ubc phar400-buy or start pharmacy-19oct2012

retailSOS.ca | Gerry Spitzner

October 19, 2012

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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

retailSOS.ca | Gerry Spitzner 3

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.

4 retailSOS.ca | Gerry Spitzner

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.


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


This 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.


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.


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.


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?


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?


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), 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?


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 the owner had

with his 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 and procedures do not match with new

owner’s 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 the zoning laws allow for a retail Pharmacy at the proposed

location?

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

How much lease hold, renovation or interior changes are necessary to comply with space and layout requirements?

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


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 your initial loan or 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.


Opportunity to select every item required for this new

venture

Hiring one’s own personnel (compatibility)

Finding a great location

Creating own systems, policies & procedures

Avoiding having to pay for intangible assets

Negotiating your own arrangements with suppliers

Choosing your own practice focus


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


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


Create your team of experts

◦ So you can do what you do best...

◦ and they can do what they do best

The first three people you need

◦ Business Lawyer; with Employment Law & leasing experience

◦ Accountant; with Tax Planning experience

◦ Banker; preferably experienced with Pharmacy accounts


Create your team of experts...

The next person you need (buying or starting)

◦ Mentors, advisors and business consultant

Then you need (if starting new)

◦ Commercial real estate agent

◦ A great general contractor that knows the Pharmacy business

and can get and keep the trades focused

Then you need (if purchasing)

◦ Business broker


Identify available pharmacies for sale or suitable

locations for a new one

Leasing Agreements

Determine a satisfactory purchase price

Evaluate and determine capital needs

Investigate & select best source of capital


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


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


“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. 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


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".


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 lease.


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; 1-2000 sq ft

◦ Taxes and CAM can be $5 - $8/sq ft

◦ So, a 2K sq ft store @ $30/ft plus $5

2000 x 30=$60,000/year

2000x 5=$10,000/year

Total lease cost is $70,000/12=$5,833/month + HST (on applicable)


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


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.

◦ Usually a multiple of earnings termed as EBITDA

◦ Get expert advice from a business broker that understands

Pharmacy


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 the 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)


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?


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


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.


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


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?


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.


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Web: retailSOS.ca

Blog: gerryspitzner.com

Email: [email protected]

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retailSOS.ca is a Vancouver-based retail consultancy guiding

Pharmacy owners to create, engage and retain great customers

which results in increased sales and profit.

Gerry Spitzner works as a management consultant supporting

community Pharmacy owners to achieve results by aligning

their vision and implementing marketing strategy with

operational execution.

Drawing on 35+ years experience in drug store multi-site retail

operations, Pharmacy ownership and Pharmaceutical

wholesale supply-chain; Gerry brings the leadership, knowledge

and market awareness of ownership and business development

to Pharmacy owners to achieve growth objectives.


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