UBC Phar400-buy or start pharmacy-19oct2012
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Transcript of 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.
5 retailSOS.ca | Gerry Spitzner
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
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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.
retailSOS.ca | Gerry Spitzner 7
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
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.
9 retailSOS.ca | Gerry Spitzner
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.
retailSOS.ca | Gerry Spitzner 10
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
retailSOS.ca | Gerry Spitzner 11
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
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
Considerations, questions,
advantages and disadvantages.
retailSOS.ca | Gerry Spitzner 14
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?
15 retailSOS.ca | Gerry Spitzner
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
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
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
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.
19 retailSOS.ca | Gerry Spitzner
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
20 retailSOS.ca | Gerry Spitzner
Things to consider and tasks to do.
Develop a project management plan
with timing and tactical action plan.
retailSOS.ca | Gerry Spitzner 21
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
22 retailSOS.ca | Gerry Spitzner
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
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
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
25 retailSOS.ca | Gerry Spitzner
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
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Key tasks for the prospective owner
whether starting or buying.
retailSOS.ca | Gerry Spitzner 27
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
28 retailSOS.ca | Gerry Spitzner
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
29 retailSOS.ca | Gerry Spitzner
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
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
31 retailSOS.ca | Gerry Spitzner
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
32 retailSOS.ca | Gerry Spitzner
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
33 retailSOS.ca | Gerry Spitzner
“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
34 retailSOS.ca | Gerry Spitzner
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".
35 retailSOS.ca | Gerry Spitzner
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
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)
37 retailSOS.ca | Gerry Spitzner
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
38 retailSOS.ca | Gerry Spitzner
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
39 retailSOS.ca | Gerry Spitzner
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)
40 retailSOS.ca | Gerry Spitzner
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
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
42 retailSOS.ca | Gerry Spitzner
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.
43 retailSOS.ca | Gerry Spitzner
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
44 retailSOS.ca | Gerry Spitzner
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
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
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retailSOS.ca | Gerry Spitzner 47
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