmacy Franchise Financing in Iowa

By Brad MacLiver
Authorship and Profile at Google

An Iowa (IA) pharmacy franchise is a contractual relationship between two parties. One, the Pharmacy Franchisor is the party that developed their drug store business model, branded the pharmacy related products, and produced the system the pharmacy franchisees will operate under. The second party, the Iowa Pharmacy Franchisee, purchases a franchise license from the Pharmacy Franchisor, and usually pays an ongoing pharmacy franchise fee, or royalty fees, to use the name, products, systems, trade secrets, etc., created by the Pharmacy Franchisor.

There are a number of options for financing a pharmacy franchise business. All Iowa pharmacy franchise funding sources, for drug stores, prefer lending to a pharmacy franchisee who will be working with a nationally recognized name and long track records. Newer pharmacy franchise models won’t possess these two traits and will be considered more risky.

Traditional Bank Financing can be used to finance pharmacy franchise in Iowa when the pharmacy franchise has the track record and some pharmacy name recognition. Many banks show interest in a funding opportunity of this type. However, after the bank reviews the loan documents, many of these banks reject the funding request because they don’t understand the security provided for the pharmacy loan. Community drug stores typically have very little traditional assets to offer as security. Lenders for the pharmacy in Iowa will use traditional methods for analyzing the cash flow available to service to the debt, and they will also need to understand the nontraditional collateral that will secure the loan.

As a borrower, even when incorporated, the independent drug store owner’s personal credit rating will be a factor, along with personal tax returns, and financial statements. The amount of actual cash on hand and the verification of the source of the down payment will be critical factor in qualifying for a pharmacy business loan.

IOWA Pharmacy Franchise Funding Tips:

1. Because there are many pharmacy franchise financing options available, Iowa pharmacy owners should perform proper due diligence then obtain the pharmacy funding that best suits their situation.

2. It is advisable to have an accountant or attorney that is familiar with pharmacy franchise financing to review the pharmacy business loan documents.

3. There are Iowa pharmacy consulting services and franchise associations who can help guide a prospective pharmacy franchisee or borrower or a drug store loan.

4. New Iowa pharmacy owners need to make sure their funding request is enough to get the pharmacy running and profitable. Less than ample funding for the initial stages may put the drug store in a position of needing additional funding. Smaller working capital loans that would be in a subordinated position will be more difficult to obtain at a later date.

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When pharmacy owners have questions and need information regarding pharmacy franchise business loans, other types of funding for community drug stores and pharmacies, or require a pharmacy valuation they should contact a pharmacy industry specialist who understands both the national and Iowa pharmacy markets and can therefore provide quality answers and sound advice.

When you contact www.PharmacyValuations.com you can receive a free pharmacy valuation plus discuss the options available to you without any cost or obligation.

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Topics include:

Selling a Pharmacy, Buying a Pharmacy, Financing a Pharmacy, Board of Pharmacies, Consulting and Advisory Services, FAQs, Pharmacy Market Conditions,  Marketing, Medicare’s effect on Pharmacies, U.S. Pharmacy Associations, Pharmacy Business Valuations, Referral Fees, Tax Advantages and Tax Strategies for Pharmacy Owners who are considering selling their business.

 

 

The Types of Pharmacy Financing Available in Iowa

By Brad MacLiver
Authorship and profile at Google


There are a number of different options available for funding IA pharmacy franchises, specialty pharmacies, and traditional community drug stores.

SBA Financing for Iowa Pharmacy Business Loans

The U.S. Small Business Administration (SBA) partially guarantees loans for pharmacy franchise lenders reducing the risk exposure for the lender. A loan program called 7(a) is a standard for funding pharmacy franchises in Iowa. These loans can provide funds for pharmacy franchise entry fees, real estate where the pharmacy will be located, property improvements, working capital, and pharmacy related equipment.

Borrowers for the Iowa pharmacy franchise must be creditworthy, without any bankruptcies, have ample down payment, but there are variations here, and the business must be able to repay the loan from the cash flow of the pharmacy.

Terms can range from 5 to 20 years. Within SBA standards interest rates may be adjustable or fixed and will be negotiated by the lender dependent on the financial strength of the IA pharmacy transaction.

There are SBA fees for guaranteeing pharmacy business loans. These fees, which are paid to the government and not kept by the bank, can be rolled into the Iowa pharmacy financing.

Patriot Express Business Loan Program

This is another SBA loan program that can be used for Iowa pharmacy franchise business loans and is reserved for military veterans, active service members, their spouses, and survivors. The Department of Veterans Affairs would be involved in the pharmacy loan process.

