UBC Phar400-buy or start pharmacy-19oct2012


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Guest lecture presentation to Entry to Practice 4th year Pharmacy students at UBC on buying an existing practice or starting a new business.

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UBC Phar400-buy or start pharmacy-19oct2012

  1. 1. retailSOS.ca | Gerry Spitzner October 19, 2012
  2. 2. Email megerry@retailsos.ca
  3. 3.  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
  4. 4.  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. retailSOS.ca | Gerry Spitzner 4
  5. 5.  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. retailSOS.ca | Gerry Spitzner 5
  6. 6.  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 retailSOS.ca | Gerry Spitzner 6
  7. 7. This packet of thought starters is justthat; a starting point.Let your mind wander and consider thevision of establishing a new practice ortaking over an existing one. retailSOS.ca | Gerry Spitzner 7
  8. 8.  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. retailSOS.ca | Gerry Spitzner 8
  9. 9.  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. retailSOS.ca | Gerry Spitzner 9
  10. 10.  Whats 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. retailSOS.ca | Gerry Spitzner 10
  11. 11. You have decided that you want to runa community Pharmacy - now decidehow you will achieve this.Will you:• buy an existing business• start up a new business from scratch retailSOS.ca | Gerry Spitzner 11
  12. 12.  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? retailSOS.ca | Gerry Spitzner 12
  13. 13.  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? retailSOS.ca | Gerry Spitzner 13
  14. 14. Considerations, questions,advantages and disadvantages. retailSOS.ca | Gerry Spitzner 14
  15. 15.  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? retailSOS.ca | Gerry Spitzner 15
  16. 16.  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? retailSOS.ca | Gerry Spitzner 16
  17. 17.  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. retailSOS.ca | Gerry Spitzner 17
  18. 18.  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. retailSOS.ca | Gerry Spitzner 18
  19. 19.  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. retailSOS.ca | Gerry Spitzner 19
  20. 20.  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 retailSOS.ca | Gerry Spitzner 20
  21. 21. Things to consider and tasks to do.Develop a project management planwith timing and tactical action plan. retailSOS.ca | Gerry Spitzner 21
  22. 22.  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 retailSOS.ca | Gerry Spitzner 22
  23. 23.  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. retailSOS.ca | Gerry Spitzner 23
  24. 24.  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. retailSOS.ca | Gerry Spitzner 24
  25. 25.  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 retailSOS.ca | Gerry Spitzner 25
  26. 26.  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 retailSOS.ca | Gerry Spitzner 26
  27. 27. Key tasks for the prospective ownerwhether starting or buying. retailSOS.ca | Gerry Spitzner 27
  28. 28.  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 retailSOS.ca | Gerry Spitzner 28
  29. 29.  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 retailSOS.ca | Gerry Spitzner 29
  30. 30.  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 retailSOS.ca | Gerry Spitzner 30
  31. 31.  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 retailSOS.ca | Gerry Spitzner 31
  32. 32.  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 retailSOS.ca | Gerry Spitzner 32
  33. 33.  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 retailSOS.ca | Gerry Spitzner 33
  34. 34.  “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 retailSOS.ca | Gerry Spitzner 34
  35. 35.  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". retailSOS.ca | Gerry Spitzner 35
  36. 36.  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. retailSOS.ca | Gerry Spitzner 36
  37. 37.  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) retailSOS.ca | Gerry Spitzner 37
  38. 38.  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 retailSOS.ca | Gerry Spitzner 38
  39. 39.  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 retailSOS.ca | Gerry Spitzner 39
  40. 40.  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) retailSOS.ca | Gerry Spitzner 40
  41. 41.  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? retailSOS.ca | Gerry Spitzner 41
  42. 42.  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 retailSOS.ca | Gerry Spitzner 42
  43. 43.  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. retailSOS.ca | Gerry Spitzner 43
  44. 44.  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 retailSOS.ca | Gerry Spitzner 44
  45. 45.  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? retailSOS.ca | Gerry Spitzner 45
  46. 46.  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. retailSOS.ca | Gerry Spitzner 46
  47. 47.  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 | Gerry Spitzner 47
  48. 48.  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. retailSOS.ca | Gerry Spitzner 48