DETERMINING
AN EQUITABLE
SELLING/PURCHASE PRICE AND ESTABLISHING A
JUNIOR PARTNERSHIP FOR
A COMMUNITY PHARMACY
Richard A. Jackson, Ph.D.
The determination of an equitable
selling price for a community pharmacy is difficult for most pharmacy
DETERMINING AN EQUITABLE SELLING PRICE
Today's business community is characterized by mergers and acquisitions. The
pharmacy marketplace is no
exception. Pharmaceutical companies are buying other pharmaceutical companies,
retail pharmacy chains
are buying other chains and independent community pharmacies. Independent
pharmacy owners are
being approached nationwide by chains interested in buying out their independent
pharmacy. The proliferation of managed care, decreasing profit margins and the
uncertainty of the
future have caused many independent owners consider selling their pharmacies.
Because many pharmacy
chains are making- offers to purchase independent pharmacies, it is very
important that owner to
be able to determine what the pharmacy is worth. This will assist the owner in
making the appropriate decision
to sell or to assure that a fair price is paid for the pharmacy should the owner
decide to sell.
Another confounding factor is associated with fact that many business owners tend to sell their business at the wrong time. Few businesses are offered for sale at a time when the business is profitable and economic trends are optimistic. Most decisions to sell occur when the profit margins of the business are poor or decreasing and future economic projections are less than favorable. Consequently, many businesses, including pharmacies, are sold for less than optimal prices.
FINANCIAL
ANALYSIS
This fiscal condition of the
business is an important consideration in the determination of an equitable
In addition to providing financial
information related to the valuation of the pharmacy, a favorable financial
analysis will assist the
seller in the negotiation process. By pointing out those aspect of the business,
such as profitability,
solvency, efficiency, etc., the seller may be able to negotiate a better selling
price. To be certain,
an astute purchaser would be quick to point out negative financial statistics in
an attempt to negotiate
a lower purchase price.
OTHER FACTORS AFFECTING THE VALUE
In addition to the financial
analysis, there are several subjective factors which would affect the value of a
business. An assessment of each of the following would be important in adjusting
the valuation of a pharmacy as determined by various formulas described later in
this monograph. Important factors include:
1. Physical Appearance and Condition of
the Pharmacy (Are certain fixed assets in need of repair or replacement?)
2. Cash Flow (Examine past cash flow and
make future projections)
3. Competition (How aggressive are
pharmacy and other non-drug outlets and is expansion planned?)
4. Inventory Composition and Condition
(Does inventory reflect needs and demands of physicians and customers and is it
saleable or shopworn?)
5. Economic Trends in the Community (Is
the community stable with high employment?)
6. Future Projections for Retail Pharmacy
(Are other pharmacies stable?)
7. Manage Care (What percentage of
prescriptions are third party and what is the outlook for the future?)
8. Lease Terms
9. Location
10. Image of the Pharmacy in the Community
11. Terms of Sale
Valuation Formulas
The value of a business is usually determined through a process of negotiation between the buyer and the seller. It goes without saying that the eventual selling price will He somewhere between the initial price asked by the seller (usually too high) and the price the purchaser is willing to initially pay (usually too low). The valuation of a business is not an exact science. It is based on the assessment of facts about the business, informed judgement and some aspects of common sense. In the final analysis, the valuation is subjective, however, several formulas have been developed to estimate the equitable selling price of a business. The valuations derived from these formulas may then be adjusted according to the financial analysis and those subjective factors described above to arrive at a valuation that is equitable.
There is no single formula that is best for all pharmacies. Many formulas should be used, providing for a range of valuations. Each formula provides for an assessment of the valuation of the business from several perspectives, e.g., profitability, net worth, sales, etc. The use of the formulas provides for a range of values that serves as a valid indication of the value of the pharmacy Based upon the financial analysis and other factors described above, one may more precisely assess the value of the pharmacy. To illustrate the use of these formulas, a pharmacy with approximately $1,300,000 in annual sales will be used. The income statement and balance sheet for this example pharmacy appear in Figures I and 2. The example pharmacy filled 34,331 prescriptions annually.
Inasmuch as space is limited, a complete financial analysis is not provided in this monograph. The financial analysis of this pharmacy reveals the pharmacy to be approximately "average", thereby not necessitating any significant adjustment in the values provided by the formulas.
