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Financial Discount Rates in Vermont for Pharmacy Cash Flow Instruments

By Brad MacLiver
Authorship and profile at Google


When a VT pharmacy is considering selling a cash flow instrument such as the pharmacy’s receivables, or a pharmacy business note, the price the pharmacy owner in Vermont 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 Vermont pharmacy owner to the Investor, there is typically a financial incentive for the Investor. The incentive is the rate of return, which is required to compensate for the Investors perceived risk. The risk is based on the credit of the cash flow instrument’s Payor, previous payment history, seasoning, interest rate, and other variables. Discount rates may change depending on the circumstances of the cash flow instrument, the economy, etc.

If the pharmacy owner in Vermont 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 $1000.00 today earns 10% interest, it will be worth $1100.00 at the same time next year. Therefore, $1000.00 today = $1100.00 next year = $2593.74 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 Pharmacy Business Notes in VT, 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 has already been written and the terms set. Unlike a loan where the rate of return needed to cover the risk is added to the loan amount. An investor cannot go back to the buyer of your business and change the terms of the note. Therefore, the investor looks at the portion of the note, which is going to be purchased and subtracts the rate of return needed to justify the risk. This is called Discounting. The amount of the discount is contingent on the risk.

Example:

If you sell something for a $1000.00 with 9% interest, equal payments received over a 7 year period, you would expect to receive $1828.04. However, should the note be paid in full in 2 years you will only have collected $1188.10. You are not collecting the other $639.94 because you are no longer risking anything (you are not earning it). If you want an investor to advance you the $1828.04, 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 might be beneficial for you to sell just a portion of the note. Because payments from a month in the 10th year holds less value than payments collected this year, it would benefit you to sell only the number of months that you need to obtain the cash that meets your current financial needs. You are always able to sell more payments at a later date if you need additional funds. Determine how much cash you really need and then 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 Vermont pharmacy’s accounts receivables.


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Is it Worth Selling a Pharmacy Note at a Discount in Vermont?

By Brad MacLiver
Authorship and profile at Google


When a Vermont (VT) pharmacy acquisition has been accomplished by using the private financing method of a pharmacy business note, the holder of the pharmacy note in Vermont has the option of selling the pharmacy business note for a lump sum of cash instead of waiting for the monthly payments and taking the risk those payments will always be made. Pharmacy business notes can be sold by using a discounting method. Instead of buying a pharmacy note at its face value, the pharmacy note will be discounted. Meaning the Investor will pay less than face value due to the risk being transferred from the Pharmacy Note Holder (the note seller) to the Pharmacy Note Investor (the note buyer).

Most pharmacy business note sellers only look at the discount rate and quickly calculate in their head that they are giving up too much money to make the selling of the Vermont pharmacy note an attractive proposition. However, further analysis needs to be completed before a final decision is made by weighing the discounted amount with the benefits of a lump sum of cash.

1. What is the motivation for selling the VT pharmacy note? What are the desired goals? Is reducing the exposure to risk a consideration? Is there a financial decision to pay off debt? Is capital required for a new venture? Are there dreams of exotic vacations or world travel that could be accomplished with a lump sum of cash? How important is it to accomplish these goals? What are the opportunity costs if you don’t have the lump sum of cash to achieve your goals, or invest in something that pays a higher return? Determine investment and family priorities.

2. What is the Current Fair Market Value of the pharmacy business? This is what someone is really willing to pay for the business, and not just an “earnings times x” formula. Real aspects of what is happening in the pharmacy industry must be considered and it is advantageous to have a Vermont pharmacy industry specialist calculate the pharmacy business valuation.

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

4. A pharmacy note in VT 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 Risks for the Note Buyer:

1. 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 Vermont 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 pharmacy business buyer in VT to meet the contractual financial obligations.

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

4. Loan to Value: When originating a pharmacy business note in Vermont you may be creating financing where there is a “negative loan to value.” Example: the pharmacy business note is for $250,000, but there is only $75,000 of tangible assets for collateral.

5. Title Insurance: Pharmacy business notes in Vermont 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 Vermont pharmacy business note ties up capital and prevents potential financial gains from other investments.

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


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Using Business Notes in Vermont for Financing a Pharmacy Acquisition

By Brad MacLiver
Authorship and profile at Google


When acquiring or selling a VT pharmacy or drug store, one alternative financing method is to have the seller originate financing and carry back a business note. At first glance many Vermont pharmacy owners will not want to take this approach. They want their cash and their exit. When a 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 Pharmacy Business Note in Vermont

1.  The process of selling a Vermont pharmacy or drug store to an individual can be easier and less time consuming when the 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 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 Vermont pharmacy note 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 VT pharmacy business note, frees up capital that can be used for new ventures, or paying off old debt.

