UBC Phar400-startup or buy pharmacy-23mar2012

UBC – Phar400Pharmacy Management

Establishing a Practice or PharmacyGerry Spitzner | retailSOS.ca

March 23, 2012

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Overview of key points to consider when establishing a new practice.

Business plan outline for buying an established Pharmacy.

Gerry Spitzner

Goals for today...

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Advantages and disadvantages of purchasing an established Pharmacy vs starting a new Pharmacy.

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

Explain factors important in leasing & rent calculation.

Objectives

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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

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What, Who and Where Do I start? Key Tasks for the Prospective Owner Reasons for Wanting a Franchise Pharmacy

Opening a New Pharmacy Purchasing an Established Pharmacy

Roadmap

Gerry Spitzner

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

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

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What’s your BIG idea? What is your why? How will you benefit? Is this right for me; right now? Are you ready?◦ 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

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The BIG question... Start up a new independent practice, or purchase an established Pharmacy?

Franchise, banner or independent? “Full mix” drug store, Health Centre or simply Pharmacy?

Thoughtstarters

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Community PharmacyOverview of types and departments

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Pharmacy set-up support and type of pharmacy◦Corporate Pharmacy retail stores

(employee or owned and operated by the licensed “associate-owner”, closely related to franchise, “manager” of a chain Pharmacy)

◦Franchise Pharmacy (independently owned and operated, sharing in

benefits, buying group, sales/promotions, contracts)

Community Pharmacy - Types

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Pharmacy set-up support and type of pharmacy◦Banner Pharmacy

(independently owned and operated, working together, buying group, sales/promotions, contracts)

◦Wholesaler (independently owned and operated, shareholder in

wholesale, buying group, working together)

◦Independent Pharmacy (independently owned and operated)

Community Pharmacy - Types

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What departments and products?◦ Consider location, clientele, age, mix, income levels,

education, health providers nearby, other retail stores, etc.◦ Alternative medicines, vitamins, OTC’s, orthotics and

mobility aids, wound care, private consultations, cosmetics, electronics, food and groceries, post office, greeting cards, books and magazines, etc.

What professional services?◦ Consultations, Medication Management, Education,

Counseling, Disease state screening, Chronic disease management, Immunization, Refill services, delivery services, blister packing, LTC, Group homes, other

Community Pharmacy – Departments

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Key Tasks for Purchasing an

Existing PharmacyWhere do I start?What do I need?

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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

What do I need to start?

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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◦ Lawyer; with Employment Law and/or leasing

experience◦ Accountant; with Tax Planning experience◦ and a Banker; preferably with Pharmacy accounts

Who do I need to start?

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Create your team of experts The next person you need

◦ Mentors and advisors

Then you need (if starting new)◦ Commercial real estate agent◦ A great general contractor that can get and keep the

trades focused

Then you need (if purchasing)◦ Business broker

Who do I need to start?

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1. Develop a Business Plan ◦ This is an essential step and critical for the planning and

viability of your business. 2. Have you undertaken extensive market research?

◦ Market research is a vital part of your Business Plan, including creating a viability report (Market Feasibility Study)

3. Do you need additional financing?◦ Banks and other lenders or investors will require a written

business plan 4. Consider and select the most appropriate structure to

operate your business◦ Partnership Agreement if applicable and Corporation

Where do I start?

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5. Submit your business name request (NR) for approval◦ Recommend that you conduct a domain name search and put a hold◦ Also recommend: contact CPBC; ask for clearance of business name

6. Incorporate your business either through a lawyer or yourself online◦ Corporations are automatically assigned a Business Number (BN) for

corporate income tax purposes◦ As soon as you get the Incorporation documents send copy to CPBC

7. Review Pharmacy Licensure Guide from CPBC 8. Open a business bank account

◦ Visit your financial institution with a copy of your Business Registration Certificate

Where do I start?

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9. Register the domain name of company 10. Open accounts under your Business

Name (BN) as required for payroll, GST/PST (HST).◦ You MUST open a GST/PST/HST account if your

sales are greater than $30K 11. Contact your municipality for a business

license◦ Need this to apply for a Pharmacy License

12. Determine whether there are any further licenses or regulations that apply to you or your business

Where do I start?

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1. As a Corporation, you must register your business for workers compensation◦ Call WorkSafe BC

2. Open a Payroll Deductions Account under your BN which was provided with your business as part of incorporation◦ Contact CRA

3. If you hire employees ensure you’re aware of your requirements under the Employment Standards Act

What are my HRM requirements as a Corporation?

