overview of the pharmacy acquisitions market · financial performance –turnover 2014 2013...
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Overview of the Pharmacy Acquisitions Market
Stuart FitzgeraldDirector – Fitzgerald Power
Global M&A 2015
Executives M&A plans
59%
41%
Expect to pursue acquisitions in the next 12
months
Yes
No
Executives M&A plans
72%
28%
Are seeking bolt on acquisitions
Yes
No
Executives M&A plans
55%
45%
Have 3 or more deals in the pipeline
Yes
No
What is driving consolidation?
• Boardroom confidence
• Cheap debt
• Pressure to become more efficient
• Desire to keep pace with rivals
International pharmacy consolidation
International pharmacy consolidation
International pharmacy consolidation
Why are pharmacy chains consolidating?
• Strong liquidity in international chains
• Preference for acquisition strategies
Group ownership in pharmacy markets
Ire 26%
UK 61%
USA 63%
Number of pharmacies in Ireland
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
Number of pharmacies in Ireland
2002 2015
New openings in Ireland 2015
28
Consolidation or fragmentation?
Changes of pharmacy ownership
2014 45
2015 92
Financial performance – turnover
2014 2013
Turnover €1,531,200 €1,600,000
Items – state 51,251 53,000
Items – private 13,044 12,000
Revenue per item €17.45 €18.38
Private fees €7.00 flat €7.00 flat
OTC/retail mark-up 50% 50%
Financial performance – profit drivers
2014 2013
Gross Profit €689,040 €720,000
GP %age 45% 45%
Generic penetration 85% 80%
Wages & salaries €285,000 €270,000
Rent €50,000 €50,000
Other overheads €72,500 €75,000
Earning vs. maintainable earnings
EBITDA
€281K
MEBITDA
€250K
What determines multiples?• Profile of the target pharmacy
• Revenue growth opportunity
• Local competition
• Local GP profile
• Culture
• Recent deals in the sector
Valuation multiples
Below 4.5: Low volume, revenue difficult to defend, secondary location
4.5 to 5: Mid-sized pharmacy, possibly in secondary location
5 to 6: High items, defendable turnover, possible growth / synergies
Above 6: Strong pharmacy, attractive location, competitive bid process
Indicative goodwill valuation
MEBITDA
€250K
MULTIPLE
5.5
VALUE €1.375M
Financing the deal
• €1.5 millionDeal price to
include net assets
• 1.5 times EBITDADebt cover
• 4.5 times EBITDALeverage
• 10 yearsTerm
Financing the deal
• 4.5%Assumed interest
• €1.125 millionBorrowing
• €139,912 annuallyLoan repayments
• €375K / 25% of deal priceCash required
The problem with predictions
The problem with predictions
“Stock prices have reached what looks like a permanently
high plateau” Irving Fisher, October 1929
The sustainability of current valuations
• Long term sector profit projections
• Competition in the bidding process
• Appetite of the banks
• Availability of alternative liquidity
Thank you
Stuart FitzgeraldDirector – Fitzgerald Power
Legal Issues in Pharmacy M&A
Barbara Kenny
William Fry
25 February 2016
Objectives
What does the Seller/Buyer want to get?
Is price everything?
Non-financial objectives
Seller’s role post sale
Is this the right buyer?
Preparation
Prepare early, agree timing
Advisers
Term sheet
Non-disclosure agreement
Due Diligence
Financial/Tax
Property
• leasehold or freehold?
