Starting or Buying a Pharmacy Business

October 28, 2011
Gerry Spitzner
retailSOS.ca

 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.

retailSOS.ca Gerry Spitzner 2

 Capital requirements for establishing a
Pharmacy and possible sources of capital.
 Factors important in performing a Pharmacy
location analysis and analysis of potential
markets.


 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


 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.


 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?


 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)


 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)


 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


 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


 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


 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


 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


 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


 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


 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


 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


 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


 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


 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


 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


 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.


 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".


 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.


 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


 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


 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.


 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)


 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?


 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


 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.


 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


 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


 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


 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)


 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


 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


 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


 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)


 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)


 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)


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


 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


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


 1. Key Initial Questions
 2. Advantages and Disadvantages
 3. Value Assessment and Price Determination
 4. Purchasing Methods


 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?


 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


 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


 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


 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”.


 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.


 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


Questions?


 Twitter: @passion4retail
 LinkedIn: Gerry Spitzner
 Blog: retailsos.ca
 Email: gerry@retailsos.ca
 Info: gerryspitzner.tel
 Info: retailsos.tel


Starting or Buying a Pharmacy Business

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