Pharmacy funding from the Patriot Express program can furnish relatively fast approval times, may accept a smaller down payment from the borrower than traditional business loans, and lower credit scores may also be accepted. Patriot Express business loans provide opportunities for lower interest rate pharmacy business loans.

Funding for Pharmacists Who Are Veterans in IA

There are specific franchise loan programs available for honorably discharged veterans and these Vet programs can be considered for Iowa pharmacy franchise loans.

Iowa Pharmacy Financing From the Franchisor

Financing a pharmacy franchisee is a usual topic in discussions with a pharmacy franchisor. Franchisors should be able to direct potential drug store franchisees toward funding programs that have previously been successful for their other pharmacy franchisees. Preferred lenders will already be familiar with the pharmacy franchisor and their systems.

Pharmacy franchisors in Iowa may also provide some funding internally. Lower collateral will be offset by higher interest rates. This may help with qualifying for a pharmacy acquisition of a franchise, but may hurt the franchisee’s long term cash flow. Due diligence of pharmacy franchisor funding should be completed before any final decisions are made.

Personal Assets Used in Pharmacy Finance

Not all prospective pharmacy franchise owners in IA have enough cash on hand. Part of the drug store business financing may require the borrower to liquidate personal stocks, provide personal assets as collateral, refinance their home, or use their 401k to assist the lenders security for making the pharmacy business loan.

If the borrower still does not have enough personal assets then a family member or a friend may be required as a partner in the IA pharmacy. Since the pharmacy partner’s cash and assets will also be at risk of loss, these partners may require some controlling interest in the drug store.

Retirement Accounts Used in IA Pharmacy Finance

Retirement Plans can be self-directed and used to invest into an Iowa pharmacy franchise. The retirement plan can purchase stock in the pharmacy franchise. This is similar to how the retirement plan currently may be investing in publicly traded stocks and mutual funds. Lower debt service and higher profit potential may result when incorporating this option that uses less external financing in funding the franchise.

The downside is, if the pharmacy in Iowa crashes, so does the retirement fund. The method of providing less expensive financing for the pharmacy needs to be weighed against the risk of failure.

Because of the factors involved such as deferred taxes, early or improper distributions, and IRS involvement, funding a pharmacy transaction with a retirement account should be handled by a company who has expertise in this arena. Pharmacists and investors interested in using this financing structure should research the Employee Retirement Income Security Act of 1974 (ERISA).

Pharmacy Franchise Agreement Buyout Funding

Be aware that situations in the Pharmacy Industry are changing.  Economic conditions are concerning, the mail-order pharmacy is starting to thrive, and market shares are shifting around.  All of these factors contribute to a negative impact on the cash flow of pharmacy franchises. Pharmacy owners paying franchise royalty payments may not survive tightening profit ratios.  Therefore, these pharmacy franchises have to resort to bankruptcy or buying out the franchise agreement when possible.

Buying out the franchisor allows the pharmacy to remove the franchisor from the equation. This in turn allows the Iowa pharmacy owner more flexibility in their business decisions. The pharmacy franchisor sold the drug store franchise with expectations of earning income from the cash flow their pharmacy franchisees. Due to their long term plan, Franchisors may not be willing to allow the pharmacy franchisee to remove itself from the franchisor. However if a Franchise Agreement Buyout can be negotiated, the buy-out transaction can also be financed.

Unfortunately many banks don’t understand the dynamics of the pharmacy industry in IA. This lack of pharmacy knowledge results in the banks looking at the funding request and all they see is a business that has very little collateral compared to amount of financing the pharmacy is requesting. To assist the successful funding process a pharmacy owner is advised to use a pharmacy industry specialist to capitalize on the funding opportunities that are available.

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Iowa Purchase & Sale Agreements for Pharmacies

By Brad MacLiver
Authorship and profile at Google


A Pharmacy Listing Agreement is the contract that provides a pharmacy broker the business seller’s permission to sell their drug store in Iowa. During the process of presenting the business being sold to qualified drug store buyers there are negotiations and preliminary offers.

Once the preliminary stages have been negotiated it is time to put forth the details of the potential Iowa pharmacy transaction in contract form. This contract is usually called the Purchase and Sale Agreement, but it may also be referred to as an Asset Purchase and Sale Agreement, Pharmacy Asset Purchase Agreement, Asset Purchase Agreement, or variations of these contract titles. Whatever the title is on the contract, this document should be considered the “blueprint” for transferring the pharmacy business to the new owner.  

