ubc phar400-buy-start-pharmacy-8mar2013

UBC | Phar400Pharmacy Management

Start or Buy A PharmacyretailSOS.ca | Gerry Spitzner

March 8, 2013

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Overview of key points to consider when establishing your own practice.

Either for....

Purchasing an existing Pharmacy business, or

starting up a new business.

Goal For Today


Questions for starting up a new or buying an established Pharmacy.

Advantages and disadvantages of purchasing an established Pharmacy vs starting one.

Important factors before you start actively searching to establish new or purchase.

Objectives


Explanation of leasing & rent calculation.

Capital requirements for establishing a Pharmacy and possible sources of capital.

Factors important in performing a Pharmacy location analysis and analysis of potential markets.

Objectives


Thoughtstarters

First questions; What, Who, How and Where Do I start?

Purchasing an Established Pharmacy

Opening a New Pharmacy

Key Tasks for the Prospective Owner

Roadmap

Thought startersThis packet of thought starters is just that; a starting point.

Let your mind wander and consider the vision of establishing a new practice or taking over an existing one.



Most community Pharmacy owners are small business entrepreneurs.

It takes time, commitment, a good idea, the right personality and at least a few basic business skills to start and run a small business successfully.

Thoughtstarters


The french word "entrepreneur" was first

defined by economist Richard Cantillon

(1680-1734) as a person who is willing to

help launch a new enterprise and accept

full responsibility for the outcome.

Thoughtstarters


What's an Entrepreneur in the 21st century?

What is it that all entrepreneurs do?

The Best Answer Ever…

Entrepreneurship is the pursuit of opportunity without regard to resources currently controlled.

Thoughtstarters


Is it better to buy an established Pharmacy or

to start your own?You have decided that you want to run a community Pharmacy - now decide how you will achieve this.

Will you:• buy an existing business• start up a new business from scratch


Will you be doing this alone, or with one or more partners? How much financing can you get together (collectively)?

What experience do you (and/or your partners) have in running a Pharmacy? Which type of community would you like to serve (and live in)?

Will you need to hire a Pharmacist or additional Pharmacists to comply with legal requirements and coverage of your open hours?

First Questions You Must Answer


What does your ideal store look like? How big, where, opening hours, what professional services to offer other than dispensing?

Will it be a “full mix” drug store, health centre, simply Pharmacy or central fill?

How will you deal with... ◦ sick leave and holidays, advertising and marketing,

growth opportunities, business development, pricing policy, staff, bookkeeping, website, wholesaler and all the other operational details of running a Pharmacy?

First Questions You Must Answer


Buying an Established Pharmacy

Considerations, questions, advantages and disadvantages.


Key Initial Questions◦ Why is this pharmacy for sale?

◦ Is the owner retiring?

◦ Has the neighbourhood changed due to competitive, demographic or economic factors?

◦ Is the pharmacy on the verge of bankruptcy?

◦ Is there a lien on the business?

◦ Who are the Doc’s? How long is their lease?

◦ Lease term of Pharmacy? How long?

◦ Is the current lease assignable?

◦ Zoning? Will the area change due to development?



Location, location, location. ◦ A good location depends on whether your ideal

Pharmacy is urban, suburban or rural;

◦ foot traffic and/or parking possibilities,

◦ other businesses in the area to draw traffic, like a supermarket or liquor store;

◦ line-of-sight to a doctor’s office or other origin for prescriptions like a hospital.

Are there any long term (zoning or construction) plans which might affect the suitability of the location?

Buying An Existing Pharmacy


The goodwill of an established Pharmacy is influenced by...

◦ how long it has been open;

◦ how long it has been under the current ownership;

◦ what type of relationship owner had with clients and community;

◦ what services (professional or “front shop”) they offer apart from dispensing medications.

Goodwill is normally calculated as a multiple of annual net profit and may include number of scripts retained over a period of time after the purchase agreement is completed.



A new owner usually enjoys the same current prescription activity, sales and profit; unless something drastic happens.