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Your Lawyer and Accountant◦ You MUST keep detailed and accurate records for

both your corporation and year end accounting

Your Bookkeeper◦ Detailed employee files and records◦ Cash and credit card receipts

Prescription records◦ Hard copy storage and record keeping

requirements

What are my requirements for keeping business records?

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Things to Consider When Purchasing

Key Tasks for the Prospective Owner

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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


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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◦ Parking, Signage, Visibility


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Location isn’t…◦Customers may drive further to a

Pharmacy they perceive having: Better prices Better service & services Better selection of merchandise Better amenities; such as private counseling

area etc. Better hours


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Leasing◦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


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Leasing Agreements◦“Offer to lease” vs. “Lease”

“Offer” is starting point where both parties negotiate lease terms Landlords have a standard “Offer” form. It is 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. A “lease” specifies what the lessor (landlord) will provide and what

the lessee (you) will do and pay.


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Leasing terminology 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.

◦ In a percentage lease, the 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".


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Leasing terminology What are "triple-net leases"?

◦ Triple-net leases are 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) in a triple-net lease.

What are “CAM” costs?◦ Common area and maintenance costs; usually in a shopping

centre lease.


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Leasing Costs◦ 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


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Desirable lease clauses◦Sublet clause – if excess space or for doc’s◦Signing incentive; first month free while setting up◦Leasehold improvements clause

Often you get just the bare walls/floor

◦Adequate signage – some landlords have restrictions◦Exclusive use clause – only Pharmacy or store selling

certain products◦Contingency on financing – similar to purchasing a home◦Whether the tenant can assign or sublet the property


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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 (EBITDA) Get expert advice from a Pharmacy biz broker or

consultant.


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Value Assessment & Price Determination◦Review the external business environment (i.e.

the local community)◦Review the financial health of the business (e.g.

solvency, liquidity, efficiency, sales, and profitability). ◦Cash Flow.◦Assess the physical assets of the business (e.g.

inventory, equipment, fixtures, technology, hardware & software, condition of the building)


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Value Assessment & Price Determination◦ Assess the *‘Goodwill’* that will come with the business

(e.g. reputation, continued patronage, knowledge & expertise, information, any special products/services) * Note: ‘Goodwill’ is normally calculated as a multiple of annual

net profit and may include number of scripts

◦ Assess the Financial liabilities of the business (eg. A/P)

◦ Assess the Financial assets of the business (eg. A/R )

◦ Are there any outstanding legal issues or contracts?

◦Will it be an asset or share purchase?


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Identifying Financing Needs and Options◦A definition of ‘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 ◦1. Set-up capital◦2. Start-up capital ◦3. Operating capital


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Common types of financing for Pharmacy 1. Personal financing 2. Debt financing

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

3. 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".

4. “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.


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Additional Purchasing Method ◦ 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

Sources of Debt Financing◦ CIT◦ Banks◦ Government loans/BDC

Sources of “Sweat equity”◦ Forewest◦ Multi store owners in PS and PDM


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Franchise or Independent?

Advantages and Disadvantages

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Proven Formula with Admin and Buying support Two types

◦ “SDM Associate” concept Own the business but not the physical assets No capital investment or capital risk Guaranteed minimum annual income and Benefits “Share” in profitability Support services in all areas of Operations

◦ “Medicine Shoppe” concept Full Pharmacy ownership Capital investment required Ongoing Sales and Biz Dev support Custom marketing strategy Training and Professional Development

Advantages of a Franchise Pharmacy

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SDM concept◦ “Share” profits◦ Many “masters”◦ Associate agreement is a renewable 3year deal◦ Retained equity requirements◦ Franchise agreement restricts or outlaws certain

activity Medicine Shoppe concept

◦ Franchise fees◦ Trademark rules◦ Required program participation

Disdvantages of a Franchise Pharmacy

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Main Reasons: ◦ Entrepreneur◦ Self-management ◦ Creative freedom ◦ Financial independence

Additional Reasons:◦ Not having to answer to others (regarding the pharmacy focus)◦ Being recognized/playing an important role in meeting the

business and healthcare needs of the community◦ Achieving a level of self-fulfilment and pride◦ Continuing a legacy of pharmacy ownership established by

family and/or mentor(s)

Reasons for Wanting an Independent Pharmacy Business

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Either:◦A desire to address some unmet

healthcare need(s) for a particular patient population

Or:◦A desire to take advantage of a

particularly or potentially, lucrative business opportunity

Or:◦A combination of the above

Key Overall Motivators for Entering an Independent Pharmacy Business

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Opening a New Pharmacy

Things to consider and tasks to do. Develop a project management plan with timing and tactical action plan.