• term of lease
• planning
Employees
• employment contracts
• history
• key employees
Contracts
• HSE
• change of control
Due Diligence
Regulatory
• Pharmacy Act registration
• Supervising Pharmacist
• PSI Inspections
• Co-location with doctors
• Data Protection
Intellectual Property
• Name/Brand
• Website
• IT systems
Litigation
• Any history
• Insurance claims history
Structure - Share Sale
– Sale of entire issued share capital of company
– Tax considerations
– Contracts/lease normally go with company
Seller
Buyer CoWF Pharmacy Limited
Shares
Structure – Asset Sale
• Pick and choose assets and liabilities
• Tax Considerations
• Property issues
• Employees – TUPE
• Contracts
Buyer CoWF Pharmacy Limited
Certain assets and liabilities
Consideration
Pre-Conditions to ContractDue Diligence
Competition and Consumer Protection Commission
Shareholder consent
3rd party consents (banks, grant bodies)
Employees
“MAC” clause
Purchase Price Options
• Payment in full at Completion
– cash, shares, discharge of liabilities
– capital gains tax clearance
• Deferred Consideration for SPA
– deferred consideration/earn-out
– escrow
– cash free/debt free adjustment
– working capital adjustment
Cash Free/Debt Free
€
• Agreed Consideration = 1,000,000
• Cash at Completion = 200,000
• Debt at Completion = (100,000)
• Adjusted Consideration 1,100,000
Working Capital Adjustment
€
• Agreed Consideration = 1,000,000
• Working Capital Assets = 150,000
– (stock, debtors, prepayments)
• Working Capital Liabilities = (140,000)
– (trade and other creditors,
accrued expenses)
• Adjusted Consideration = 1,010,000
Purchase Price
Completion Accounts
Locked Box
Retention for Warranty Claims
Purchase Price – Bank Funding
• Buyer should be a company
• Mortgage over all assets of Target
• Additional Security? Guarantee?
• Financial Assistance
– Summary Approvals Procedure
– Personal liability – get advice
IndemnitiesWarranties V
Warranties
Scope
every aspect of
the business
constitution and share
capital
accounts
tax
assetsliabilities
employees
pensions
compliance
Warranties• Disclosure Letter
– general disclosures
– specific disclosures
• Warrantors
– management shareholders
– financial investors and other shareholders?
Warranties• Limitations
– time (tax and non-tax claims)
– cap
– minimum threshold
– “several” or “joint and several”
– other standard limitations
– “awareness” qualification?
• Set-Off against consideration
• Tax Indemnity
Other Issues
• Restrictive Covenants
– time, territory and subject matter limits
• Debtor assistance
406666v2
Practical Tips
Prepare early
Consider “must haves” and
“deal breakers”
Retain control and keep all
strands moving
Agree negotiation
tactics
Close quickly
Keep calm!
Barbara Kenny Partner D: + 353 1 639 5146
E: barbara.kenny@williamfry.com
Thank you
WF16126518v1
A profiled approach to pharmacy acquisitions
SAM PATEL
Director – Day Lewis
Identifying targets
• Agents and brokers
• Own networks
• Direct mail
• Advertising
Filtering out the good and bad
Five minute filter:
• Items
• Counter turnover
• Opening hours
• Rent
• How far is it?
Approach to valuations
• Site visit – any skeletons in the closet?
• Building up a bottom-up P&L
– Adjustment for vendors’ salary and operating model?
– Will you add any services?
• Will it go up or down under your management?
• Adjust the multiple according to the risks
– Scripts locked in? Capture rate too high? “Magnet” effect?
– Doctors moving?
Assuring a smooth deal
• Have your funding ready in advance
• Each side to get advisers in place quickly
• Share deals – satisfy yourself on company’s tax situation
• Don’t let the lawyers do all the talking
Managing the takeover
• Reputation counts
• Making people comfortable
• Openness and transparency
• Training and support
Buying well
• Your reputation counts
• Buying off-market
• Build a relationship
• Find mutual wins
• Keep the legals light
• Explore different ownership models
Thank you
Tax, Structuring &
Financial Planning
Aspects
Deirdre Lyons
Tax & Wealth Structuring Specialist – Davy
Pre-Sale Planning for Pharmacies
1. How is my business positioned for a sale?
Key Questions
Legal?
My Pharmacy Ltd.
Commercial?
Tax? Valuation?
Co-shareholders
Do we want to
retire?
Kids’
education?
Future
ventures?
Can we afford to
retire?
Other financial commitments?
2. How am I / we positioned for the future?
Key Questions
My Pharmacy Ltd.
