Nevada Pharmacy Acquisitions and Bridge Loans

By Brad MacLiver
Authorship and profile at Google


With the changes in the NV pharmacy industry independent drug store owners, small and regional pharmacy chains, and Nevada pharmacy equity investment groups are acquiring pharmacies to obtain a larger competitive footprint in a geographic area. During the acquisition phase of the business expansion there may be opportunities that require action, which is faster than the traditional funding process.

Bridge Loans are a short-term financing option and are used while waiting for permanent financing, or the next stage of financing to be obtained. Bridge loans provide funding to "bridge" the gap between a company’s current needs and their long term financing requirements.  Permanent financing is generally used to "take out," or pay back, the bridge loan.

One of the characteristics of a bridge loan is that they can close quickly, which in turn allows a company to capitalize on a timely business opportunity, or acquisition. The quick access to money can also allow a business the chance to avoid penalties, bankruptcy, or other temporary problems. If longer term issues need to be dealt with, this “transitional financing” provides the company time until longer term financing can be secured.

Another characteristic of bridge loans is that the process usually requires less documentation than conventional financing. Bridge loan lenders don’t usually have the same government regulations to adhere to, so they tend to have more flexibility in their lending criteria and the documentation they require. However, less documentation does not mean they won’t perform due diligence to have a comfort level with the transaction before they fund.

Examples of using Bridge Loans in Nevada Pharmacy Transactions:

1. An independent NV pharmacy owner learns of health issues and decides to quickly sell the family owned pharmacy to an employee or local competitor. Traditional financing for the pharmacy buyer may require a time line that is not acceptable when considering the circumstances. A bridge loan can be used to quickly accomplish the transaction.

2. A small Nevada pharmacy chain needs $1 million to expand their business. They have 3 new equity investors who will be investing in the firm over the next 6 months, but at different intervals. However, the business has opportunities which require action sooner than 6 months. The quick closing bridge loan allows the NV pharmacy chain access to the needed funds so they can complete their expansion and increase profits. Money from the 3 new equity investors will pay off the bridge loan.

3. A Nevada pharmacy owner in a leased location has an opportunity to quickly acquire a commercial property that would be a great pharmacy location, but the property is in disrepair. A bridge loan provides the needed funds to acquire and rehab of the property and once that is complete conventional long term financing can be obtained.

4. A pharmacy group developing new pharmacy locations in NV can receive bridge loan funding to get through the permitting process of a project when conventional financing isn’t available at this early stage due to there is still too much risk. A bridge loan allows the project to move into the construction phase and then qualify for other forms of financing.

5. When a Nevada pharmacy is owned by two or more partners and one of the partners is ready to exit the business, a bridge loan can help ensure the cash flow and uninterrupted operation of the business during the partner buyout.

6. Real estate or equipment purchased at auction could have a narrow window to close the deal. The timing of traditional financing methods would prevent the buyer from proceeding with the opportunity. THe benefits of bridge loans permit the pharmacy owner in Nevada to quickly respond to the opportunity.

If there are business opportunities, opportunities to buy or sell pharmacies, quickly approaching deadlines, old loans maturing before a new loans can be taken out, funding necessities during the permit, planning, or evaluating stages, etc., bridge loans are an invaluable tool for financing.

Tips regarding Nevada pharmacy bridge loans:                        

1. Bridge loans can be obtained quickly, but they also expire quickly.

2. A bridge loan is similar to a hard money loan and the terms are often used interchangeably during conversation. Both loans are short-term, high interest rate, non-standard loans.  However, amongst some, hard money refers to lending sources while a bridge loan refers to the duration of the loan.

3. Because bridge loans usually come with higher interest rates than traditional financing a larger down payment, meaning a lower Loan to Value (LTV) and a lower level of risk and provides an opportunity for lower interest rates.

4. With the shorter time period of bridge loans borrowers will need to be aware that fees for valuations, legal, dues diligence, etc., will be amortized over a shorter period than traditional financing transactions.

Understand the types of deals that require a bridge loan may be considered speculative in nature, or have higher risk factors. Due to this many banks do not offer bridge loans. Banks must meet government regulations and need to justify their lending practices. Riskier bridge loans do not usually fall within the lending parameters of many banks. Therefore a majority of the bridge loans will come from private investment firms.  It is best to consult a company that has access to a number of funding sources who provide bridge loans.

