For pharmacists, often their first entry point into business ownership is buying into a partnership. For most it’s the pharmacy they are currently working for. It’s the start of a very exciting phase of a pharmacist’s career, being a business owner. Like most other professionals it’s the logical next step in a career after you have reached the ranks of manager.
It also comes along at a time in which you have had very little knowledge or education about business matters. It is vital at this stage you start getting together your A team. This being your lawyer, your accountant and your bank manager/finance broker, who are going to help you through this process, and who are all pharmacy specialists. They are there to guide you, hold your hand, and take you through the process of buying into a pharmacy business.
There are many things a first time buyer needs to know about before they head down this path. Our team at Peak deals extensively with first time pharmacy buyers and there are often lots of questions and some degree of uncertainty from first time buyers. To get you started I have listed below the top 6 issues you need to know about before buying into a pharmacy business. These are the most common discussion points we have with first time buyers.
Of course, there are many others. I have written several blogs on this topic so please join our Peak Pharmacy Hub where you can access these blogs. Also check out our podcast Speaking Pharmacy. We have a few episodes that you may find relevant.
1. Funding Your Investment
This is the most common question. It’s very important you speak with your bank manager or finance broker to understand the requirements here before you commit to anything. You need to understand the typical security arrangements when you are seeking funding from a bank for your investment. Banks will need security on the debt. Pharmacy is one of the rare industries where the bank will use the business as security. Every bank is different, but on average the bank will use 75% of the market value of the pharmacy as security for the debt. The balance is either your cash investment or is secured on your personal assets. The bank engages a bank panel valuer to determine a market valuation of the business (which is Peak by the way).
If you are paying $500,000 for a 25% interest in the business, and assuming the market value of the 25% is $500,000, then $375,000 of the $500,000 investment will be secured on your share. That leaves $125,000. You either pay this via cash, or the bank will lend that amount but secured on your personal assets. The difference between the amount of your investment and the market value as determined by the valuer is important to note.
For example, if the valuation came in at $480,000, then 75% of $480,000 is $360,000, leaving you with $140,000 that needs to be secured personally. Whilst every bank is different, this will at least give you some understanding of the equity requirements and backing you need to fund your investment.
2. Your Percentage Interest - Make It Worth While
If you are going to invest in a pharmacy business, understand the amount of effort, commitment, stress etc. is the same regardless of whether you have 50% or 1%. The only different is the size of the debt and the profit share. If you are going to buy into a pharmacy business, make sure your percentage in the business is worth the effort.
3. What Is The Succession Plan?
Do you want to stay on your percentage investment for years to come, or do you want to buy further parcels to grow your interest in the business? It’s important both you and your future partners have an understanding here early. You may be happy to stay on your interest in the business and all parties may be happy with that. This is particularly the case if its equal share and all partners are active in the business. However, you may also want to grow interest and have a succession plan whereby you progressively buy additional parcels from a senior partner, who is looking at a slow exit. Have this discussion early and if necessary, have it documented.
4. Is The Pie Big Enough?
Also, on the topic of “make sure it’s worth your while”, is the size of the profits of the business large enough to divide up? Obviously, a business producing $1m in profit is a good business to divide up into smaller parcels. However why would you want a 50% interest in a business making only $50,000 profit.
5. Partnership Agreements
First of all, let’s be clear on something. You have a partnership agreement for partnerships, a shareholder’s agreement for shareholders in a company, and a unit holders agreement in a unit trust. They are essentially the same thing. Partnership agreements are absolutely essential. You must have one in place. It lays out many aspects about how the partnership is to be conducted, how decisions are to be made, how profits are to be allocated, how drawings are to be determined and paid, what’s the procedure if someone wants to sell etc. etc. It is vitally important you have one in place. You will have to rely on it one day.
6. Cashflow
It is very important you understand what your personal cashflow position is going to be as a result of your buy in to the business. This is how you need to work it out;
Total annual drawings (excluding your salary)
Less
Annual loan repayments
Less
Tax
Total Annual Drawings – the cash drawings you receive, which is different from your share of the profit of the business. Profitability and cashflow are different things. You are entitled to your share of the profits of the business, but you receive in cash the drawings only.
Annual Loan repayments – interest, principal repayments, and any associated charges.
Tax – Estimated tax on your share of the profits of the business, less interest on the debt. Note here you take into account the interest component only, not the principal component. It is best you speak to your accountant or get us at Peak to help you with this.
What’s left? Is it positive or negative? You want to be able to demonstrate positive cashflow as a result of your investment. If the cashflow is negative, break even, or only a minor surplus, then why do it in the first place?
Also, what is your margin of error here? How much do your sales need to decline by before your surplus cashflow disappears? It is really important you understand this before you get into it.
The points I have raised above are only a sample of the issues that need to be addressed when you are buying into a pharmacy business. These are the top issues that get raised by most pharmacists that come to see us. We have some great content available at Peak for pharmacists who are thinking of wanting to buy into a pharmacy.
The best advice I can give you at this stage is ask questions and be clear before you sign anything. Otherwise, it will be the most expensive signature you have ever written. Listen to your advisors.