Using Tax Strategies When Selling a Pharmacy in Georgia

By Brad MacLiver
Authorship and profile at Google


When an industry’s many players are consolidated into smaller groups for economic benefits it is known as an industry roll-up. Georgia (GA) pharmacy buyers participate in the pharmacy industry roll-up in Georgia to achieve economies of scale in purchasing, marketing, information systems, logistics, distribution, and top management. 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 Georgia pharmacy owners sell their GA 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 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 Georgia 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 pharmacy owner in Georgia.

Many Business Brokers, CPA’s, attorneys, and other professional advisors inform their clients that selling a GA pharmacy 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 a pharmacy transaction allowing the reduction of the tax burden to the pharmacy owner in Georgia.

There are some capital gain tax strategies that must be implemented before any obligation to sell the Georgia 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 GA 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 is nearing a retirement age, or will be working as a Georgia 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 in Georgia continue to slip, more independent pharmacy owners along with small and regional pharmacy chains will be considering selling their GA pharmacies and drug stores. Tax considerations should be a paramount part of the decision process.

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

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Pharmacy Industry Roll-Up in Georgia

By Brad MacLiver
Authorship and profile at Google


GA 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 pharmacy industry in Georgia. 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 GA pharmacists - a required key employee.

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

During the Georgia 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 has the result of more customer traffic through a single location.  This reduces the expenses that come with multiple locations and can also dramatically drive up total sales while driving down the administrative and overhead costs per customer.

To help fund pharmacy acquisitions during the roll-up in Georgia, specific programs for funding have been created. These pharmacy chain funding programs are backed by major financial institutions that provide the funding for pharmacy acquisitions. These pharmacy funding programs allow an individual Georgia pharmacy business, or an investment group, the capital to acquire and combine pharmacies in geographic areas.

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

When considering the buying, selling, or financing a 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 GA pharmacy industry expert to guide a Georgia 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 in Georgia need to have the business valued at the current market value. Business valuations for the 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 GA 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. Georgia pharmacy owners have been watching what has been occurring in the 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 pharmacy industry will continue to slide to lower levels, and thus the Georgia pharmacy industry roll-up will continue.

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Pharmacy Acquisition Finance in Georgia

By Brad MacLiver
Authorship and profile at Google


When a GA pharmacy or drug store is being sold, seldom does the buyer pay “out of pocket” cash for the acquisition. Even when cash is available, Georgia pharmacy acquisition 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, so the process should involve qualified parties.

Along with the buyer and seller the acquisition will involve attorneys, accountants, lenders, valuation companies, industry specialists, 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 Georgia pharmacy buyer’s ability to close the deal.

The process will begin with determining the value of the business. There are many companies that offer valuation services. However, pharmacies in Georgia are not ice cream stores. There are many aspects of 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 GA 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.

Georgia 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 GA 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 in GA have typically been known as being stable, profit-generating businesses. Despite this, they may look worse to a buyer because they are usually in leased locations, and their furniture, fixtures, and computers will only provide $15-20,000 of collateral when the buyer could be requesting a million dollar loan. A lot a pharmacy's money is tied up in inventory, but lenders view their small pills as an easy asset to move out the door in the event of default. These circumstances cause many lenders to avoid loaning money to these traditional money-making businesses. To have a successful transaction, it requires a lender who understands the pharmacy industry.

Tips regarding GA pharmacy acquisitions and finance:

1. Attorneys and CPAs who have been representing the pharmacy seller 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 Georgia 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 pharmacy seller in GA 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 Georgia pharmacy.

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Pharmacy Industry: Current Market Conditions in Georgia

By Brad MacLiver
Authorship and profile at Google


Currently there are a number of factors that are impacting the current market conditions of the U.S. pharmacy industry. These factors are affecting the pharmacy business valuations of pharmacies in GA and drug stores all across the U.S.

Local demographics:

The valuation process also includes local market conditions and local demographics. Smaller communities have less growth potential and with the declining profits a buyer will need to purchase at a lower value because they will have to service the debt from a business loan and still try to make a living. The same is true for communities that have lost population due to economic conditions, or have a high rate of unemployment. Fewer people, or fewer customers with the ability to purchase, will mean fewer sales and less chance of any substantial improvement in the near term. This results in a lower pharmacy business value.

Pharmacists Shortage in Georgia:

Pharmacies across the country have had difficulties in finding pharmacists.  This shortage of pharmacists in GA not only affects employee opportunities it also affects the number of potential independent buyers. 

Fewer Buyers:

There are also fewer corporate buyers. Some of the largest pharmacy chains have been purchased and consolidated in the pharmacy industry roll up in Georgia. Many smaller chains have run into financial difficulties and have stopped their expansion. It is more difficult to drive a price higher when there are fewer willing, or capable, to purchase.

Current Market Conditions Requires Industry Roll-up:

The consolidation of the pharmacy industry is required to get more traffic into a single store.  Due to simple economics, when any business has a reduction in profits they are less attractive to a buyer and Georgia pharmacy business values drop. There are many factors contributing to the downward pressure of pharmacy values and there is not any expectation of a turn around. Pharmacy owners should not be fooled by inexperienced Brokers claiming grand outcomes and over stating pharmacy business values not based on realistic market conditions.