It’s often easier to transfer contracts, permits and registrations than to apply for new ones; if local laws allow this.

Partnering with a retiring Pharmacist/owner can help you build your business experience, if this is not your strongest point.



Advantages◦ Lower level of risk for the buyer

◦ No additional competition added to the marketplace

◦ Reduced set-up and start-up costs / less risk

◦ Less time required to show a profit

◦ Buyer receives established goodwill

◦ Business has an established clientele

◦ Business provides buyer with trained employees, inventory, physical facilities, and established relationships with healthcare providers and doctors.



Potential Disadvantages◦ Inadequate facilities

◦ Old/Outdated fixtures and equipment

◦ Inventory that may be too large and/or unsellable

◦ Established policies/procedures don’t match new owner philosophy

◦ Inflated sale price; less than full disclosure on financials

◦ Problems with the location or landlord

◦ Undesirable established leases / lease terms or conditions

◦ Existing owner may reopen and take customers Write the vendor into the deal or have a non-comp clause




Things to consider and tasks to do.

Develop a project management plan with timing and tactical action plan.


How to Get Started: ◦ 1. Decide on the type of pharmacy ◦ 2. Assess potential market◦ 3. Develop a detailed business plan ◦ 4. Determine the legal structure ◦ 5. Identify financing options ◦ 6. Select a location; sign a lease ◦ 7. Obtain licences, permits and insurance ◦ 8. Determine leasehold, renovation and fixtures◦ 9. Develop a marketing and promotion plan◦ 10. Establish the management philosophy of the

business



Again, location. And all the same points as in buying.

◦ Do zoning laws allow for a retail Pharmacy at proposed location?

◦ Renting space from a clinic or diagnostic and treatment centre might be good for “leapfrog” traffic, but beware of self-referral and anti-kickback statutes.

How much leasehold or renovation changes are necessary to comply with space/layout requirements?

Consult a lawyer and/or accountant on the company form which gives you the best tax advantages.

Opening A New Pharmacy


The lease can make or break any new business.

◦ Reasonable rent is essential to keep overheads as low as possible while building a reputation and client base for a starting Pharmacy.

◦ The optimal length of the lease is a fine line which influences your eventual exit strategy.

Make sure initial loan/financial package includes enough working capital to cover expenses like salaries and wholesale purchases until the money starts coming in.

◦ Modesty here can cost you dearly in the long run.

Opening A New Pharmacy


Opportunity to select every item for the new venture

Hiring one’s own personnel (compatibility)

Finding a great location

Creating your own systems, policies & procedures

Avoiding having to pay for intangible assets

Negotiating your own arrangements with suppliers

Choosing your own practice focus

Advantages of Opening a New Pharmacy


Difficult to get financing High level of risk Suppliers may not extend you credit Longer term to profit Considerable time investment Need to do everything yourself Un-established brand Competitors

Disadvantages of Opening a New Pharmacy


Things to Consider Key tasks for the prospective owner whether starting or buying.


Hard skills◦ Knowledge of Leasing◦ Negotiation Skills◦ Fundamentals of Financing and Accounting◦ Project management

Soft Skills◦ Insights into complexity of issues involved in leading

change◦ Recognize your personal values and define work/life

balance◦ Cultivate a calm, clear mind even in times of stress◦ Lead strategic change initiatives and decision making

What do I need to begin?


Create your team of experts

◦ So you can do what you do best...

◦ and they can do what they do best

◦ Create an advisory board

The first three people you need

◦ Business Lawyer; with Employment Law & Leasing experience

◦ Accountant; with Tax Planning experience

◦ Banker; preferably experienced with Pharmacy accounts

Who do I need to begin?


Create your team of experts... The next person/people you need (buying or

starting)◦ Mentors, advisors and a business consultant

Then you need (if starting new)◦ Commercial real estate agent◦ A great designer/general contractor that knows the

Pharmacy business and can get and keep the trades focused

Then you need (if purchasing)◦ Business broker

Who do I need to begin?