The Pharmacy Purchase and Sale Agreement details how much the buyer agrees to pay and what assets the seller is conveying to the buyer. When the agreement is put in writing, describes the transaction in some detail, and is accepted and signed by both parties, this contract becomes a legally binding agreement. Therefore, during the negotiated development of the Pharmacy Purchase and Sale Agreement, one should take proper diligence.

Because of liability issues, it is not often that a Iowa pharmacy’s corporate stock is purchased. Therefore, these transactions are almost always "asset only" purchases.

The elements in a Pharmacy Purchase and Sale Agreement include but not limited to: the assets being purchased, the assets being excluded, any aspects of counting and purchasing inventory, both hard and electronic copies of pharmacy customer files, any liabilities, the purchase price, the closing date, transferring title of the assets that are being purchased, pharmacy customer file conversion, the representations and warranties, non-compete clauses, any restrictive covenants, the transferring of the phone, notifying customers, signs, Board of Pharmacy notification, accounts receivables, employment of business seller and pharmacy employees, confidentiality, counting the Iowa pharmacy’s inventory, costs associated with the closing, lien searches, actions to be taken before the date of closing, along with the pharmacy’s computers, office equipment, and any automated filling machines.

Although it covers many aspects of transferring the business assets from the pharmacy seller in Iowa to the new owner, it should be understood that the Purchase & Sale Agreement does not provide tax and legal guidance for the seller. Those issues do not pertain to the buyer of the assets. Therefore, the pharmacy seller should be well advised by a knowledgeable pharmacy broker, accountant, or attorney regarding tax consequences, restrictive covenants, and the structure of the deal. These aspects of the deal may not have any impact from the buyer’s point of view, but if not considered carefully may have affects to the seller’s financial position after the transaction is closed.

Pharmacy owners in Iowa who are considering selling will benefit when working with a specialist who operates exclusively in the Iowa pharmacy industry and can provide expert guidance in bringing about a transaction that provides the most benefits regarding the seller’s tax consequences, family and estate planning. Proper planning and a blueprint that structures the transaction appropriately will increase the net amount of money the seller receives for the pharmacy’s assets.

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Iowa Pharmacy Industry: Current Market Conditions

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 Iowa (IA). These factors are affecting the pharmacy business valuations of Iowa pharmacies and drug stores all across the U.S.

Local demographics:

Besides the business data, 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 some population due to economic conditions, or communities with a high rate of unemployment. Fewer people and fewer customers with the ability to purchase results in fewer sales and less chance of any substantial improvement in the near term. The result of this is a lower pharmacy business value.

Iowa Pharmacists Shortage:

Iowa pharmacies and pharmacies across the country have had difficulties in finding pharmacists and this shortage of pharmacists not only affects employee opportunities it also affects the amount of potential independent buyers. 

Fewer Buyers:

There are also fewer corporate buyers. Some of the largest pharmacy chains have been purchased and consolidated in the Iowa 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 IA 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 should not be fooled by inexperienced Brokers claiming grand outcomes and over stating pharmacy business values not based on realistic market conditions.

With the consolidation of the pharmacy industry in Iowa that has been happening for several years, many new brokers have entered the market to broker pharmacy acquisitions. Most brokers do not have pharmacy related experience, nor do they use current market conditions when they value a pharmacy. Most are using simple accounting formulas that hold no sound reasoning for the value when faced with current pharmacy market conditions. Due to this many brokers are valuing 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.  However, that does not mean the over inflated asking price is what the business will actually sell for.

Mail Order Drug Stores:

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

Choose a firm that can provide either a retail or specialty pharmacy business valuations based on real market conditions and does not use a simple formula for calculating the value of a pharmacy. Complex methods are used to derive the value of an IA pharmacy.

It is best to use a company that specializes in pharmacy and has extensive and current industry data.  Choose pharmacy specialists who have been working in the pharmacy industry long enough to have extensive pharmacy experience and an excellent reputation.  A company with good credentials possesses large amounts of national data.  The largest financial institutions, national chain pharmacies, regional pharmacy chains, independently owned drug stores, and Iowa pharmacy equity investment groups use the services of companies fitting this description.

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Using Multiples in Iowa Pharmacy Business Valuations

By Brad MacLiver
Authorship and profile at Google


People who have purchased a residence are familiar with real estate appraisals. With an IA pharmacy business there are times when both the real estate and the business itself needs to be appraised. The pharmacy business appraisal does not include the real estate and is more commonly called a Pharmacy Business Valuation.