It should be pointed out that some adjustments may need to be made in the data provided on the financial statements before being utilized in the valuation formulas. For example, some of the formulas use net profit in their calculation. In some situations, an owner may be taking an unusually large salary, thereby resulting in an inordinately small net profit. In this case the owner's salary would need to be adjusted to a more "realistic" figure and the net profit adjusted upward for use in the valuation formulas. Other adjustments from "book values" to more realistic figures may be necessary.
In addition, since depreciation is not an "out of pocket" expense, it is usually added to the net profit in those formulas wherein net profit is used in calculation of the selling price.
The
following valuations using formulas do not include accounts receivable or
accounts or notes payable. The accounts receivable may be negotiated
separately by the buyer and seller. The accounts and notes payable would be
handled by the seller. 1. Sales Projection Method
One valuation method that relates
to a simple percentage of sales should be mentioned since it has used for many
years to estimate the value of a pharmacy. The traditional formula of one-third
of annual sales is no longer applicable due to shrinking profit margins and
would result in an overstating of the value of the pharmacy. A more appropriate
"rule of thumb" in today's competitive community pharmacy marketplace
would be closer to 25%-28% of sales. Using 26.5% this gives us a value of
$349,914.
2.
Return (Net Profit) on Investment (Purchase Price)
Another method uses the return on
investment as an indicator of the value of the pharmacy. The "return"
is the net profit per year and the "investment" is the selling price
of the pharmacy. If a return on investment of 20% were desired, the selling
price would be (.20) (selling price) = Net Profit or $61,137. Therefore,
the selling price = $305,685. A third method of valuation
involves selection of "relevant factors" from the balance sheet. These
factors include assets, liabilities and net worth as well as
"goodwill" to assess the purchase price. Before
using these figures in the valuation calculation, it may be necessary to adjust
them. The value of the inventory on the balance sheet may not be an accurate
figure. The inventory may contain unsalable items or outdated items that have
not been removed from stock. It is best to have an outside inventory service do
a complete inventory, the cost of which should be shared by the buyer and the
seller. The value of fixtures and equipment should be determined by a
disinterested third party such as an individual who sells fixtures and equipment
who could give an accurate appraisal of how much new fixtures of similar
condition would cost.
3. Summation of Relevant Factors
The fourth component in the summation of relevant factors is "goodwill". Goodwill is the intangible asset associated with the positive reputation that the pharmacy enjoys. An estimation of the value of goodwill is approximately one year's net profit for an "average" pharmacy and two years net profit for an "above average" pharmacy.
In the example pharmacy, the net
profit before tax. Using the data in Figures I and 2, the value of the
pharmacy is estimated to be $254,626.
Assets |
$298,607 |
-Liabilities |
-78,118 |
Net Worth |
220,489 |
+ Goodwill |
+61,137 |
Purchase Price |
$281,626 |
A fourth method involves a direct assessment that has been established by the Bank of America. It is outlined in Figure 3. In the example, the inventory investment is $143,926 and fixtures and equipment are $29,049, which totals $172,975. This is the value of the tangible assets of the business. The next item, earning power, represents the amount that might be earned by investing the $172,975 in something other than the purchase of a pharmacy. Assuming a 10 percent return, this means that the earning power of $172,975, if not invested in a pharmacy, would be $17,297.
The next item lists the salary that the prospective owner might make if he or she were a manager elsewhere. This is estimated to be about $60,000. Therefore, if instead of purchasing the pharmacy, the prospective owner invested the $172,975 and went to work as a manager somewhere else, he or she could expect to have a total income of $77,297 ($17,297 + $60,000).
The total income that could be expected if the prospective purchase actually purchased the pharmacy would be $61,133 in net profit from the pharmacy plus the owner's salary of $63,280, which totals $124,517.
The next item, the extra earning power, is calculated by subtracting the earning power and salary if employed elsewhere ($77,297) from the income of the pharmacist if he or she were to purchase the pharmacy. This would be $47,220 in the example.
The next line, in Figure 3, intangible assets, is calculated by multiplying the extra earning power times an item that is known as the years-of-profit factor. The years-of-profit factor is a number varying from one to five that indicates the approximate number of years it would take a newly opened pharmacy to get to the financial position of the pharmacy under consideration. A value of I would be used for a pharmacy that was not very profitable and a value of 5 would be used for a pharmacy that was extremely profitable and stable. If we assume that our pharmacy is average, we would use a years-of-profit factor of three. Multiplying this factor times the extra earning power yields a value of $141,660.
The final calculation of the purchase price involves adding the tangible and intangible assets together. The total for this example is $314,635.