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Acceleration Clauses in Pharmacy Business Loans and Commercial Leases in Nevada

By Brad MacLiver
Authorship and profile at Google


A provision of many NV pharmacy business loans and commercial leases is an acceleration clause. The acceleration clause in the loan/lease agreements allows the lender to accelerate their collection of payments contingent on an event occurring. These events may include lack of payment by the borrower, failure to keep the property adequately insured, failing to pay tax assessments, not maintaining 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 Nevada pharmacy owner will describe the rights, conditions, and obligations relevant to the acceleration clause. When the NV 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 Nevada pharmacy owner has additional unencumbered assets they may be able to negotiate with the lender by offering additional collateral.

2. If a pharmacy in Nevada 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. Pharmacy owners should fully understand the laws in their own state because lack of knowledge is not an excuse.
                                 
4. When an acceleration clause is used on a commercial lease, the possibility exists that the landlord is unable to collect rent from both the defaulting tenant and a new tenant at the same time. So, to save themselves money, pharmacy owners should aid the process by assisting the landlord re-lease the property. Please take not, however, that should the pharmacy be in the process of selling and the files and inventory moved to a competitor’s location, the pharmacy buyer will then require restrictions in the Purchase and Sale Agreement that forbid the new tenant from being another pharmacy.

5. Lenders prefer not to have to go through the foreclosure process, so if your NV pharmacy is headed in that direction start talking with the lender about finding a solution. Communication with the lender is a good thing.

6. Some pharmacy business loans and commercial leases require a “personal” guarantee from the business owner. This means that the business owner’s personal assets and credit will become involved in the event of a default. The “corporate” status of the business will not keep the lender from seizing the personal assets.

When considering financing a pharmacy for acquisition, or expansion, due diligence and understanding of all aspects of the transaction should be considered. Using the services of a Nevada pharmacy industry expert to guide a pharmacy owner through the maze of details will benefit the pharmacy owner in making the best business decision.

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Pharmacy Transactions and Capital Gains Tax in Nevada

By Brad MacLiver
Authorship and profile at Google


Almost everything you own and use for personal, or business, purposes in Nevada is a capital asset. When 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.

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 (the Nevada 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.

CRT’s are a tax-planning tool and professional financial planners are using CRT’s to maximize their clients’ financial position, and at the same time increasing charitable donations.

Third party appraisals, or pharmacy business valuations, must be completed to determine the value of the asset or Nevada business. For the charitable deduction, the donated value will be limited to the cost basis of the asset and not the current fair market value. CRT’s, as a concept, are very simple to understand. However, strict and complex tax rules govern how and when a CRT can be set up.

As a tool for reducing capital gain taxes, CRT’s are often used when a business, or other highly appreciated asset, is going to be sold. In accordance to the IRS codes, assets must be transferred to the CRT before there is any obligation to sale the asset. Since CRT’s are irrevocable trusts, the assets cannot be taken back out of the CRT once donated. An owner of an asset, whose sole purpose it to attempt to reduce capital gain taxes on the sale of an asset, must be warned that if after the transfer of the asset to the CRT, and the sale of the asset does not happen for any reason, the asset cannot be returned. Strict, complex, and specific procedures must be followed in order to take advantage of the CRT benefits in Nevada. Only someone who has advanced knowledge in these matters should be retained to guide the donor through the process of setting up a CRT.

In order to qualify as a CRT, the trust is required to meet all conditions set forth in Internal Revenue Code 664 and it must meet every definition of and function as a CRT from its creation.  These requirements cannot be met unless every transfer to the trust can be qualified as a charitable deduction under the Internal Revenue Codes. 

There are a few issues which may affect the status of an asset's ability to be donated into a CRT.  Assets which don't qualify may reverse the benefits of the CRT, causing it to be revoked of its tax-exempt status.

When the CRT's donor in Nevada dies or it expires at the designated time period, its remaining assets in the Trust will automatically pass to the charitable organization specified.  This charity can be any legally-formed, tax-exempt organization, including family foundations.

As the tax rate increases, more and more business owners in Nevada will utilize tools like the CRT to put more money into their pocket legally instead of the government.  Business owners selling large assets like their company will typically use that money to invest in more assets, whether it be new equipment, personal real estate, or business real estate.

Over time there have been some less than respectable individuals who have tried to use CRT's and other financial tools in illegal scams.  With increases in capital gains taxes, there is an expectation that more scams will be lurking around.  Be cautious and aware of the possibilities, but remain confident that you are working with experts in your industry.  Use a company which has extensive experience with Nevada pharmacy and drug store acquisitions.  Experienced pharmacy consulting firms that have the knowledge and expertise in structuring transactions appropriately for tax purposes can save Nevada pharmacy owners large amounts of money when their pharmacy is sold.

