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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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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Pharmacy Acquisition Finance in Arizona

By Brad MacLiver
Authorship and profile at Google


When an AZ pharmacy or drug store is being sold, a buyer will seldom pay “out of pocket” cash for the acquisition. Even in the event that cash is available, Arizona pharmacy acquisition strategies usually involve financing the transaction.

Because acquisitions typically take 6-9 months to complete, the pharmacy seller in Arizona will need the buyer to provide some proof up front about their ability to close the transaction. Acquisitions involve many hours of negotiation and due diligence, which means the process should involve qualified parties.

The acquisition will involve attorneys, accountants, lenders, valuation companies, industry specialists, and others in addition to the buyer and seller. No one wants to pursue 6-9 months of work with this many highly paid professionals without having some confidence of the AZ pharmacy buyer’s ability to close the deal.

The process begins with determining the business' value. Although there are many companies that offer valuation services, pharmacies are a special kind business. There are several aspects to valuing a pharmacy that are unique to the industry, so generic valuations or simple accounting formulas should not be used. An industry specialist should be used for valuing the Arizona pharmacies 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 will not accept old data, or a sellers “gut feeling.” Lenders need to make a decision to finance based on sound and verifiable information.                

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

Pharmacies and drug stores are in an industry where it is more difficult to obtain business loan due to the majority of the value in a pharmacy in Arizona is the customer files and not hard assets. Therefore, for the acquisition to be financed a lender will need a strong understanding of the industry and what, beyond the collateralized assets, the company offers to reduce the perceived risk.

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 will only provide $15-20,000 of collateral for a buyer possibly 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. A successful transaction takes a lender that understands the Arizona pharmacy industry.

Tips regarding pharmacy acquisitions and finance:

1. Attorneys and CPAs who have been representing the pharmacy seller in AZ for many years may see the transaction as putting themselves in a position of losing a client when the business is sold. Make sure they are working diligently on the transaction and are not slowing or undermining the process

2. Since pharmacy acquisitions involve 6-9 months of work to complete , all parties involved need to be aware of time tables. Much too often, items of importance end up sitting on the desk of someone that is outside of the control of the buyer or seller.

3. All financial information needs to be current. Over the lengthy process the data supplied to both the buyer and the lender will need to be updated on a continuous basis. Things can change drastically during a nine month period and the Arizona pharmacy seller will need to continually prove the financial condition of the company.

When pursuing “pharmacy acquisition finance,” for the best chance of success, make sure the valuation company and the lender have expertise in that industry. Choose a company that has the pharmacy experience and expertise, and is a direct correspondent with lenders who understand AZ pharmacy.

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Estate Planning for Arizona pharmacy owners

By Brad MacLiver
Authorship and profile at Google


With the current market many Arizona pharmacy owners are experiencing lower profit margins, and have considered selling. A pharmacy industry roll-up has been going for years, consolidating the pharmacy seller's customer traffic into fewer pharmacy locations. There are however a number of pharmacies that are not in a geographical location with other nearby pharmacies, such consolidation can not take place. Some Arizona drug store owners, despite their location or what is happening in the industry, has taken a stand and will not consider selling. But like paying taxes, an exit of the company is ultimately inevitable.

Estate Planning is a subject that many people, in all industries, timid. The Arizona pharmacy owner who works 6 days a week, taking very few vacations, fill scripts all day, then mops the floor and makes the books at night, it usually is not much time to consider additional things like estate planning. But, knowing that it will be a transfer of business, it is fundamental for pharmacy owners to consider a proper succession plan for the pharmacy business.

Develop a plan to transfer operations will be time consuming, but done correctly allows the Arizona company to be successfully transferred in an acceptable manner. An estate plan for a pharmacy owner need not be immutable process. Fine-tuning, updating, and changes recommended by government regulation, economic conditions and personal expectations change.

Estate planning allows a pharmacy owner to anticipate and provide for the transfer of the drug store. The plan will be formatted in an attempt to eliminate uncertainty, to assist the transfer by trimming costs and cutting taxes.

Process may involve Trusts, wills, living wills, Power of Attorney, Medical Power of Attorney, Business Valuation, Life Insurance, a charitable remainder Trusts, Buy-Sell Agreements and other legal documents. All aspects of estate planning for the pharmacy owners coordinated guidelines.

If there are non-family members as partners in the Arizona drug store business, it is fundamental that estate planning include a Purchase-Sale Agreement. A buy-sell agreement, governs the transfer of business between the pharmacy partners. The agreement may also be known as a partner buyout agreement, or a company wants. To protect the family in the event of death of a partner, buy-sell agreement funded with life insurance.

Estate planning, buy-sell agreements, and transferring of a pharmacy requires an accurate pharmacy valuation. This should be completed by a third party who has expertise in the pharmaceutical industry. Using simple accounting formulas, multipliers, and a valuator inexperienced in pharmacies will not provide an accurate business valuation.

Most Arizona pharmacy owners spend a large part of their lives to build the business. The effort should not disappear because the pharmacy owner refuses to accept their mortality, and plan accordingly. The only pharmacist in a small town is usually the pharmacy's owner. If the script can not be filled by a licensed pharmacist since the law the client files must be transferred to another pharmacy. Because of this, a pharmacy business value fall to a negligible figure in just a few days after the death of the owner. Contingencies outlined in an estate plan should address this issue. Unfortunately, due to not having an effective plan in place, each year a number of pharmacy owners die and their families are left with an asset with very little value.

Tips for Pharmacy Owners Doing Estate Planning:

1. When the family pharmacy is the only means of income for many families it becomes more fundamental to have a set plan in place.

2. To avoid disputes should estate plans should be developed with clear directives.

3. Minimize tax liabilities is an fundamental goal for most people to complete an estate plan should be an expert tax advice should be sought.

4 Many online documents and books are available that provide advice and documents to develop an estate plan. When you go to self-help route, it is advisable to have a paid expert review the completed documentation to ensure that it can be legally respected when the time comes.

5. While developing the farm plan, it is fundamental to talk with children and other family members of the pharmacy market owner especially if there are any family members who work in business and others do not.

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