5. Percentage of Sales Plus Inventory
The
fifth method involves taking 15% of sales and adding that to inventory giving a
value of $341,990. 6. Income Approach
(0.15)(Sales) + Inventory
(0.15)($1,320,431) + $143,926 = $341,990
The net income approach involves doubling the net profit and owner's salary and
adding the value of the inventory. This yields a value of approximately
$378,960.
2(Net
Profit + Owner's Salary) + Inventory
$ 61,132 Net Profit
+ 63,380 Owner's Salary
124,517
x2
249,034
143,926 Inventory
$ 392,960
7. Asset Approach
The asset approach simply involves adding, two times the net profit to the net
worth. This yields a value of approximately $308,763.
Net Worth +2 (Net Profit)
$220,489 + 2($61,137) = $342,763
8. Owner's Equity Approach
The owner's equity method is arrived at by multiplying the net worth by 1.5
yielding a value of $300,733.
1.5(Net Worth)
1.5($220,489) = $330,733
9. Net Profit Approach
The net profit approach involves multiplying the net profit by a factor of
5-7(we will use 6) providing a value of $324,822.
6 (Net Profit)
6($61,137) = $366,822
10. Owner's Cash Flow Method
This formula involves multiplying net profit by a factor between 2 and 4
depending on the financial condition of the business. The better the condition,
the higher is the number with an average pharmacy assigned a value of 3. To this
is added current assets and liabilities are subtracted. This mathematical
manipulation yields a value of approximately
2-4(Net Profit) + Current Assets - Liabilities
Use 3:
1.75($61,137) + $251,636 - $78,118 =
$356,929
11. Owner's Cash Flow Intangible
Method
This formula is similar to the previous one. Net profit is multiplied by a
factor between I and 2.5 depending on the condition of the business with 1.75
being average. The formula is as follows and yields a valuation of $287,306.
1-2.5(Net Profit) + Current Assets + Fixed Assets - Liabilities
Use 1.75
1.75($61,137) + $251,636 + $39,049 - $78,118 = $319,556
12. Itemization
If one considers what is actually being purchased when the ownership is
transferred, (inventory, fixtures and equipment and goodwill(estimated on year's
net profit), equitable selling/purchase price may be estimated by adding the
value of the three components. This yields a value of $227,112.
Inventory + Fixtures and Equipment + Goodwill
$143,926 + $39,049 + $61,117 = $244,092
13. $3-$7 per prescription
filled annually + inventory
This is a formula that is used by many chains in their estimation of a
selling/purchase price.
Using $5 per prescription for an average pharmacy produces a value of $315,581.
($5) (# prescriptions filled annually) + inventory
($5) (34,331) + ($143,926) = $315,581
14. $10 times annual
prescriptions
Multiply $ 10 times the number of prescriptions filled annually is also used
by some chains, in a value of $343,310.
($10) (34,331)
($10) (34,331) = $343,310
Summary of Valuation Variables
1. Sales volume: $349,914 ESTABLISHMENT OF A JUNIOR
PARTNERSHIP
The establishment of a partnership
or a "junior partnership" is an alternative to a direct and immediate
sale. In this situation, the sale of the pharmacy occurs over several
years, with the new owner acquiring a gradually increasing percentage of
ownership in the pharmacy while increasing his or her share of the management.
2. Return on Investment: $305,685
3. Summation of Relevant Factors: $281,626
4. Direct Assessment: $314,635
5. Percentage of Sales Plus Inventory: $341,990
6. Net Income Approach: $392,960
7. Asset Approach: $342,763
8. Owner's Equity Approach: $330,733
9. Net Profit Approach: $366,822
10. Owner's Cash Flow Method: $356,929
11. Owner's Cash Flow Intangible Method: $319,556
12. Itemization: $244,092
13. $Per prescription plus Inventory: $315,584
14. $Per prescription: $343,3 10
The estimated range of the value of the pharmacy varies between approximately
$244,092 to $392,960 with an average of $329,042. The financial analyses will
indicate whether the price should be at the upper, middle or lower range of the
valuations provided by the formulas. Further, certain intangible, subjective
factors described above such as the economy, competition, and the physical
facility will provide insight as to whether the values should be adjusted upward
or downward.
For the purposes of the junior partnership example, we shall assume that the
selling/purchase price for this "average" example pharmacy has been
negotiated and is $330,000.
