Bridge Loans and New Jersey Pharmacy Acquisitions

By Brad MacLiver
Authorship and profile at Google


With the changes in the NJ pharmacy industry independent drug store owners, small and regional pharmacy chains, and pharmacy equity investment groups are acquiring New Jersey pharmacies to obtain a larger competitive footprint in a geographic area. During the acquisition phase of the business expansion there may be opportunities that require action, which is faster than the traditional funding process.

Bridge Loans are a short-term financing option and are used while waiting for permanent financing, or the next stage of financing to be obtained. Bridge loans provide funding to "bridge" the gap between a company’s current needs and their long term financing requirements.  The bridge loan is generally "taken out," or paid back, with traditional financing.

One characteristic that a bridge loan has is that they can close quickly, which in turn allows a company to capitalize on a timely acquisition or another business opportunity. This sort of quick access to cash alsos businesses the chance to avoid temporoary problems like penalties or bankruptcy. If there are  longer term issues that need to be dealt with, this form of “transitional financing” can provide the company with time until longer term financing can be secured.

Another characteristic that bridge loans have is that the process will usually require less documentation than conventional financing. Bridge loan lenders typically don't have the same government regulations to follow, so they tend to have more flexibility with their lending criteria and documentation they require. However, less documentation doesn't mean they will fail to perform due diligence to have a comfort level with the transaction before they fund.

Examples of using Bridge Loans in NJ Pharmacy Transactions:

1. An independent New Jersey pharmacy owner learns of health issues and decides to quickly sell the family owned pharmacy to an employee or local competitor. Traditional financing for the NJ pharmacy buyer may require a time line that is not acceptable when considering the circumstances. Bridge loans can be used to quickly accomplish the transaction in these scenarios.

2. In order to expand their business, a small pharmacy chain needs $1 million. They have 3 new equity investors who will be investing in the firm over the next 6 months, but at different intervals. However, the business has opportunities which require action sooner than 6 months. The quick closing bridge loan allows the pharmacy chain in New Jersey access to the needed funds so they can complete their expansion and increase profits. Money from the 3 new equity investors will pay off the bridge loan.

3. A New Jersey pharmacy owner in a leased location has an opportunity to quickly acquire a commercial property that would be a great pharmacy location, but the property is in disrepair. A bridge loan provides the needed funds to acquire and rehab of the property and once that is complete conventional long term financing can be obtained.

4. A pharmacy group developing new NJ pharmacy locations can receive bridge loan funding to get through the permitting process of a project when conventional financing isn’t available at this early stage due to there is still too much risk. A bridge loan allows the project to move into the construction phase and then qualify for other forms of financing.

5. When a pharmacy in New Jersey is owned by two or more partners and one of the partners is ready to exit the business, a bridge loan can help ensure the cash flow and uninterrupted operation of the business during the partner buyout.

6. Real estate, or equipment bought at auction may have a narrow window for closing the deal and timing of traditional financing would keep the buyer from proceeding with the opportunity. Benefits of a bridge loan will permit the pharmacy owner to quickly respond to the opportunity.

When there are business opportunities, buying NJ pharmacies, selling pharmacies, quick deadlines, an old loan maturing before a new loan can be put in place, funding needs during the permit, planning, or evaluating stages, etc., bridge loans can be an essential financial tool.

Tips regarding pharmacy bridge loans in New Jersey:

1. Bridge loans are quick to obtain, but quick to expire.

2. A bridge loan is similar to a hard money loan and the terms are often used interchangeably in conversations. Both are short-term, higher interest rate, non-standard loans, but in some circles hard money refers to the lending source and a bridge loan refers to the duration of the loan.

3. Because bridge loans usually come with higher interest rates than traditional financing a larger down payment, meaning a lower Loan to Value (LTV) and a lower level of risk and provides an opportunity for lower interest rates.

4. With the shorter time period of bridge loans borrowers will need to be aware that fees for valuations, legal, dues diligence, etc., will be amortized over a shorter period than traditional financing transactions.

Understand the types of deals that require a bridge loan may be considered speculative in nature, or have higher risk factors. Due to this many banks do not offer bridge loans. Banks must meet government regulations and need to justify their lending practices. Riskier bridge loans do not usually fall within the lending parameters of many banks. Therefore a majority of the bridge loans will come from private investment firms.  It is best to consult a company that has access to a number of funding sources who provide bridge loans.

************************

340B Pharmacy Discount Programs in New Jersey

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 NJ 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.

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

Along with the additional record keeping a pharmacy owner in New Jersey will need employees who understand the various state and federal rules and regulations, which govern the 340B program. The pharmacy will also need to have a location for the 340B inventory, which is separate from their normal inventory, or have a software management system to track the separate inventories.

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 pharmacy. Since the 340B inventory is not “owned” by the pharmacy this inventory will be treated differently for tax purposes. The New Jersey 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 high unemployment and current economic situation, there are many people who have lost their insurance benefits. This will likely increase demand for 340B pharmacy programs and provide additional 340B customers to a participating New Jersey pharmacy.

However, when pharmacy owners weigh the potential benefits of a 340B program, they should also examine other aspects of their business and the current market conditions of the New Jersey pharmacy industry. What are the goals of the pharmacy over the next couple years? A younger pharmacy owner with long term goals will benefit from the added customers for many years. However, a NJ 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 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 NJ pharmacy in the couple years, it is advisable to discuss the options with a pharmacy industry expert who understands how this program and other factors affect the valuation of the business.

New Jersey Pharmacy Transactions and Capital Gains Tax

By Brad MacLiver
Authorship and profile at Google

Almost everything you own and use for personal, or business, purposes in New Jersey is a capital asset. When pharmacy owners sell a capital asset, the difference between the amounts you sell it for and the amount you paid for it (the basis), is a capital gain, or a capital loss.