Elements of a good pre-sale strategy
Fit for purpose commercially
Flexible
Tax-efficient
Provisions for retirement
1. Prepare or update your financial plan.
2. Maximise pension funding
3. Ensure current structure is fit for purpose.
4. Be attentive to tax-reliefs which may be relevant on a
future sale.
4 Key Steps
Five to ten years out… what should I be doing?
Aims to help you identify and meet your financial goals
Step 1: Financial Plan
Lifestyle &
Protection
Investment
Strategy
Business Exit
Strategy
Business Exit Timeline
Pre-Sale
Sale
Post Sale
Income from
-Salary
-Dividends
-Other?
Fund pension
Income from
pension / investments
/other
Future Ventures?Ensure this happens
as tax-efficiently as
possible
Financial plan helps track finances when you sell
1. Tax-relief on individual and company contributions
2. Each owner / director spouse can build up a fund of €2M tax-efficiently
3. De-risking wealth from business
4. Tax-relief on income and gains on pension investments
Step 2: Maximise Pension Funding
Why?
Married couple, both spouses working in the business, currently have combined pension assets of c.€500,000. They each have 25 years of service in the pharmacy which they own and run together.
They have significant scope to build up their pension funds through a combination of personal and company contributions.
Starting Value €250,000
Allowable special contribution c.€950,000
Target Value on Retirement €2,000,000
Lump sum on retirement (Estimate) €440,000
Balance to ARF / annuity to help fund retirement €1,500,000
Annual Income assuming a 4% drawdown €60,000
Pension Funding Case Study
Source: Taxes Consolidation Act 1997 & Revenue Pensions Manual. Please note that figures are
estimates and are for illustrative purposes only.
How is the business currently structured?
Sole trade?
Roche
Pharmacy Ltd
Limited Company?Roche
Pharmacy
Ltd
Family
HoldCo
Holding Company?
Co-investors?
Step 3: Structuring the business for sale
It depends: No one size fits all
approach
Consider:
long-term plans
tax-treatment on sale
what a purchaser might want to buy
Advance planning and good
advice are key
Working together: all advisors
cooperating for benefit of client
Which structure is best?
1. Sole trade to limited company
My Pharmacy Ltd
Why?
Benefits of incorporation
More scope for pension funding
Share sale potentially more attractive to a buyer
How?
Potential relief from CGT and management Stamp Duty on transfer of trade into sole name
Some Structuring Options
2. Single Limited Company to Holding Company
My Pharmacy Ltd
My Pharmacy Ltd
Family
Hold Co
Why?
Pay dividends from TradeCo to HoldCo tax-free
Facilitate tax-free sale into HoldCo –provided certain conditions are met
Useful in a scenario with multiple shareholders
How?
Share-for-share exchange
Potential relief from CGT and stamp duty provided certain conditions are met
Some Structuring Options
3. Moving trade into new “clean” company
My Pharmacy Ltd New Co
Why?
Maybe more attractive to a potential
purchaser
Retain certain elements in ‘OldCo’ if desired
How?
Share-for-undertaking exchange
Potential relief from CGT and stamp duty provided certain conditions are met
Some Structuring Options
Basic Position CGT at 33%
Retirement Relief 0% rate of CGT Applies to proceeds up to €750k (or €500k if over
65)
10 year holding period
Working director for 10 years, full time working
director for 5 of those years
New 20% Rate of CGT 20% on amounts up to €1M gains Owned shares for 3 out of 5 years prior to disposal
Worked as manager / director for 3 of 5 years prior
to disposal
Min 5% shareholding
Sale into holding company
from trading company
Tax-free 12 month holding period
Various other conditions
Share buyback by company Income tax (52% / 55%) or CGT
(33%) where certain conditions
are met
Significant reduction of shareholding
For benefit of trade
Vendor unconnected after sale
Other Various other permutations depending on circumstances
Tax Treatment on Retirement
Source: Taxes Consolidation Act 1997. Rates correct as at February 2016.
1. Start early
2. Separate strategy for the
business and you personally
3. Bring it all together….in a plan
Key Actions
Questions?
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