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

When originating a pharmacy business note the terms and interest rate are set and agreed upon between the seller and buyer of the business. The seller of the business accepts the promissory note, which is secured by the business including any inventory and equipment that belongs to the business. The pharmacy business seller then sells the note to an Investor who is willing to hold the Vermont pharmacy note in exchange for compensation. Since Investor can’t go back to the 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.

More Tips for Business Notes:

1. If a business note is poorly structured, it may prevent their sale, so seek out professional advice before you originate a financial instrument that can’t be sold.

2. Sellers of business notes should fully understand the risk of Investors to successful sell the business note.

3. Private Financing in the form of a Business Note is a suitable alternative that should be looked at as a business financing option.

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Pharmacy Acquisition Finance in Vermont

By Brad MacLiver
Authorship and profile at Google


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

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

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

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

Structuring the transaction is extremely important. The drug store seller of course wants as much money as possible and wants cash. However, the pharmacy buyer desires to spread out the debt service, wants to have as little cash as possible invested in the acquisition.

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

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

For the best chance of success at pursuing Pharmacy Acquisition Finance, make sure that both the pharmacy valuation company and the lender have expertise in the Vermont pharmacy industry.

Tips for Pharmacy Acquisition Finance:

1. Attorneys and CPAs who have represented the pharmacy or drug store for several years may potentially see the transaction as putting themselves at risk of losing a client when the business is sold. Make sure they work diligently on the Vermont pharmacy transaction and are not slowing or undermining the process.

2. Because pharmacy acquisitions in Vermont will usually involve about 6-9 months or even up to two years, all parties involved should follow a time table. Important items end up sitting on the desk of someone that is outside of the control of the buyer or seller much too often.

3. All of the VT pharmacy’s financial information needs to be current. During the lengthy acquisition process, the data supplied to both the lender and the buyer will need to be updated on a continual basis. During a nine month period, things can change drastically, and the pharmacy seller will need to continually prove the financial condition of the company.


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Vermont EBITDA and Pharmacy Acquisitions

By Brad MacLiver
Authorship and profile at Google


EBITDA: earnings before interest, taxes, depreciation and amortization..... is often used to measure the value of some businesses including independently owned pharmacies. It can also be used in the comparison of similar companies whether independents or pharmacy chains.
       
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 Vermont pharmacies don’t meet that criteria, this formula is not a useful measure as the sole means for valuing pharmacies for acquisition purposes.

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

EBITDA calculation example:
1) Start with net Income   1,300
2) Add taxes paid            375
3) Add interest Expenses     225
4) Add depreciation          115
5) Add amortization           60
6) Result is EBITDA        2,075

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

In previous years, EBITDA was being used as a way to estimate 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 Vermont pharmacy specialists performing pharmacy business valuations will use EBITDA in pharmacy valuations, but only as part of a larger formula when computing values for specialty 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 in Vermont.

The EBITDA number for a specific existing Vermont pharmacy is important, for the most part, when the existing ownership is establishing their store value for the purpose of a line of credit, borrowing, creating a Trust, stock values, etc., but EBITDA does not have the same importance when selling a pharmacy. 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 VT pharmacy. Instead of the EBITDA number, Vermont pharmacy buyers should be focusing on sales, gross profit, cash flow, and customer mix.

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Pharmacy Industry Roll-Up in Vermont

By Brad MacLiver
Authorship and profile at Google


VT 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 Vermont 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 Vermont pharmacists - a required key employee.

Industry roll-ups are often initiated by investors seeking investment opportunities. However, in the case of pharmacies in Vermont, 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 VT pharmacy chains.

During the pharmacy industry roll-up pharmacies 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 Vermont pharmacy acquisitions during the roll-up, specific funding programs have been developed. These pharmacy chain funding programs are backed by significant financial institutions who can provide the funding for pharmacy acquisitions. These pharmacy funding programs allow an investment group or an individual pharmacy business in Vermont with the capital to acquire and combine pharmacies in geographic areas.

Funders are willing to provide the necessary capital for the pharmacy roll-up because they recognize that combining individual pharmacy businesses provides a greater total business value than if each individual pharmacy value were added together. This synergistic quality reduces the risk of funding the individual acquisition.

When considering the selling, buying, or financing a VT pharmacy, whether an independent drug store, or multiple pharmacy locations,  due diligence and understanding of all aspects of the transaction should be considered. Using the services of a Vermont pharmacy industry expert to guide a pharmacy owner through the maze of details will benefit the pharmacy owner 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 Vermont pharmacy industry should be calculated by a company that has in-depth knowledge of the pharmacy. Simple accounting formulas 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.

The aspects of the market which are stimulating the roll-up are also having downward pressure on the pharmacy business valuations. Pharmacy owners have been watching what has been occurring in the Vermont pharmacy industry. While profit margins slip, new regulations are being imposed, and as reimbursements are pared down there is wide expectation that the business values in the VT pharmacy industry will continue to slide to lower levels, and thus the pharmacy industry roll-up will continue.

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