Pharmacy ownership marks a HUGE milestone in a pharmacist's professional journey. And it often begins with acquiring a stake in the pharmacy where they currently work. It's a logical progression, especially for those who have climbed up to managerial positions. Nevertheless, this transition is not without its unique challenges, particularly for those with limited exposure to business matters. If we had a dollar for every time, we've heard pharmacists say, "I didn't learn this in university," we'd be millionaires! In this blog, we will explore the essential considerations that every aspiring pharmacy business owner should grasp before embarking on this thrilling venture.
1. Funding Your Investment: Unlocking the Door to Ownership
One of the initial questions that frequently arises is how to finance the purchase of a pharmacy business. It's crucial to commence this journey with a clear understanding of the financial landscape. This is where your bank manager or finance broker comes into play. These professionals specialise in the intricacies of pharmacy financing and can guide you through the process.
In the world of pharmacy business, banks often use the pharmacy itself as collateral, leveraging its market value to secure the necessary funding. On average, banks may require a security arrangement of 75% of the pharmacy's market value for the debt. The remaining portion can be covered by your cash investment or secured against your personal assets. An independent bank panel valuer is typically engaged to determine the market valuation of the pharmacy.
Consider this scenario: You're purchasing a 25% stake in the pharmacy for $500,000, and the market value of that stake is also $500,000. In this case, $375,000 of your $500,000 investment would be secured against your share, leaving $125,000. You have the option to pay this balance in cash or have the bank lend the amount, secured against your personal assets.
Understanding the gap between your investment and the valuer's determined market value is crucial. For instance, if the valuation comes in at $480,000, 75% of that is $360,000, leaving you with $140,000 to be personally secured. While each bank may have its own unique approach, this insight provides a foundational understanding of the equity requirements and financial backing needed to fund your investment.
2. Your Percentage Interest: Making It Worthwhile
It's essential to recognise that the level of effort, commitment, and challenges in pharmacy business ownership remains relatively consistent, whether you own 50% of the business or just 1%. The primary difference lies in the magnitude of the financial commitment and the corresponding share of profits.
Before you venture into pharmacy business ownership, it's wise to ensure that your stake in the business reflects the effort you're willing to invest. This alignment between effort and ownership can significantly impact your overall satisfaction and success in your new role as a pharmacy business owner.
3. Succession Planning: Plotting the Course Ahead
As you embark on your journey as a pharmacy business owner, it's essential to consider your long-term goals. Do you envision yourself maintaining your initial investment percentage for an extended period, or do you have ambitions of acquiring additional shares to expand your interest in the business? The answer to this question holds substantial significance for your future and the future of the pharmacy.
Clear communication and alignment with your prospective partners regarding succession planning are critical. This is particularly relevant if you're considering a gradual increase in your ownership stake over time, a strategy often pursued when senior partners plan for a gradual exit from the business. Early discussions and, if necessary, documented agreements regarding succession planning can help ensure a smooth and harmonious transition.
4. Evaluating Profit Potential: Is It Worth It?
While the prospect of pharmacy business ownership can be exciting, it's essential to conduct a thorough evaluation of the business's profit potential. This is especially true now more than ever. However, it may also be a little more difficult.
All industries are changing but none more so than the pharmacy industry. In the last 6 months we have had 60 days dispensing, upcoming renegotiations of the 8th Community Pharmacy Agreement (8CPA) and the prospect of full scope of practice. All these changes will have an impact on a pharmacy’s profitability.
When considering the profit potential of a business, communication with the vendors is critical to understand what they have put in place to mitigate/capitalise on these changes in the current environment that the pharmacy industry finds itself in. It is also necessary to understand what mitigation plans are in place to ensure the profitability of the business can grow in these dynamic times.
Before you commit to pharmacy business ownership, it's essential to assess the profitability of the business and determine whether the potential financial rewards align with your expectations and financial objectives.
5. Partnership Agreements: Blueprint for Collaboration
In the realm of pharmacy business ownership, clarity and structure are paramount. This is where partnership agreements come into play. It's essential to have a well-defined partnership agreement in place, serving as the blueprint for how the partnership will operate.
A partnership agreement addresses a multitude of critical aspects, including decision-making processes, profit allocation methodologies, drawing policies, and procedures for selling ownership interests. Essentially, it outlines the rules and guidelines that govern the partnership's operation and the interactions between partners.
Having a comprehensive partnership agreement in place is not merely a formality; it's a necessity. This document can serve as a vital reference point in the future, helping to navigate complex situations and unforeseen challenges that may arise during your journey as a pharmacy business owner.
6. Understanding Cash Flow: The Financial Pulse of Ownership
Your personal financial situation is a key consideration when embarking on pharmacy business ownership. Specifically, you'll want to understand how your investment will impact your cash flow.
Calculating your cash flow involves several key components:
- Total Annual Drawings (Excluding Your Salary): This represents the cash you receive, distinct from your share of the business's profits.
- Annual Loan Repayments: This includes both interest and principal repayments, along with any associated charges.
-Tax: Estimating the tax you'll owe on your share of the business's profits, less the interest on the debt.
The result of this calculation provides insight into your annual cash flow. Ideally, you'd want to see a positive cash flow, indicating that your investment is financially sustainable and contributes to your overall financial well-being.
However, it's essential to consider your margin of error in this equation. How much can your pharmacy's sales decline before your surplus cash flow disappears? Understanding this margin of error is critical to managing potential financial risks associated with pharmacy business ownership.
In the world of pharmacy, the journey from pharmacist to business owner is a significant step. It often starts by acquiring a stake in the pharmacy where you work. While it's a logical move, it can be filled with unique challenges, especially if business matters weren't part of your education. At Peak Strategies, we understand these challenges, and we're here to assist you every step of the way.
We specialise in helping pharmacists transition to owners. Whether you need valuations, due diligence, assistance with trust and company setups, or expert accounting consulting, we have the expertise to make your journey smoother. Your path to pharmacy business ownership begins here. Contact Peak Strategies today to explore how we can help you turn your aspirations into a successful reality.