Tips for Preserving the Legacy of an Independent Pharmacy
By Scott Welle |
Stepping outside the owner’s view, however, the situation may be an ideal opportunity for a prospective buyer interested in extending the pharmacy’s legacy. Assuming positive cash flow and annual sales of roughly $2.5 million or greater, the pharmacy may not only survive, but thrive, with new ownership and the right infusion of patient-care programs and supporting technology.
When buyer and seller reach common ground on an ownership transition, there’s mutual satisfaction in the pharmacy’s value and its future. The new owner can then take the reins confident that they’ve purchased a long-term profit generator, not just a job.
Through collaboration before, during and after the sale, both parties set the stage for positive return on investment, while continuing to support the store’s role in the community.
Before the sale
Here are the key action items for anyone selling a pharmacy to take in preparation for a sale:
Release information only on a “need-to-know” basis to minimize disruptions with your patients, prescribers and staff. Keeping the secret will also prevent your competitors from breaking the news to your patients in a self-serving manner before you can communicate the truth.
- Get your financials
Gather three full years’ worth of historical financial records and operational reports. Include tax returns, profit-and-loss (P&L) statements, balance sheets, prescription summary reports and third-party plan summaries. Also, be ready with P&L and prescription reports for the current fiscal year to date. Lists of your pharmacy’s top-selling and controlled drugs dispensed will be helpful to the buyer as well.
- Carry out a physical
This will help you measure and manage one of the biggest expenses in your pharmacy. Excess inventory represents tied-up capital—potentially tens to hundreds of thousands of dollars—that otherwise could be invested elsewhere in the business. Once you have an accurate count, assign a staff member to monitor either a manual or software-based inventory management system structured with minimum and maximum ordering parameters. Leading up to the sale, regularly scan shelves and return excess product that may be expiring soon. Keep an eye on the will-call bin to ensure timely patient pickup and avoid the expense of returning items to stock. Additionally, order expensive drugs for next-day delivery and patient pick-up rather than shouldering the carrying cost.
- Analyze your payroll
Take a close look at your current and historical labor and productivity costs to determine if you’re overstaffed or if you have any employees who could be considered overpaid. Although this can be difficult in the independent pharmacy setting, where your staff is like your surrogate family (or, in many cases, includes your actual family), but workforce compensation should align with operational efficiency and bottom-line business performance. An incoming buyer would be turned off by the prospect of inheriting lax labor management practices and having to make staffing adjustments from the outset.
On the flip side of the transaction, here’s what should be on the to-do list of anyone interested in buying a pharmacy:
- Formalize a plan
Having a comprehensive business plan is essential for securing financing, and it doubles as your strategy for long-term success. This document should describe the type of pharmacy you want to operate (e.g., retail, compounding, specialty, long-term care) and what patient populations you’ll serve, along with store location, space requirements and lease provisions. Your plan should detail the proposed pharmacy’s strengths, weaknesses, opportunities and threats, while explaining how you’ll capture and grow business within your chosen market. It should also estimate financing needed for the purchase and the potential return on investment.
- Partner with experts
Assemble an advisory team, typically comprised of an acquisition advisor, attorney, accountant and lender. The advisor identifies suitable opportunities for pharmacy acquisitions, helps draft a letter of intent and works as an intermediary during the due-diligence phase of negotiations. The accountant and lender quantify the amount of liquid capital required for a down payment and verify whether your documentation supports the proposed loan amount. The attorney drafts the binding purchase-and-sale agreement for the buyer and seller to execute. It helps if members of the team have pharmacy-specific experience; they know the right questions to ask and can spot potential problems that might be missed by a generalist advisor.
During and after the saleAs you can see, the sales process is front-loaded with preparation and planning tasks intended to keep things on track. When you reach the due-diligence phase, which is arguably the most important part of any independent pharmacy ownership transition, the business proposition needs to be fully vetted to ensure settlement at a fair price with clearly defined deliverables that will pave the way for the new owner’s future success.
Prospective buyers should work with the advisory team to put together a comprehensive set of due-diligence questions. Don’t be tempted to formulate questions on the fly. Look at all available financial and operational reports with a focus on whether key indicators are pointing in the desired direction. For instance, what are the trends for cash flow and physician prescribing, and what’s the status of existing PBM contracts? The more well-informed you can be about the pharmacy’s operations, the more confident you can be about the asking price for the business. Sellers, on the other hand, have a responsibility to be readily available and responsive to buyer requests throughout due diligence.
After the sale, the seller will be called upon by the buyer to provide introductions to key prescribers, patients and staff members. The seller should also grant the buyer “viewer access” to a central account for reconciling claims and payments in relation to the closing date of the pharmacy sale; this gives the buyer full transparency into when claims were filed, when they will be paid and what amounts are due to the buyer and seller, respectively.
Additionally, after the sale, the buyer should set aside time to conduct one-on-one meetings with all retained staff members. This is the ideal opportunity to refine the pharmacy’s organizational structure based on the strengths, weaknesses and career goals of each individual. In addition to learning about what each person would like to be doing on the job moving forward, you’ll also get a better understanding of what is and isn’t working in the pharmacy from an operational perspective. At the same time, you’ll also be able to express what your expectations are as the new owner directly to your staff to clear up any doubt and confusion.
Making adjustmentsNaturally, not all pharmacy acquisitions follow a set pattern, so it’s best if both parties maintain flexibility, even after the sale. In some cases, it makes sense for a seller to be retained as a part-time consultant, marketer or relief pharmacist. This can be helpful to a person buying a pharmacy when it comes to establishing relationships with existing prescribers and patients.
What’s more, the buyer and seller should talk through business relationships with board-and-care or assisted-living facilities. For instance, someone selling a pharmacy may have had a substantial amount of prescriptions flowing in from such facilities without formal contracts in place. The buyer would naturally be concerned about retention of that business. The solution would be to set up an escrow account, from which the seller could withdraw funds on a timetable tied to retention of a specified amount of business (e.g., one-third of the agreed-upon amount for Year 1 after closing, one-third for Year 2, and one-third for Year 3). This type of arrangement diffuses risk of reliance on non-contracted prescribers.
And, in regard to financing, the lending institution may not approve the full requested loan amount to close a deal in certain situations. As a result, the seller sometimes offers the buyer financing on the back end to secure the asking price. Alternatively, the buyer may opt to increase his or her down payment, which, when added to the approved loan amount, satisfies the seller’s asking price.
In the end, the legacy of an independent pharmacy lives on when a buyer is able to recognize the potential value of the business, the seller can secure a fair exit price and both have confidence in the good intentions of one another. Experience shows that commitment and flexibility by both sides throughout the process leads to a lasting, positive outcome—for the seller, the buyer, the staff and the community.