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Arizona (AZ) pharmacy and drug store owners.... Merry Christmas!

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When you have questions about the value of your drug store, need pharmacy financing, or want to either sell a location or expand into a new store we can assist you. Contact www.PharmacyValuations.com.

Arizona Pharmacy Franchise Financing

By Brad MacLiver
Authorship and profile at Google


Arizona (AZ) pharmacy franchises are contractual relationships between two parties. First is the Pharmacy Franchisor.  They are the party that developed their drug store business model, branded pharmacy related products, and produced the system under which pharmacy franchisees will operate. 

The second party is the Pharmacy Franchisee. The franchisee purchases a franchise license from the Pharmacy Franchisor, then usually pays an ongoing pharmacy franchise or royalty fees to use the name, products, systems, trade secrets, etc., created by the Arizona Pharmacy Franchisor.

There are a number of options for financing an Arizona pharmacy franchise business. All 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 used in funding a pharmacy franchise is available when a pharmacy franchise in Arizona has the track record and pharmacy name recognition. Many of the banks will show interest in this type of funding opportunity. Unfortunately once the bank reviews the loan documents, many of these banks decline 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 Arizona retail and specialty pharmacies 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 loans. 

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.

Pharmacy Franchise Funding Tips:

1. Because there are many pharmacy franchise financing options available, AZ 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 pharmacy consulting services and franchise associations who can help guide a prospective pharmacy franchisee or borrower or a drug store loan.

4. New pharmacy owners in Arizona 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.

When Arizona pharmacy owners have questions and need information regarding pharmacy franchise business loans, or any types of funding for community drug stores and pharmacies, they should contact a pharmacy industry specialist who can provide quality answers and sound advice.

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Types of Available Pharmacy Financing in Arizona

By Brad MacLiver
Authorship and profile at Google


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

SBA Financing for Pharmacy Business Loans

The U.S. Small Business Administration (SBA) partially guarantees loans for Arizona 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 in Arizona 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 AZ 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 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 pharmacy loan process.

Arizona 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 AZ 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 AZ pharmacy franchisor and their systems.

Pharmacy franchisors 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 Arizona 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 pharmacy. Since the AZ 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 Arizona Pharmacy Finance

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

The downside to this is that if the Arizona pharmacy crashes, so does the retirement fund. The method of providing more inexpensive financing for pharmacy needs to be weighed against the risks of failure.

Because of various factors involved like deferred taxes, improper or early distributions, or IRS involvement, funding pharmacy transactions in Arizona with a retirement account should be handled by a company that is an expert in this arena. Investors and pharmacists interested in using this type of financing structure should research the 1974 Employee Retirement Income Security Act (ERISA).

Pharmacy Franchise Agreement Buyout Funding

Understand that Arizona pharmacy situations are changing, economic factors are a concern, mail order pharmacy is growing, and market shares are shifting. All of these can have a negative impact on the cash flow of a pharmacy franchise. Drug store owners paying franchise royalty payments may not survive the tightening profit ratios. Due to this, these AZ pharmacy franchises may only have the options of bankruptcy, or buying out the franchise agreement when allowable.

Buying out the franchisor allows the pharmacy in Arizona 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 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 AZ. 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 Arizona 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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Financial Discount Rates in Arizona for Pharmacy Cash Flow Instruments

By Brad MacLiver
Authorship and profile at Google


When an Arizona (AZ) retail or specialty drug store is considering selling a cash flow instrument such as the pharmacy’s receivables, or a pharmacy business note, the price the pharmacy owner in Arizona 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 Arizona to the Investor, there is usually a financial incentive for the Investor. This incentive is the rate of return, something that is required to compensate for the Investors perceived risk. This risk is based on the credit of the cash flow instrument’s Payor, the previous payment history, seasoning, the interest rate, and any other variable. These discount rates may also change depending on the circumstances of the cash flow instrument, the state of the economy, etc.

If the Arizona 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.

Along with interest rates and principal amounts, a cash flow instruments such as AZ 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 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.

If you sell something 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 over a period of time, 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 an Arizona pharmacy’s accounts receivables.

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

By Brad MacLiver
Authorship and profile at Google


When an Arizona (AZ) pharmacy acquisition has been accomplished by using the private financing method of a Arizona pharmacy business note, the pharmacy note holder has the option of selling the pharmacy business note for a lump sum of cash rather than waiting for the monthly payments and taking the risk those payments will always be made. Pharmacy business notes can be sold using a method of discounting; instead of buying a pharmacy note at face value, the pharmacy note is discounted, which means that the Investor pays less than face value due to risks transferred from the Pharmacy Note Holder (the note's seller) to the Pharmacy Note Investor (the note's buyer).

Most pharmacy business note sellers will look only at the discount rate and then quickly calculate in their head that they are giving up too much money to make the selling of the Arizona pharmacy note an attractive proposition. Further analysis needs to be performed, however, before a final decision can be made by weighing the discounted amount against the benefits of a lump sum of cash.

1. What is the motivation for selling the AZ pharmacy note? What are the goals? Is reduction of exposure to risk worth considering? 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 an Arizona 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 AZ 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. Pharmacy Buyer Competency - There is the risk that the Arizona 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. AZ 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 to meet the contractual financial obligations.

3. Future Competition - Sales and income of the store may be affected by yet unforeseen Arizona 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 Arizona pharmacy business note is for $300,000, but there is only $100,000 of tangible assets for collateral.

5. Title Insurance – Pharmacy business notes in AZ 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 Arizona 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 AZ 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 for Financing a Pharmacy Acquisition in Arizona

By Brad MacLiver
Authorship and profile at Google


When acquiring or selling an AZ pharmacy or drug store, an alternative to normal acquisition is to have the seller originate the financing and carry back a business note. Many pharmacy owners will not want to take this approach at first glance because they want their cash and their exit. When an Arizona pharmacy owner considers selling their drug store, by looking at the benefits of originating a business note instead of just the perceived costs, they may discover that by offering Private Finance in the form of a Pharmacy Business Note, they may find an alternative course of action.

The Advantages of Creating and Selling an AZ 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 Arizona pharmacy seller agrees to carry a business note, rather than a buyer pursuing traditional financing methods.

2. By offering Seller Carryback Financing, often referred to as Private Finance, a pharmacy business owner in Arizona 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 for a large lump sum, or selling part of the Arizona pharmacy business note to meet current financial needs and keeping the remainder for future income.

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

5. When an Arizona 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 pharmacy business note the valuation, purchase price, 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 pharmacy business buyer in AZ 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 Arizona 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, in the form of a Business Note, is an alternative that should be looked at as a business financing option.

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Using Tax Strategies When Selling a Pharmacy in Arizona

By Brad MacLiver
Authorship and profile at Google


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

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

There are some capital gain tax strategies that must be implemented before any obligation to sell the Arizona pharmacy. When a drug store owner is considering selling their pharmacy either now, or in the next few years, it is urgent the best course of action be considered now instead of later.

Estate Planning when selling a pharmacy in Arizona 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 AZ is nearing a retirement age, or will be working as an Arizona 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 Arizona pharmacy owners along with small and regional pharmacy chains in AZ will be considering selling their pharmacies and drug stores. Tax considerations should be a paramount part of the decision process.

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

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