Succession Planning: an important strategy for wealth creation and the long term survival of independent community pharmacy

Succession planning refers to the process of progressively transferring ownership and control to another generation of owners. In essence, it aims to promote a win-win situation for vendor, entrant and industry as a whole. Long used by other professions, correctly managed, and with the right parties, it leads to improved values for the retiring owner and reduced risks for the incoming partner.

Synopsis:

• Many pharmacy owners, as a practical alternative to business sale, are adopting succession planning which involves the progressive transfer of ownership.
• Long used by other professions, correctly managed, and with the right parties, it leads to improved values for the retiring owner and reduced risks for the incoming partner.
• Ultimately it's a process not an event and requires careful execution of a number of steps. It also must be tailored to the objectives of each partner; new and old.
• Once completed, often the process starts again with another generation.

Current pharmacy landscape

The current community pharmacy landscape is characterised by:

• An increasing number of older owners and decreasing numbers of buyers with the capacity to pay current asking prices. These owners are also confronted with increased management and capital requirements related to ownership of a modern pharmacy.
• A large number of disenfranchised aspiring pharmacy owners.
• Limited access to capital.
• General uncertainty about the future economic climate for Australia and pharmacy in particular.
• Poor and/or uncertain returns from alternative investments.

Increasing number of older owners under pressure

It is generally estimated that more than 50% of current pharmacy owners are over the age of 55 and considering retirement or sea change. However, these 'prospective vendors' are now faced with:

• A decreasing number of buyers who can afford to buy them out.

  The anecdotal evidence is that Gen X & Y pharmacists are unlikely to have been frugal in their financial management to have built up the required deposit to purchase a pharmacy¹. Many younger pharmacists may also not be prepared to make the financial sacrifices required in taking on the debt required to buy a pharmacy.

  Inevitably, business brokers will drift towards the consolidators in order to achieve a sale.

• If they retain the business, they will need to:

  • reinvest significantly to maintain the performance and value of their business; and
  • up skill and train to cope with the increasing complexity of community pharmacy.

  Changing community and government requirements, as well as the requirements for competent professional management, make pharmacy ownership more complex and demanding today. This brings pressure to bear on owners. A pressure which often leads to the desire to sell up and move towards an easier life.

A large number of disenfranchised aspiring pharmacy owners

Graduation numbers have increased, according the portion of aspiring pharmacy owners also continues to grow.

In recent years, many of these prospective buyers have not been able to buy their dream pharmacy for a number of reasons. Some have chosen to leave the profession, others have remained but are becoming increasingly frustrated by the process and the inability to achieve their aspiration to own their own pharmacy.

Limited access to capital

Access to capital is decreasing. The US Sub-prime crisis and resultant credit crunch has led to many banks reducing the capital available to pharmacy.

This is not a commentary on pharmacy but, rather, a function of the overall economic climate.

Banks have reduced the level of debt they will provide to a buyer. Previously banks would lend up to 80 to 90% of the value of the pharmacy. However, most banks are now limiting their lending to about 70%. Some banks have withdrawn from the market entirely.

Economic Uncertainty

It is now obvious to all of us that there is general uncertainty about the future economic climate for Australia generally and pharmacy in particular. This sentiment has manifested all aspects of the Australian economy.

While pharmacy is and remains relatively robust, we cannot escape the climate within which we operate.

Poor and/or uncertain returns from alternative investments

The global financial melt-down has meant that the prospect of great returns from share-market or property investments has disappeared. For many, the uncertainty and risks in investing the proceeds from the sale of their pharmacy has meant that holding on to ownership appears a safer bet.

For older owners this makes sale of the pharmacy not as easy as it was a few years ago. Succession provides a valuable solution which can create value for both the aspiring owner and the vendor wishing to retire.

Succession planning is also critical to retaining high performers across all levels of community pharmacy and mitigating the risk of loss of management and business expertise in community pharmacy. It also provides career advancement opportunities to pharmacists, and therefore, retention of talent within pharmacy.