With the consolidation of the pharmacy industry that has been happening for several years, many new brokers have entered the market to broker pharmacy acquisitions. Most brokers do not have pharmacy related experience, nor do they use current market conditions when they value a pharmacy. Most are using simple accounting formulas that hold no sound reasoning for the value when faced with current Georgia pharmacy market conditions. Due to this many brokers are valuing pharmacies 2 to 3 times more than what the market is really willing to pay. Any inexperienced person can quote a high value to capture a listing.  However, that does not mean the over inflated asking price is what the business will actually sell for.

Mail Order:

Some insurance companies have started designating a significant number of pharmacy patients as “long-term medications”, requiring that they only purchase the medications from mail order pharmacy companies who provide products at lower prices. Local pharmacies are impacted by not only missing out on prescription sales, but front-end sales will also decline because those customers are not entering the store. Pharmacy mail order sales have currently eclipsed sales from independent retail Georgia pharmacies.

Consult a firm that provides pharmacy business valuations that are based on real market conditions.  These companies do not use a simple formula for calculating the value of a pharmacy. Complex methods are used to derive the value of a Georgia pharmacy.

It is wisest to consult a company that specializes in pharmacy along with extensive and current industry data.  Choose pharmacy specialists who have worked in the pharmacy industry in Georgia long enough to have thorough pharmacy experience as well as an excellent reputation.  Companies with good credentials possess large amounts of national data and the largest financial institutions, national chain pharmacies, regional pharmacy chains, independently owned drug stores, and pharmacy equity investment groups rely on the services of companies fitting this description.

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340B Discount Programs for Pharmacies in Georgia

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 GA 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.

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

Pharmacy owners in Georgia participating in a 340B pharmacy program need to manage their business consistent with customary business practices. In the event of an audit the pharmacy should have dispensing and inventory records, billing statements, etc. Business records should prove that drugs purchased by customers who are under the 340B Drug Pricing Program were not diverted to customers who are not part of the program.

In addition to the additional record keeping, pharmacy owners will need employees who know how the various state and federal rules and regulations govern the 340B program. The pharmacy also needs to have a location for the 340B inventory, which is separate from normal inventory, or track the separate inventories with a software management system.

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 Georgia pharmacy. Since the 340B inventory is not “owned” by the pharmacy in GA 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 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 Georgia pharmacy.

However, when a pharmacy owner is weighing the potential benefits of a 340B program, they should also consider other aspects of their business and the current market conditions of the pharmacy industry. What are the pharmacy’s goals over the next couple years? A younger Georgia pharmacy owner with long term objectives can benefit for many years from the added customers. However, a pharmacy owner considering selling the business in the next couple years should be aware that acquisition values are based on the customer files, and many buyers are not currently willing to include 340B customer files in their offers. This results in a lower pharmacy business valuation and market price for the pharmacy despite the volume of business. Also, due to the current economic conditions there are some 340B customers who despite the deeply discounted prices, have chosen not to purchase medications. Pharmacy owners in Georgia need to consider the added costs and time 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 GA pharmacy in the couple years, it is advisable to discuss the options with the pharmacy industry expert.

Georgia Pharmacy Transactions and Capital Gains Tax

By Brad MacLiver
Authorship and profile at Google


How can a capital asset affect a Florida pharmacy business owner wanting to sell their business, and what is it?

Looking solely a Georgia pharmacy business and not the personal property of the pharmacy owner, if the pharmacy owner wanted to sell their pharmacy business, it then is a “capital asset.” Now the pharmacy owner would look at the disparity in the cost they paid for the pharmacy business (the basis), and the monetary figure the pharmacy business sells for, either for loss or gain, and this is deemed a “capital gain or loss” by the U.S. government, it has to be stated and can be taxed.

Capital gains may also be identified as Investment income due to its relation to real assets, such as property, intangible assets such as donations, and financial resources.

Finding financing for a potential pharmacy business buyer will be increasingly more difficult and the amount of cash available will be less with the current economic down turn, while selling a Georgia pharmacy business for a net profit will become increasingly more problematic. Now couple this with the possibility that the seller of the pharmacy business might need to reduce the asking price so buyers have the opportunity to get financing, and then, still pay an increased tax percentage.

How can an owner of a Georgia Pharmacy business combat these issues? There are some good tools and strategies out there, but first the pharmacy owner requires a specialist in the pharmacy business industry that is knowledgeable in these strategies and tools. Washburn & Associates are these specialists that are keenly aware of the practice of selling a Georgia pharmacy for the highest profit available, while paying the least in taxes.

One tool is the “Charitable Remainder Trust” or CRT; this used to assist with the capital gains tax burden.

Now, what is a Charitable Remainder Trust? Legally explained as “Split Interest Trust,” which are used because to the mix of charitable donations and personal financial positions; CRT’s may enhance the pharmacy business owner’s finances, and allow for charitable giving, while decreasing tax liabilities.

