UBC Phar400-buy or start pharmacy-19oct2012

retailSOS.ca | Gerry Spitzner
October 19, 2012

 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.


 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.


 Follow Twitter: @passion4retail
 Connect LinkedIn: Gerry Spitzner
 Web: retailSOS.ca
 Blog: gerryspitzner.com
 Email: gerry@retailsos.ca
 Online Biz Card: gerryspitzner.tel
 Online Biz Card: retailSOS.tel


 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.


UBC Phar400-buy or start pharmacy-19oct2012

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UBC Phar400-buy or start pharmacy-19oct2012