Iowa Pharmacy Business Valuations are part of the due diligence that will be conducted when there is a possible acquisition of the pharmacy business, or pharmacy financing is needed. Pharmacy Business Valuations in Iowa place a reasonable market value on the drug store after consideration has been given to factors such as, but not limited to: assets, financial statements, tax returns, goodwill, customer lists, licensing, competitive advantages, regulatory concerns, management team, inventories, and industry comparisons.

There are a number of accepted methods for valuing a retail drug store business. Each method has its own perspective and the business owner should have a reasonable understanding of the method being used.

One simple method is to use “multipliers” This is when someone takes the net profit, gross sales, or some other figure from the financial statements and then multiplies that number by 3, 5, 8 times (whatever the case may be). However, when using simple methods such as multipliers you need to understand a few points:

1. Financial statements are typically prepared to justify the lowest possible taxes.

2. The stated profits are typically not the actual cash flow of the company.

3. Due to tax reasons, the company's assets will probably have a different value than what is on the books.

Taking the points above into account, it is clear that a simple Iowa pharmacy valuation using multipliers may not reflect the true market value of the drug store.  So, when financing is a necessity, simple multiplier methods are not acceptable. Banks and finance companies require third party, unbiased pharmacy valuations that are completed using advanced calculations, industry knowledge, and sound financial reasoning.

Companies that specializes in specific industries are able to provide more precise and credible valuations.  Specialists should have more industry data than a company that does not normally value businesses in that industry.  The end result of not consulting a professional who has the proper industry data will be a more ambiguous valuation.

Due to the nation's aging population, pharmacy sales are on the rise as the older generations are purchasing more prescriptions.  At the same time, however, government and insurance reimbursements have been drastically cut.  This has caused a major decline in the nets profits for the pharmacy industry. Lower profits means it is harder for the business to service debt. That in turn means it is harder to obtain funding, and when there is funding it will be in lower amounts. Someone who is not a pharmacy specialist in Iowa and used a gross sales multiplier would be way off in their calculation compared to other IA pharmacy valuations. A banker that sees valuations that are not within realistic industry comparisons is not going to fund the deal and fees paid for the business valuation will have been wasted.

When it is necessary to have a pharmacy business valuation completed, it is strongly advised to pay more for a specialist that can provide a banker realistic and current information. Don’t try and save a few bucks by cutting corners, and then end up wasting time, money, and possibly even ruin a chance of obtaining funding that either the pharmacy business owner, or pharmacy buyer was seeking.

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Iowa Pharmacy Transactions and Capital Gains Tax

By Brad MacLiver
Authorship and profile at Google

Almost everything you own and use for personal, or business, purposes is a capital asset. When IA pharmacy owners sell a capital asset, the difference between the amounts you sell it for and the amount you paid for it (the basis), is a capital gain, or a capital loss.

Capital gains may also refer to "investment income" that arises in relation to real assets, such as property, financial assets, and intangible assets such as goodwill. In the U.S., all capital gains must be reported and the appropriate tax paid.

When selling a pharmacy or a drug store, there are specific tax strategies that can be used to help offset the tax liabilities. 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 Iowa pharmacy owner.

During this period of history where it is more difficult to finance a business, pharmacy sellers in IA may already be required to lower their asking price, so a pharmacy buyer can qualify for the financing required. On top of the lower offers they will be required to pay higher percentages in taxes.

This is a dilemma for the pharmacy seller who wants as much money out of the deal as possible. For most pharmacy owners their business is the largest asset they will ever own and selling the business at a certain dollar amount has been part of their retirement and estate planning.  Planning that they will need to pay out a larger chunk of their proceeds to the government will cause some pharmacy owners to revue their retirement plans. The good news is that financial strategies and tools are available that allow the Iowa pharmacy owner to go ahead with their plans.

One type of tax exempt/nonprofit organizations are called Family Foundations.  Family Foundations provide tax advantages and control over philanthropic activities and they are typically private foundations, funded by a small handful of sources.  Also, they do not conduct widespread fund-raising activities, although they may take gifts from friends and limited sources.  Family members will serve as its trustees, directors, and officers, and as private foundations, they are free to make grants or donations to other organizations.  By establishing a Family Foundation, a number of benefits are provided including income tax deductions, some exemptions from estate and gift taxes, and reduction or elimination of other taxes.

Another possible strategy 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 in Iowa 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.

You should consult a firm with extensive experience in Iowa pharmacy and drug store acquisitions. Firms that 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 in IA is sold.

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