For many owners the transfer of ownership to an individual rather than a chain is difficult because the prospective buyer may lack the necessary capital to make the purchase. It is this problem that causes many independent owners to sell to a chain rather than an individual. The junior partnership example described in this monograph provides the owner or potential buyer with a practical guide as to how the transfer of ownership of a community pharmacy may be accomplished in a situation wherein the buyer has little or no capital. Adjustments in the factors in the example such as the time frame, percentage of purchase per year and amount paid may be adjusted to meet special needs of the owner or purchaser.
To explain the establishment of a junior partnership, a case study has been developed in which the first 50 percent of the pharmacy is purchased over a six-year period at approximately 10 percent per year. After the sixth year, the junior partner could purchase the other 50 percent using a bank loan, owner financing, or the same procedure as for the first 50 percent. In our example, the junior partner pays for and receives the first 10 percent of the pharmacy after the second year of the agreement, which gives him two years to save for the purchase of the initial 10 percent. After years three through six of the agreement 10 percent is purchased per year based on the valuation of the pharmacy at that time.
All provisions of the junior partnership should be agreed upon in writing by both the owner and junior partner. This agreement may be drawn up by an attorney. The description of the current example may serve as a guide. Particular attention should be given to provisions that would allow the owner or the junior partner to terminate the agreement should particular situations develop. In the event a portion of the pharmacy had been purchased by the junior partner at the time of termination, provisions should be
delineated to describe the disposition of the junior partner's share, i.e., would it be sold back to the owner and , if so, how would the purchase price be determined?We will use the Jones Professional Pharmacy for this case study. The income statement and balance sheet for the pharmacy may be examined in Tables I and 2. It may be noted that the pharmacy has annual sales of approximately $1.3 million For the purpose of this example, it shall be assumed that the purchase price has been determined to be $330,000. Adjustments will be made each year to reflect an increase in the value of the pharmacy In the example the increase in the value has been assumed to be six percent. In terms of salary for the junior partner, the agreement calls for him to receive an annual salary of $54,000 plus a $6,000 bonus each year. This bonus is used as an incentive for the junior partner to remain with the pharmacy and continue to participate in the junior partnership. Salary increases would be provided each year as allowed for in the junior partnership agreement.
Ten percent of the ownership in the pharmacy will be transferred to the junior partner beginning at the end of the second year and continuing through the end of year six. Therefore, the junior partner will obtain 50 percent of the ownership of the pharmacy in six years. In this agreement, the junior partner will actually pay for only five percent of the pharmacy at the end of each year in which a payment is due. An additional five percent will be provided by the owner at no charge as an extra incentive for the junior partner.
Income
to the Owner The net profit (line 3) and value
(Top line of Table 3) of the business are projected to increase at six percent
per year. Line 2, which is the payment from the junior partner, is determined as
follows: the initial value of the pharmacy was established to be $330,000. By
the end of the first year the value of the pharmacy has increased to $344,800
based on a 6 percent increase each year. The actual value may be recalculated
each year. It should be remembered that the junior partner pays for five percent
of the business, but actually receives 10 percent. At the end of the second year
when the junior partner purchased the first 10 percent of the business, 10
percent of the value ($3 70,78 8) is $37,078, but the junior partner only pays
for 5% of the business or approximately $18,539.
During the first six years of the junior partnership agreement wherein the
junior partner purchases 50 percent of the pharmacy, the owner receives
compensation in the form of his share of the net profit (line 5, Table 3) of the
pharmacy and the payment from the junior partner (line 2, Table 3) for the
incremental 10 percent of the business beginning at the end of year two. The
total income of the owner from net profit and purchase payments is provided in
(line 6, Table 3).
By summing Line 2, it can be determined that the owner will receive $104,513 in payments from the junior partner over six years for the purchase of 50% of the business at 10% per year after years two through six of the agreement.
The net profit of the pharmacy is estimated to increase 6% per year (See line 3). The owner's share of the net profit decreases 10 percent each year after the second year (See line 4). In years one and two of the agreement he still owns 100 percent of the business so all of the net profit accrues to him. In year three the junior partner owns 10% of the business so the junior partner receives 10% of the profits and the owner 90% or $65,533 (See line 5). The total received by the owner from his share of the net profit over the six years of the junior partnership agreement is $370,082 (The sum of line 5).
Assuming that the value of the pharmacy increases six percent per year, the remaining 50 percent of the pharmacy will be valued at approximately $234,055 at the end of the six-year penod. (50% of $468,111). The junior partner may then agree to pay the remainder to the owner over a period of years through owner financing. He may choose to go to a lending institution and obtain a loan to purchase the remaining 50%.
