Financing Types Available for Nevada Pharmacies

By Brad MacLiver
Authorship and profile at Google


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

SBA Financing for Pharmacy Business Loans in Nevada

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. 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 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 Nevada 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 pharmacy transaction.

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

Patriot Express Business Loan Program

This is another SBA loan program that can be used for 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 Nevada pharmacy loan process.

Nevada 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 in NV Who Are Veterans

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

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 Nevada 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 Nevada Pharmacy Finance

Not all prospective pharmacy franchise owners 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 Nevada 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 Nevada Pharmacy Finance

Retirement Plans can be self-directed and used to invest into a pharmacy franchise. The retirement plan can purchase stock in the NV 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 crashes, so does the retirement fund. The method of providing less expensive financing for the pharmacy in Nevada 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 Nevada 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).

NV Pharmacy Franchise Agreement Buyout Funding

Keep in mind that the situation with pharmacies are changing due to economic factors, a growing mail order pharmacy market, and shifting market shares. All of these variables have a negative impact on cash flow for Nevada pharmacy franchises.  Due to tightening profit ratios, drug store owners paying franchise royalty payments may not survive. These pharmacy franchises may no choice but to declare bankruptcy or buy out the franchise agreement if and when they can.

Buying out the franchisor allows the pharmacy to remove the franchisor from the equation. This in turn allows the 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 Nevada 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. 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 Nevada pharmacy owner is advised to use a NV pharmacy industry specialist to capitalize on the funding opportunities that are available.

********************

Nevada Pharmacy Cash Flow Instruments and Financial Discount Rates

By Brad MacLiver
Authorship and profile at Google


When a NV pharmacy is considering selling a cash flow instrument such as the pharmacy’s receivables, or a pharmacy business note, the price the Nevada 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 in NV 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 Nevada 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.

An example: If $3.50 today earns 10% interest, it will be worth $3.85 at the same time next year. Therefore, $3.50 today = $3.85 next year = $9.08 ten years from now.

Within the same reasoning the reverse is true. An investor will not pay $1.00 today for a dollar that won’t be collected until next year, or 10 years from now. Today’s dollar will be discounted to reflect risk, inflation, the strength of the economy, etc.

Along with interest rates and principal amounts, a cash flow instruments such as Nevada Pharmacy Business Notes, 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. When the Note is paid early, you don’t get to collect the compounded interest amount, which would have accumulated if you had waited the full time period. The Note was already written and it has already had its terms set. Unlike a loan where the rate of return needed to cover any risks, this risk is added to the loan amount. An investor is unable to go back to the buyer of your business and retroactively change the terms of the note. so the investor will look at only a portion of the note that is going to be purchased and subtract the rate of return necessary to justify the risk. This is practice called Discounting, and the size of the discount is contingent on the risks.

Example:

If you sell something for a $4.50 with 4% interest, equal payments received over a 20 year period, you would expect to receive $9.86. However, should the note be paid in full in 10 years you will only have collected $6.66. You are not collecting the other $3.20 because you are no longer risking anything (you are not earning it). If you want an investor to advance you the $9.86, 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 Nevada pharmacy’s accounts receivables.


************************

  
 

In Nevada, Is it Worth Selling Pharmacy Notes at a Discount?

By Brad MacLiver
Authorship and profile at Google


When a NV 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. Nevada pharmacy business notes 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 in NV 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 pharmacy note an attractive proposition. More analysis needs to be performed before any decisions can be made by weighing the discounted amount with the benefits of a lump sum of cash.

1. What is the motivation for selling the Nevada 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. Do you know the pharmacy business' Current Fair Market Value? This value is what a buyer is really willing to pay for the business, and it is not simply an “earnings times x” formula. The are real aspects happening in the pharmacy industry that must be considered and it is advantageous to have a Nevada pharmacy industry specialist calculate the pharmacy business valuation.

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

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

Understanding the Risk for the Note Buyer:

1. Nevada Pharmacy Buyer Competency - There is the risk that the pharmacy buyer may not run the business as efficiently as you have, sales drop, and the pharmacy business buyer cannot meet the payment obligations. Incompetency could lead to late payments, missed payments, or bankruptcy.

2. Pharmacy Industry Changes - Changes caused by influences either within the industry, or regulations governing the industry, can make it increasingly difficult for the Nevada pharmacy business buyer to meet the contractual financial obligations.

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

4. Loan to Value - When originating a pharmacy business note you may be creating financing where there is a “negative loan to value.” Example: the pharmacy business note is for $260,000, but there is only $65,000 of tangible assets for collateral.