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Buy-Sell Agreements for Pharmacy Owners in Nevada

By Brad MacLiver
Authorship and profile at Google


When a NV pharmacy is owned by two or more people the stockholders/partners should have a Buy-Sell Agreement. A buy-sell agreement is a written document that provides the procedures and governs the future sale of the pharmacy business.
               
Nevada pharmacy buy-sell Agreements protect the interest of the parties who own the pharmacy in NV and directs the actions triggered by a stockholder leaving the business due to death, disability, divorce, dissolution, or retirement. The agreement will govern how and when the shares of the pharmacy business can be sold, or transferred. It will also provide guidance as to how the pharmacy will be valued along with the obligations of the remaining shareholders of the NV pharmacy.

Buy-sell agreements are important because the different elements of a future sell are predetermined and won’t need to be negotiated during a heated dispute, or during a grieving period. It provides both the stockholder and the family a comfort level that when the inevitable time comes for an exit strategy that the process was thoroughly thought out in advance.

Disadvantages of not having a buy-sell agreement between pharmacy owners in Nevada is that a disability may leave one partner working more and another not adding to the productivity. In the event of a death, without an agreement, one partner may be left with a nonproductive heir, or a new partner may be inserted that has personality conflicts with the surviving partner. The wrong partner could be devastating for the NV pharmacy business.

There are various types of buy-sell agreements such as: Entity Buy-Sell Agreement, Cross-Purchase Buy-Sell Agreement, Wait and See Buy-Sell Agreement, Disability Buy-Sell Agreement. Buy-sell agreements are also known as a Business Will or a Buyout Agreement.

Potential elements of a Nevada Buy-Sell Agreement: 1. The names of, voting rights, and quantity of shares belonging to stockholders.
2. Guiding procedures for the certified pharmacy valuation and potential purchase of a stockholder’s shares.
3. Mutual covenants and considerations.
4. Restrictions on the transferring, purchasing or encumbering Nevada pharmacy’s stock.
5. Established protocol in the event of a shareholder’s death, disability, or divorce from a shareholders employment.
6. Obligation to buy/sell shares from an estate.
7. Purchasing of insurance to ensure obligations are met.
8. Purchase of stock paid either in one lump sum or in instalments.
9. Remedies for either a breach of the agreement or default of payment.
10. The right to inspect books and records until transfer has been completed.
11. Notices and amendments and for legal matters or offers.
12. The ability to enforce the agreement, its binding effects, and arbitration procedures for any disputes.
13. Process for dissolution, or liquidation, of the corporation.
14. Maintaining the premises during a transition.
15. Preserving representations and warranties.
16. The terms of transfer.
17. Bill of Sale.

To ensure that the money required is available, buy-sell agreements are often funded with a life insurance policy. Should the death of one of pharmacy owners occur, the life insurance settlement will provide the funds for the remaining pharmacy owner in Nevada to buyout the partners shares from the estate.

Life insurance coverage for each partner needs to be in place, because without a way to accomplish the purchase of the NV pharmacy shares the buy-sell agreement will not be functional. As the business grows and develops the amount of insurance need to be adjusted to provide an adequate coverage. Without the insurance the surviving stockholder may not have enough cash to satisfy the amount required to buy out the estate - leaving the survivor with an unwanted partner.

To have the adequate insurance coverage and to determine the specifics of the buy-out terms, a certified pharmacy business valuation is needed. There are a large number of companies that provide business valuations. Due to the dynamics and current market conditions of the Nevada pharmacy industry a valuation firm should have extensive pharmacy experience. Simple accounting formulas and multipliers will not provide an adequate, or realistic, valuation for a NV pharmacy business.

NV Pharmacy buy-sell agreements are extremely important documents that need to be completed with seriousness and care. Even with a long standing partnership, it is only too late to create a buy-sell agreement when an event has already occurred....that would require the document.

Tips for Nevada Pharmacy & Drug Store Owners:
1. Buy-Sell Agreements are critical documents that should not be taken lightly. Consult a licensed professional.
2. Documents must address the proper laws and regulations which vary from state to state. Seek the proper guidance.
3. Premiums for insurance that will fund the buy-sell agreement might be deductible.
4. Ensure that the Nevada pharmacy valuation is performed by an established NV pharmacy industry expert.