He would have 50% of the pharmacy to then use as collateral. Of course, the remaining 50% may be purchased by simply continuing the purchase agreement used in the first 50% in years seven through eleven.As may be determined from Table 3, the total income for the owner at the end of six years, in terms of annual payments from the junior partner and his share of the net profit, would be approximately $474,595 (The sum of fine 6). The purchase of the remaining 50% is $234,055. Assuming the junior partner obtained a loan from a lending institution at the end of 6 years and paid the $234,055 the total amount received by the owner for the purchase of the entire pharmacy would be $708,650, which is the sum of $474,595 from payments from the junior partner and the owner's share of the net profit, and $234,055 from the purchase of the remaining 50% of the business.
By comparison, let's consider the income to the owner if the pharmacy were sold outright for $330,000 instead of entering into the junior partnership described above. If invested at six percent interest, this would yield about $112,231 interest or a total of about $442,231 for the six years of the junior partnership agreement example. The junior partnership example provided the owner with $708,650 or a $266,419 difference ($708,650-$442,23 1). 'Considering that the owner's share of profits and payments from the junior partner could also be invested, the $3 86,750 figure from the junior partnership could be even larger. Therefore, it may be seen that the partnership yields a significantly greater financial dividend for the owner.
Projected
Payments of Junior Partner
Figure 5 provides information concerning the junior partnership from the
perspective of the junior partner. The income from net profit (column 2) is
based on the junior partner's share of the net profit which increases each year
beginning at the end of the second year. The last column represents the payments
that the junior partner makes to the owner each year based on the purchase of
10% for which he pays only 5%. These numbers correspond to the figures in line 2
of Table 3. From Table 4, it is obvious that the junior partner would have to
use little of his or her personal funds to make payments to the owner because
payments are made primarily from the junior partner's share of the net profit
and the bonus. By the time the junior partner makes the first payment, he or she
would have received two bonus payments. Using these bonus payments plus saving
$272 per month from salary in the first two years the junior partner could make
the payment. In year three, $530 per month would need to be saved from the
junior partner's salary plus the bonuses to make the payments. None of these
amounts are unreasonable for a practicing pharmacist. Beyond year three, the
payments could be made totally from the junior partner's bonus and share of the
net profit.
From this example it may be determined that it is possible through the establishment of a junior partnership for an independent owner to transfer ownership to a prospective purchaser who may not have the necessary capital to purchase the pharmacy outright. The procedure is financially beneficial for both the owner and the junior partner. Most importantly for many independent owners, it provides a mechanism to transfer the ownership of the pharmacy and keep independent pharmacy independent.
Figure 1 |
Income and Expense Statement |
Jones Professional Pharmacy |
Anytown, USA |
Income and Expense Statement |
For year ended December 31, 199x |
(NCPA_Searle Digest Average in Parentheses) |
SALES |
|||
Prescription |
$1,047,102 |
79.3% |
(79.9%) |
Other |
273,329 |
21.7% |
(20.1%) |
Total |
$1,320,431* |
100.0% |
|
Cost of Goods Sold |
969,196 |
73.4% |
(73.1%) |
Gross Margin |
$351,235 |
26.6% |
(26.9%) |
EXPENSES |
|||
Managers salary |
63,380 |
4.8% |
5.7% |
Employees wages |
102,595 |
7.8% |
(7.9%) |
Rent |
27,729 |
2.1% |
(1.8%) |
Utilities |