Succession planning is not an event, it's a long-term, ongoing process that begins well before an owner wishes to retire. It should be factored into the strategic plan of the business and considered when new pharmacists are employed. It is not new to pharmacy. It is now also critical to the maintenance of a viable independent community pharmacy network.

A carefully developed succession plan enables the transition into a fulfilling retirement while transferring knowledge and resources to the next generation of pharmacists.

Succession - the process

Succession is a process rather than an event. It enables:

• Transfer of knowledge and management to a new generation of pharmacy owners;
• Management of both operational and financial risks associated with pharmacy ownership for both the incoming (buyer) and outgoing (vendor) owners;
• Access to finance for single pharmacy owners and first time buyers;
• The protection of assets;
• For the incoming owner, a relatively easy transition into ownership. For the outgoing owner, a managed transition into their new career be it retirement or a sea change; and
• The use of business equity to formulate and implement a retirement strategy.

Pharmacy trends - Pharmacy values have escalated

Pharmacy values have also escalated due to improved operating efficiencies and latent growth. (refer to graph)

Keys to a successful transition

At Medici Capital every succession plan is developed and tailored to suit the objectives of each party. The process and approach is different to suit the situation.

As in the purchase of a pharmacy, the process must be rational, independent, and objective. The process must also be orderly.

It is also a very emotional process and relies on the assessment of many qualitative or 'non-financial' aspects. Your trust in each person is a key example. It is more likely a succession plan will run into difficulty because of cultural (i.e. differences in management style and work ethic) conflicts rather than financial.

Help is available! - Workshop & Self-help sessions

Medici Capital helps many clients seeking to develop and implement a succession plan. Medici Capital also offers a seminar program that focuses on the core issues and steps to succession. With the help of practical examples and case study scenarios, pharmacy owners contemplating a life-stage change are encouraged to clarify their individual needs and identify change solutions that are consistent with their own circumstances and time frame.

Separate sessions are held for aspiring owners and vendors. Medici Capital then offers a matching service and facilitation process.

Call (03) 9853 7933 or email us to register for the next workshop in your capital city.

The benefits

"A successfully implemented Succession Plan inevitably leads to better outcomes for both the retiring and succeeding partner".

Medici Capital has completed detailed financial analysis which demonstrates that succession is financially beneficial to both the buyer and the seller. They are both initially better off and they become much better off in overall wealth terms by opting for a transitional process.

Both parties benefit from the progressive transfer of equity. While the risks may be higher, well planned and managed, the benefits of this process warrant the serious consideration of succession as an option.

Call or email for a copy of the worksheet.

The outcomes

Structured business plans and commitment to goals ensures the realisation of long term value. A succession plan can begin early in the business life cycle thus aiding the final transition.

Succession relies on management of transition from previous owners to new. It is important that it is managed harmoniously and with the minimum disruption to the pharmacy, its customers, and staff.

Appropriately managed, it drives growth and opportunity and leads to better business outcomes. It also harnesses the value and resources of the pharmacy to achieve a true win-win outcome for buyer and vendor; entrant and exiter.

The main reason many business owners have a viable succession plan and exit strategy is to maximise their return on the sale of the business.

The take-away

Succession planning will be an increasing aspect of pharmacy ownership for the next decade. While driven by industry structural and capital requirements, it is also fed by the need for most people to have 3-5 years to prepare and create substantial interests outside pharmacy and achieve a fulfilling retirement.

• Commitment is key
• The payoff is better outcomes
• Although not for everyone, as the ability to let go is critical. There is tangible evidence of how both parties will be better off as a result. A true win-win will drive, and is vital to, ongoing commitment.
• One size (one approach) never fits all. It must be tailored to your needs.

Most banks will lend between 60 and 80% of the value of the pharmacy. Therefore to purchase a pharmacy, a buyer will require cash or unencumbered equity of between 40 and 20% (respectively). For an average pharmacy, that means about $1,000,000 to $500,000 respectively.