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If the venture is not planned carefully, there is likely to be:◦A greater amount of risk in general◦An increased chance of specific unforeseen

events◦A longer time lag between start-up and

profitability◦A formidable challenge to obtaining

sufficient capital


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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 ◦7. Obtain licences, permits and insurance ◦8. Develop a marketing and promotion plan◦9. Establish the management philosophy of the

business


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Obtaining Licences, Permits, and Insurance◦1. General business items (e.g. zoning, fire,

business interruption, health and safety)

◦2. Pharmacy specific items (eg. Pharmacy License – College of Rx, software, suppliers, contracts)

◦3. Insurance (e.g. natural disasters, physical accidents, employee, health / injury / compensation, professional liability)


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Types of Pharmacy◦Health Authority Associated Pharmacy

(ambulatory care pharmacy, Cancer drug Pharmacy, HIV drug pharmacy, hospital pharmacy, corrections facility pharmacy, addiction, etc)

◦Community Pharmacy (consulting pharmacy, compounding pharmacy, retail pharmacy, veterinary pharmacy, central fill pharmacy, etc)

◦Other Pharmacy (nuclear pharmacy, military pharmacy, etc)


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Determine the type of Pharmacy set-up that is most compatible with your needs and style◦Your pharmacy practice desires◦Your pharmacy training (Community residency,

hospital residency, certificate training, certified diabetes educator, certified geriatric pharmacist, certified asthma educator, injection training, Pharm D, MSc, PhD, MBA, etc.)

◦Your experience (technician, staff pharmacist, pharmacy manager, corporate staff member, other)


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Establishing the Management Philosophy of the Business◦Management / Leadership Style◦Organizational Culture◦Corporate Values


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Opportunity to select every item required for this new venture

Hiring one’s own personnel (compatibility)

Finding a great location Creating sound policies and procedures

Avoiding having to pay for intangible assets

Advantages of Opening a New Pharmacy

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High level of risk Longer term to profit Considerable time investment Need to do everything yourself

Disadvantages of Opening a New Pharmacy

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Buying an Established Pharmacy

Considerations, questions, advantages and disadvantages.

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1. Key Initial Questions 2. Advantages and Disadvantages 3. Value Assessment and Price Determination

4. Purchasing Methods

Purchasing an Established Pharmacy

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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?


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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


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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 ◦ Problems with the location or Landlord◦ Undesirable established leases / lease terms or

conditions◦ Existing owner may reopen and take customers

Write them into the deal or have a non-comp clause


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Issues and Opportunities

Community Pharmacy - Independents and Chains

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Chain drug stores, supermarkets, mass merchandisers, mail order, hospital pharmacies, primary care centres.◦ In 2010, Pharmacy chains, franchises and banners

accounted for 61% of the market, leaving 20% for supermarket and mass merchandiser pharmacies and 19% for IND’s.

◦ In 1995 the breakdown was 60%, 8% and 32% respectively.

Drug Reform Drug Shortages

Issues Facing IND Pharmacy Practice

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Third Parties◦ Plans are becoming more complex and patients

don’t understand them. Reimbursement Rates

◦ In Canada – more than 50% of prescriptions paid by Government; most of the rest is covered by an insurer like Blue Cross and NIHB; very little “cash pay”.

Issues Facing IND Pharmacy Practice

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Key Industry Stat◦ Per capita usage of prescriptions is climbing

among all age groups, ranging from 4.21Rx/year among those aged 0-39 years up to 41.82/year for 60 years and up.

Patient Care Service Development ◦ Home delivery, home consultation, patient

charge accounts, disease management programs (diabetes, asthma), LTC, Group Homes, Workplace immunization etc.

Opportunities Facing IND Pharmacy Practice

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Niche Development◦ Developing a relatively narrow specialty or

niche to fill an observed unmet need in the local community, such as AIDS services, addiction, pain or celiac.

Chains are slow to change to the new business model

Opportunities Facing IND Pharmacy Practice

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Questions?

Thanks

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