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

It is beneficial to discuss the options and potential origination of a pharmacy note with Pharmacy Business Note Investor before the Purchase and Sale Agreement is finalized for the acquisition of the pharmacy. This provides the NV pharmacy business seller, and future note seller, valuable insight into structuring the pharmacy business note so it can be successfully purchased.

************************


 

Using Business Notes for Financing a Pharmacy Acquisition in Nevada

By Brad MacLiver
Authorship and profile at Google


When acquiring or selling a NV pharmacy or drug store, one approach is to have the seller originate the financing and carry back a business note. At a quick glance, many pharmacy owners may not want to use this approach because they want their cash and their exit. However, when a Nevada 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.

Advantages of Creating and Selling a Nevada Pharmacy Business Note

1.  The process of selling a pharmacy or drug store to an individual can be easier and less time consuming when the NV pharmacy seller agrees to carry a business note, than a buyer pursuing traditional financing.

2. By offering Seller Carryback Financing, often referred to as Private Finance, a NV pharmacy business owner can greatly increase the number of potential buyers for their business, and most likely sell the business at a higher price.

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

4. Selling either a portion, or the entire Nevada pharmacy business note, frees up capital that can be used for new ventures, or paying off old debt.

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

When originating a Nevada 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 Nevada 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 supplied in the form of a Business Note is an alternative that should be viewed as a viable business financing option.

************************


 

Using Tax Strategies When Selling a Nevada Pharmacy

By Brad MacLiver
Authorship and profile at Google


Industry Roll-Ups occur when an industry’s many players are consolidated into smaller groups for economic benefits. NV pharmacy buyers participate in the Nevada pharmacy industry roll-up to achieve economies of scale in purchasing, marketing, information systems, logistics, distribution, and top management. Pharmacy sellers who are 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 Nevada pharmacy owners sell their pharmacy 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 in Nevada 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 pharmacy or a drug store. Unless a professional is handling a large number of NV pharmacy acquisitions, they usually do not know these federal regulations that allow for reducing the tax liability for the Nevada pharmacy owner.

Many Business Brokers, CPA’s, attorneys, and other professional advisors inform their clients that selling a pharmacy will result in tax consequences. However, most of these professionals do not handle the buying and selling of Nevada pharmacies on a daily basis and may not realize the different aspects of structuring a pharmacy transaction in Nevada allowing the reduction of the tax burden to the NV pharmacy owner.

There are some capital gain tax strategies that must be implemented before any obligation to sell the pharmacy. When a drug store owner is considering selling their Nevada 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 pharmacy seller in NV 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 pharmacy owners in Nevada along with small and regional pharmacy chains will be considering selling their Nevada pharmacies and drug stores. Tax considerations should be a paramount part of the decision process.

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

************************
 

Nevada 340B Pharmacy Discount Programs

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 NV 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 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 Nevada pharmacies allowing the pharmacies the opportunity for additional front end sales along with the Rx sales.

Pharmacy owners participating in a 340B pharmacy program need to manage their business consistent with customary business practices. In the event of an audit the Nevada 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 the inventory is required due to the drug inventory used for the 340B pharmacy program is owned by entity that contracted the pharmacy. Since the 340B inventory is not “owned” by the Nevada pharmacy this inventory will be treated differently for tax purposes. The pharmacy generates income from dispensing fees they are paid instead of a mark-up or profit margin on the inventory.

Since customers participating in a 340B program can only purchase the designated medications from a pharmacy contracted with a 340B entity, this allows a pharmacy to have a market niche. A contracted Nevada pharmacy servicing 340B customers benefit from additional customer traffic visiting the store.
 
With the current economic situation and high unemployment, many people have lost their insurance benefits. This will likely expand the need for 340B pharmacy programs and provide additional 340B customers to a participating pharmacy.

However, when a pharmacy owner is weighing the potential benefits of a 340B program, they should also take the other aspects of their business and the current market conditions of the pharmacy industry into account. What goals does the pharmacy have over the next couple years? A younger pharmacy owner that has long term objectives benefits from the many years of added customers. However, a NV pharmacy owner who considers selling their business within the next few years should note that acquisition values are based on the customer files and, currently, buyers are often unwilling to include 340B customer files in their offers. This has the result of lower Nevada pharmacy business valuations and market prices for the pharmacies despite the volume of business. Also, due to current economic conditions, there are some 340B customers who, despite deeply discounted prices, have decided not to purchase medications. Pharmacy owners must consider that the added time and costs of 340B inventory and customer tracking and reporting may not be offset by the fees received.

If a 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 NV pharmacy industry expert.



 

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.

************************