1. Identify available pharmacies for sale or suitable locations for a new one

2. Leasing Agreements

3. Determine a satisfactory purchase price

4. Evaluate and determine capital needs

5. Investigate & select best source of capital

Key Tasks for the Prospective Owner


Location Analysis is a Hierarchal decision…◦ Region – Lower Mainland, Okanagan, the Island◦ Market Area – West Van, Kelowna, Comox◦ Trading Area – Caulfield, Glenmore, Comox “downtown”◦ Site – specific location

Location Analysis◦ Location is the most important factor; “traffic” is the key◦ Very difficult and expensive to re-locate◦ You don’t want to be “one block away from success”◦ Doc’s and/or nearby clinics, hospital◦ Parking, Signage, Visibility from street/parking lot

Identify Location


Most Pharmacies lease (rent) their space

Common is 5 years plus an option to renew for 5 years

Once you sign you are obligated!

Before you sign is the time to negotiate

If you are purchasing an existing biz-need to get an assignment from landlord◦ usually this is a “subject to” clause in purchase

agreement

Leasing


“Offer to lease” vs. “Lease”

◦ “Offer” is starting point where both parties negotiate terms.

◦ Landlords have a standard “Offer” form.

◦ At this point you try to drive your best bargain/value.

◦ “Offer” usually includes “Sunset clause” – date by which lease must be signed or null and void.

◦ A “lease” is a written legal document. A verbal lease does not exist. (i.e. worthless)

◦ A “lease” specifies what the lessor (landlord) will provide and what the lessee (you) will do and pay.

Leasing Agreements


What is "Base rent"?

◦ Base rent refers to the minimum or base amount of rent as set out in the lease excluding percentage rents or any other additional or operating costs.

What is a "percentage lease"?

◦ A percentage lease refers to a specific type of rental arrangement that applies mainly to retailers, especially in shopping centres or multiple-tenant malls.

◦ Tenant pays a fixed or base rent plus a percentage of gross income. To create this type of rental arrangement, the tenant pays "Base Rent plus % of Gross Profits or Sales".

Leasing Terminology


What are "triple-net leases"?

◦ The most common form of commercial lease.

◦ They can be used for retail, warehouse and industrial properties.

◦ The tenant is responsible for all of the costs of operating the building (including taxes, insurance and repairs and maintenance) .

What are “CAM” costs?

◦ Common area and maintenance costs; usually in a shopping centre, strip mall or power centre lease.

◦ CAM costs cover maintenance of the property, gardening, floor washing, snow removal, repairs, lighting; indoors/parking lot, security.

Leasing terminology


Downtown Vancouver/Victoria – YIKES!!! Langley/Surrey - $25 – $30/sq ft triple net plus CAM New locations/escalating construction costs Rural locations/old buildings; $12 – $25/sq ft Leasing example

◦ Store “footprints” vary; Dispensary only; usually 1-2000 sq ft◦ Taxes and CAM can be $5 - $8/sq ft◦ So, a 2K sq ft store @ $30/ft plus $5 CAM

2000 x 30=$60,000/year 2000 x 5=$10,000/year ~Total lease cost is $70,000/12=$5,833/month + Tax (on

applicable)

Leasing Costs


Sublet clause – if excess space or for doc’s

Signing incentive; first month free while setting up

Leasehold improvements; often get just bare space

Adequate signage – some landlords have restrictions

Exclusive use clause – only Pharmacy or store selling certain products; i.e. Prescriptions, greeting cards

Contingency on financing – similar to buying a home

Whether the tenant can assign or sublet the property

Desirable Lease Clauses


If purchasing; determine a satisfactory purchase price

Accurate pharmacy valuations are critical in successfully buying a pharmacy.◦ Due to changes in Generic reimbursement and

Professional Allowances; Pharmacy valuations are more complex and difficult than ever.

◦ “Normalize” the script count; ie nursing home contracts.

◦ Usually a multiple of earnings termed as EBITDA.

◦ Get expert advice from a business broker that understands Pharmacy purchase agreements.

Valuation


Review the external business environment (i.e. the local community; how are other businesses doing ?)

