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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