A CRT is created from charitable donations when a pharmacy owner donates from their own assets, such as real estate, cash, etc and is donated to this special type of Trust. The trust is then put in place for a specific time period or until the donor’s death; during this time the pharmacy owner may collect income and if desired, buy life insurance from the Trust’s assets, and without state tax liability to provide for their designated heirs after they (the pharmacy owner) are gone. CRT’s are for use by financial specialists in the pharmacy business industry, such as Washburn & Associates, to raise the pharmacy owner’s assets and charitable donations by understanding the U.S. government’s strict and nebulas tax laws revealed in Internal Revenue Code 644, which states when and how a CRT can be set up.

Georgia pharmacy business owners need to receive the greatest amount of cash for their pharmacy business. By utilizing Washburn & Associates as their pharmacy business industry specialists, Georgia pharmacy business owners can rest assured they would garner the best from their business investment.

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Buy-Sell Agreements for Pharmacy Owners in Georgia

By Brad MacLiver
Authorship and profile at Google


Buy-Sell Agreements for Pharmacy Owners in Georgia

When a GA pharmacy is owned by two or more people the stockholders/partners should have a Buy-Sell Agreement. A buy-sell agreement is a written document that provides the procedures and governs the future sale of the Georgia pharmacy business.
               
Pharmacy buy-sell Agreements protect the interest of the parties who own the pharmacy in Georgia and directs the actions triggered by a stockholder leaving the business due to death, disability, divorce, dissolution, or retirement. The agreement will govern how and when the shares of the pharmacy business can be sold, or transferred. It will also provide guidance as to how the Georgia pharmacy will be valued along with the obligations of the remaining shareholders of the pharmacy.

Buy-sell agreements are important because the different elements of a future sell are predetermined and won’t need to be negotiated during a heated dispute, or during a grieving period. It provides both the stockholder and the family a comfort level that when the inevitable time comes for an exit strategy that the process was thoroughly thought out in advance.

There are disadvantages to not having a buy-sell agreement between pharmacy owners.  A disability can leave one partner working while another does nothing to add to the productivity.  Also, in the case of a death, one partner may be left with a nonproductive heir if there is no agreement, or a new partner with personality conflicts with the surviving partner may be inserted. The wrong partner could be a devastating situation for the Georgia pharmacy business.

Various types of buy-sell agreements exist, such as the Entity Buy-Sell Agreement, Cross-Purchase Buy-Sell Agreement, Wait and See Buy-Sell Agreement, and Disability Buy-Sell Agreement.  Buy-sell agreements are also called a Buyout Agreement or Business Will.

Potential elements of a Buy-Sell Agreement in GA:
1. The names, voting rights, and number of shares belonging to stockholders.
2. Guidance for the certified pharmacy valuation and purchase of a stockholder’s shares.
3. Mutual covenants and considerations.
4. Restrictions on the transferring, purchasing, or encumbering stock belonging to the company.
5. Necessary protocol in the event of a shareholder’s divorce/termination of a shareholder's employment.
6. Any obligations to buy or sell shares from an estate.
7. Purchase of insurance to ensure ability to meet obligations.
8. Purchase of stock paid in lump sum or by installments.
9. Remedies for breach of the agreement or default of payment.
10. Until transfer is complete the right to inspect books and records.
11. Amendments and notices for offers or legal matters.
12. Enforceability of the agreement, the binding effects, and arbitration procedures for disputes.
13. Process for dissolution, or liquidation, of the corporation.
14. Maintaining the premises during a transition.
15. Preserving representations and warranties.
16. The terms of transfer.
17. Bill of Sale.

To ensure that the money required is available, buy-sell agreements are often funded with a life insurance policy. Should the death of one of pharmacy owners occur, the life insurance settlement will provide the funds for the remaining pharmacy owner in Georgia to buyout the partners shares from the estate.

Life insurance coverage for each partner needs to be in place, because without a way to accomplish the purchase of the pharmacy shares the buy-sell agreement will not be functional. As the business grows and develops the amount of insurance need to be adjusted to provide an adequate coverage. Without the insurance the surviving stockholder may not have enough cash to satisfy the amount required to buy out the estate - leaving the survivor with an unwanted partner.

To have the adequate insurance coverage and to determine the specifics of the buy-out terms, a certified GA pharmacy business valuation is needed. There are a large number of companies that provide business valuations. Due to the dynamics and current market conditions of the pharmacy industry a valuation firm should have extensive pharmacy experience. Simple accounting formulas and multipliers will not provide an adequate, or realistic, valuation for a pharmacy business in Georgia.

Pharmacy buy-sell agreements are extremely important documents that need to be completed with seriousness and care. Even with a long standing partnership, it is only too late to create a buy-sell agreement when an event has already occurred....that would require the document.

Tips for Georgia Pharmacy Owners:
1. Buy-Sell Agreements are critical documents that should not be taken lightly. Consult a licensed professional.
2. Documents must address the proper laws and regulations which vary from state to state. Seek the proper guidance.
3. Premiums for insurance that will fund the buy-sell agreement might be deductible.
4. Ensure that the pharmacy valuation is performed by an established Georgia pharmacy industry expert.