14,524 |
1.1% |
|
Accounting, legal & other professional fees |
5,281 |
0.4% |
|
Taxes |
18,486 |
1.4% |
|
Insurance |
13,204 |
1.0% |
|
Interest paid |
7,922 |
0.6% |
|
Computer |
3,961 |
0.3% |
|
Miscellaneous |
33,016 |
2.5% |
|
TOTAL EXPENSE |
$304,090 |
23.0% |
(24.1%) |
NET PROFIT |
$61,137 |
4.6% |
(3.0%) |
Add Managers Withdrawals |
$63,380 |
4.8% |
|
Total income of self-employees proprietor (before taxes and profits) *1/3 are credit/third party |
$124,517 |
9.4% |
Figure 2 |
Balance Sheet |
Jones Professional Pharmacy |
Anytown, USA |
Income and Expense Statement |
Balance Sheet, December 31, 199x |
(NCPA_Searle Digest Average in Parentheses) |
ASSETS |
|||
Current Assets |
|||
Cash |
$39,612 |
3.0% |
(3.0%) |
Accounts Receivable |
$68,098 |
5.2% |
(4.4%) |
Inventory |
143,926 |
10.9% |
(9.9%) |
Total Current Assets |
$251,636 |
19.1% |
(17.3%) |
FIXED ASSETS |
|||
Fixtures, equipment, leasehold improvements (net after reserve for depreciation) |
$39,049 |
3.0% |
(2.2%) |
OTHER ASSETS |
|||
Prepaid expenses, deposits, etc. |
$7,922 |
0.6% |
(0.6%) |
TOTAL ASSETS |
$298,607 |
22.6% |
(20.1%) |
LIABILITIES |
|||
Current Liabilities |
|||
Accounts Payable |
$46,778 |
3.5% |
(4.3%) |
Notes Payable (within 1 year) |
$8,524 |
0.6% |
(1.1%) |
Accrued Expenses |
3,204 |
0.2% |
(1.0%) |
TOTAL CURRENT AND ACCRUED LIABILITIES |
$58,506 |
4.4% |
(6.4%) |
LONG-TERM LIABILITIES |
$19,612 |
1.5% |
(3.0%) |
Notes Payable |
|||
NET WORTH |
$220,489 |
16.7% |
(10.8%) |
TOTAL LIABILITIES AND NET WORTH |
$298,607 |
Figure 3 |
|
Direct Assessment (Bank of America) |
|
I. Tangible Assets |
|
Inventory |
$143,926 |
Fixtures and Equipment |
29,049 |
Total |
$172,975 |
II. Earning Power @ 10% |
$17,297 |
III. Salary if Manger Elsewhere |
$60,000 |
IV. Net Profit ($61,137) Plus owners Salary ($63,380) |
$124,517 |
V. Extra Earning Power (IV minus III minus II) |
$47,220 |
VI. Intangible Assets: (V times years-of-profit factor) |
$141,660 |
VII. Purchase Price: |
|
Tangible Assets |
$172,975 |
Intangible Assets |
141,660 |
$314,635 |
|
*Years-of-profit factor is an estimate of the number of years to get the profitability of a new pharmacy to the profitability under consideration. It varies from 1 to 5, with 3 being average. |
Figure 4 |
Income to Owner from Net Profit and Purchase Payments |
End of |
End of |
End of |
End of |
End of |
End of |
TOTAL |
|
1st year |
2nd year |
3rd year |
4th year |
5th year |
6th year |
||
Value of Pharmacy |
$349,800 |
$370,788 |
$393,035 |
$416,617 |
$441,614 |
$481,111 |
|
1. Ownership share to junior partner |
0% |
10% |
20% |
30% |
40% |
50% |
|
2. Payment from junior partner* |
0 |
$18,539 |
$19,651 |
$20,830 |
$22,090 |
$23,412 |
$104,513 |
3. Net profit from pharmacy** |
$64,805 |
$68,692 |
$72,815 |
$77,184 |
$81,815 |
$86,724 |
|
4. Owners share of pharmacy *** |
100% |
100% |
90% |
80% |
70% |
60% |
|
5. Owners share of profit |
$64,805 |
$68,693 |
$65,533 |
$61,747 |
$57,270 |
$52,034 |
$370,082 |
6. Total |
$64,805 |
$87,232 |
$85,154 |
$82,577 |
$79,350 |
$75,447 |
$474,595 |
*The value of the pharmacy is estimated to increase approximately 6 percent each year, so the payment for the incremental 10% share of the practice will increase proportionally. |
|||||||
**Net profit is expected to increase approximately 6% each year. |
Figure 5 |
Income from Bonus and Profits and Projected Payments of Junior Partner |
Years of |
Income from |
Income from |
Net Profit and |
End of Year |
Transfer Agreement |
Net Profit |
Annual Bonus |
Annual Bonus of |
Payment to |
Junior Partner |
Current Owner |
|||
1 |
0 |
$6,000 |
$6,000 |
0 |
2 |
0 |
$6,000 |
$6,000 |
$18,539* |
3 |
$7,281 |
$6,000 |
$13,281 |
$19,651** |
4 |
$15,436 |
$6,000 |
$21,436 |
$20,830 |
5 |
$24,544 |
$6,000 |
$30,544 |
$22,080 |
6 |
$34,689 |
$6,000 |
$40,689 |
$23,413 |
*Junior Partner needs to save $272 per month to avoid borrowing
**Junior Partner needs to save $530 per month to avoid borrowing.