Review the financial health of the business (i.e. solvency, liquidity, cash flow, sales, and profitability).

Assess physical assets of the business (i.e. inventory, equipment, fixtures, technology, hardware & software)

Assess the condition of the building, (i.e. roof, electrical, plumbing, lighting, HVAC, concrete or wood)

Value Assessment & Price Determination


Will it be an asset or share purchase?o Asset purchase; your company takes over only the

assets like inventory but not the liabilities.

o Share purchase; your company takes over the vendors company in total and owns everything; assets and liabilities.

o Asset purchase generally favours the buyer; share purchase generally favours the vendor.

o In either type of purchase; always consider… Assess the Financial liabilities of the business (i.e. A/P) Assess the Financial assets of the business (i.e. A/R ) Are there any outstanding legal issues or contracts?

Type of Purchase


Definition of financial capital◦ Wealth, in the form of cash, equipment, property;

◦ or a combination of these factors, that can be used in the production or creation of income.

Areas of capital need ◦ Set-up capital

◦ Start-up capital

◦ Operating capital

Identifying Financing Needs


Personal financing Debt financing

Debt financing takes the form of loans that must be repaid over time, usually with interest.

Equity financing Equity financing takes the form of money obtained from

investors in exchange for an ownership share in the business.

Also known as "share capital".

“Sweat” equity Build equity over time at a reduced wage rate or

reinvesting part or all of salary or bonus back into the business in exchange for shares or options.

Common Types of Financing


Debt Financing◦ Desante (MAXIUM Financial)◦ Banks (RBC), Government loans or BDC

Equity Financing◦ Junior partnership

Buyer can purchase a pharmacy with little or no initial capital and build equity over time.

Seller can ease gradually out of ownership and maintain the legacy of the independent pharmacy in the community.

“Sweat equity”◦ Forewest-Pharmasave◦ Multi store owners in banner stores

Sources of Financing


Is owning a community Pharmacy still possible in the world of today?

With the current economic conditions, is this a good time to be financing your Pharmacy vision?

The Two Most Asked Questions


Yes!

◦ It is not exactly easy – buying or starting a Pharmacy is a challenge; involving many different risk factors.

◦ But so is parenting. Don’t miss out on the personal and financial rewards just because the unknown risks put you off.

◦ With trustworthy guidance and support you can make your vision a reality.

Answer The Two Most Asked Questions

retailSOS.ca 47

Want a copy an electronic copy of this of this presentation with bonus slides?

◦Email me; [email protected]

To your business and professional success...

THANK YOU for your attention.

Questions?

Thanks

Gerry Spitzner

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Find me


Gerry Spitzner is an optimist with a natural "kid-like“ curiosity for improving life and business results. He believes in a bright future and our ability to build it together. Gerry is passionate about making the public aware of the great things Pharmacists do.

Drawing on 35+ years experience in multi-site retail Pharmacy operations, drug store ownership and the Pharmaceutical wholesale supply-chain; Gerry brings the leadership, knowledge and market awareness of business development to retail Pharmacy owners helping them achieve growth objectives. He teaches and inspires Pharmacists to achieve results by aligning their vision with marketing strategy and operational execution.

Fascinated with a lifelong curiosity for why customers buy and a passion for retail Pharmacy; Gerry guides leaders and organizations to create, engage and keep great customers by delivering the promise of an extraordinary customer experience. He has devoted his life to sharing his thinking with other Pharmacy leaders to manage market analysis and build business plans that increase profitability and create competitive advantage with systems to implement.

His company is retailSOS.ca, a Vancouver-based business management consultancy with a suite of outsourced business services to support Pharmacy owners starting, buying or strategically realigning their practice. With a clear understanding of the business of Pharmacy he uses a solution oriented focus with ideas and alternatives that clients can use to address the changing practice issues they face right now. Gerry understands who they are, what they need, and where to find it, helping them market and strategically realign their professional clinical services to integrate the business activities of optimal drug therapy outcomes through patient centered care.

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ubc phar400-buy-start-pharmacy-8mar2013

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