One strategy, but not the only one, that is currently available to assist the capital gains tax burden is the Charitable Remainder Trust (CRT). CRT’s are legally described as Split Interest Trusts. The term is used because of the blend of philanthropic motivations and personal financial aspects. CRT’s can decrease tax liabilities, increase a business owner financial wealth, and at the same time provide a vehicle for charitable giving.

CRT's are created when someone first donates an asset into this special type of Trust.  These assets can be several things such as cash, stocks, real estate, etc.  The lifetime of the CRT is predetermined, or it will expire on the event of the donor's (the pharmacy owner in New Jersey) death.  The pharmacy owner or any family member can receive income from this Trust's assets.  If the donor dies, the assets will go to a designated charity.  Also, part of the Trust's income can be used to purchase life insurance for the donor, and the proceeds will go to a designated heir(s) who will receive the money without estate tax liability.

CRT's are a tool for tax-planning that professional financial planners are using to maximize their clients' financial position, while at the same time they increase charitable donations.

Third party appraisals, or pharmacy business valuations, must be completed to determine the asset or business value. For the charitable deduction, the donated value will be limited to the cost basis of the asset and not the current fair market value. CRT’s, as a concept, are very simple to understand. However, strict and complex tax rules govern how and when a CRT can be set up.

As a tool for the reduction of capital gain taxes, CRT's are often utilized when a highly appreciated asset or a New Jersey business is being sold.  Following the IRS codes, assets are required to be transferred into the CRT before there are any obligations to sell the asset.  Because CRT's are irrevocable trusts, these assets can't ever be taken back out of the CRT once they are donated.  As the owner of an asset whose sole purpose is to reduce capital gain taxes on the sale of an asset, take heed that after the transfer of the asset into the CRT, if the sale of the asset does not happen for whatever reason, the asset can never be returned.  Strict, complex, and specific procedures must be followed in order to take advantage of the CRT benefits. Only someone who has advanced knowledge in these matters should be retained to guide the donor through the process of setting up a CRT.

To qualify as a CRT in New Jersey the trust must meet all the requirements set forth in the Internal Revenue Code 664, and must, from its creation, in every respect meet the definition of, and function exclusively as a CRT. The requirements cannot be met unless each transfer to the trust qualifies in itself as a charitable deduction under the Internal Revenue Codes.

There are issues that may affect the status of the assets ability to be donated to a CRT. Non-qualifying assets may reverse the benefits of the CRT causing the CRT to lose its tax-exempt status.

When the CRT ends at its designated time period, or with the death of the donor, the remaining assets in the Trust will pass to the charitable organization. The designated charity can be any legally formed tax-exempt organization including a family foundation.

As tax rates increase more business owners will use tools such as the CRT to legally put more money in their pocket instead of the governments. Business owners selling a large asset, or their company in New Jersey, typically use the money to invest in other assets whether it is new equipment or real estate, business or personal.

Over the years there have been unscrupulous individuals who have tried using CRTs and similar financial tools in illegal scams. With the increase in capital gains taxes there are expectations more scams will be floating around out there. Be knowledgeable about the possibilities, but be confident you are working with experts in your industry.  Use a company that has extensive experience in pharmacy and drug store acquisitions. Knowledgeable pharmacy consulting firms who have the knowledge and expertise to structure the transaction appropriately, for tax considerations, can save a New Jersey pharmacy owner large sums of money when a pharmacy is sold.

************************

New Jersey Buy-Sell Agreements for Pharmacy Owners

By Brad MacLiver
Authorship and profile at Google

When a New Jersey (NJ) pharmacy is owned by two or more people the stockholders/partners should have what is known as a Buy-Sell Agreement. Buy-sell agreements are written documents that govern the future sale of New Jersey pharmacy businesses and provides the necessary procedures.

Pharmacy buy-sell Agreements protect the interest of the parties who own the New Jersey pharmacy and directs the actions triggered by a stockholder leaving the business due to death, disability, divorce, dissolution, or retirement. The agreement governs the conditions which determine how and when the shares of the pharmacy business can be sold or transferred. It will also provide a roadmap as to how the pharmacy will be valuated along with the obligations to the remaining shareholders of the pharmacy.

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

Disadvantages of not having a buy-sell agreement between pharmacy owners in NJ is that a disability may leave one partner working more and another not adding to the productivity. In the event of a death, without an agreement, one partner may be left with a nonproductive heir, or a new partner may be inserted that has personality conflicts with the surviving partner. The wrong partner could be devastating for the New Jersey pharmacy business.

Several kinds of buy-sell agreements are used, such as: Entity Buy-Sell Agreements, Cross-Purchase Buy-Sell Agreements, Disability Buy-Sell Agreements, and Wait and See Buy-Sell Agreements. Buy-sell agreements are also referred to as Business Wills or a Buyout Agreements.

Potential elements of a New Jersey Buy-Sell Agreement:

1. Stockholders names and the number of shares and voting rights of each. 

2. Guidance for the certified pharmacy valuation and purchase of a stockholder’s shares.

3. Mutual covenants and considerations.

4. Restrictions on transferring, purchasing or encumbering the company’s stock.

5. Protocol in the event of a shareholder’s divorce or termination of a shareholders employment.

6. Obligation to buy/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. Agreement enforceability, binding effects, and arbitration procedures for disputes.

13. The corporation's process for dissolution or liquidation.

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 New Jersey 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 NJ 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 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 New Jersey pharmacy industry a valuation firm should have extensive NJ pharmacy experience. Simple accounting formulas and multipliers will not provide an adequate, or realistic, valuation for a pharmacy business.

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:

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 NJ pharmacy valuation is performed by an established New Jersey pharmacy industry expert.