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Economic challenges facing pharmacies
Before starting the process, it’s important to understand the economic issues you’ll be facing whether you’re buying or selling. They include:
- Soaring inflation. After hitting historic highs, Canada’s inflation rate cooled a bit in November 2022 at 6.8 per cent. This affects everything from rental prices to commercial stock (like over-the-counter medicine, first aid products and other items typically sold in pharmacies.)
- Increased utility rates. Increasing inflation means energy costs are also going up. In July of 2022, prices for electricity rose 14.9% in Canada compared to July of 2021.
- Climbing interest rates. The Bank of Canada raised interest rates last year by about 400 basis points, with another rate hike expected in early 2023. This affects all valuations and funding.
- Rising real estate prices. Whether leasing or owning property, this will be a major consideration as prices continue to climb.
The market: How pharmacies are faring during an economic downturn
As many small businesses struggle to survive in this economic climate, pharmacies are actually doing quite well. During the recent pandemic, many patients opted for pharmacies when it came to treating minor health concerns. Pharmacies also began offering testing and Covid-19 vaccination services, which increased their customer bases. While the pharmacy market did experience a small decline in growth in 2020 (with growth at 2.25% globally), that number increased to 6.88% in 2021.
Selling a pharmacy
Selling a pharmacy is a long and often arduous process. To ensure you’re getting the best price, it’s important to prepare your business for sale. This means streamlining your operations to reduce costs and organizing your financial documents.
Getting your documents in order
Before starting the selling process, make sure you have 3 to 5 years of easy-to-understand financial information ready for review, as the buyer will expect this. The buyer will likely ask to review:
- Tax returns
- Profit and loss statements
- Balance sheets
You should also do a proper inventory count before the sale to accurately provide script prices, number of refills, new fills, and top 100 drug sales.
In order to attract the right buyer, you may also want to review your non-fixed costs, including:
Wages. This is typically one of your biggest expenses, especially as inflation soars. Review where hours can be reduced, but be careful about reducing too many hours, especially during busy times.
Utility costs: Before looking for a buyer, consider undergoing an energy audit to reduce rising energy costs.
Theft. It’s vital to review loss prevention measures regularly. Theft can lead to a significant drop in year-end gross margins.
How to structure your sale
It’s important to decide whether you’re interested in an asset or share sale. In an asset sale, the buyer is purchasing your tangible assets (like real estate, equipment and inventory) while allowing you to stay in control of the corporation. Keep in mind that this also means you’ll be retaining any long-term debt obligations.
Share sales are typically more popular with sellers because it’s not as complicated as an asset sale. In this sale type, the buyer purchases shares and obtains ownership of the entire legal entity, meaning multiple agreements aren’t necessary. All liabilities are included in the sale.
To understand which sale type works best for you, it’s important to talk to an experienced financial advisor, like our team at Zeifmans.
Buying a pharmacy
As a buyer, financing will be a huge consideration. Rising interest rates are not only affecting valuations, but they’re also increasing risk when it comes to investors and traditional loans.
While there’s not much to be done about interest rates, there are other ways to mitigate risk factors, such as:
- Recurring revenue. Look for a pharmacy with a stable revenue stream year to year. Having wildly fluctuating revenue increases risk, which will affect your funding options.
- Depending on one customer type. Review the potential pharmacy’s customer base. If they’re too dependent on one customer type (like a contract with a healthcare institution), there may be an issue if you ever lose that particular customer.
- Reliable financial records. Banks and investors will be looking out for inconsistent records.
Deciding on your sale type
There are pros and cons to both the share and asset sale types.
Asset purchases
Purchasing a pharmacy’s assets protects new buyers from any negative history or debts. Buying the pharmacy’s assets will usually result in being created. In most cases, buyers will be able to use the goodwill deduction to save on taxes. Goodwill is deducted in the same way as capital cost allowances.
Still, asset purchases are lengthy and complicated. As the buyer, you’ll have to negotiate new supplier contracts, attain leases, apply for a new ODB number, and obtain a new license through the Ontario College of Pharmacists.
Share purchases
A share purchase isn’t as long or complicated as an asset purchase, partly because you’ll be able to use the former pharmacy’s employment agreements and ODB numbers. You’ll also be able to use any previous losses against your taxable income. You won’t, however, be able to take advantage of the goodwill deduction, and any debt or negative history can affect your new business.
Next steps
Once you’ve chosen a pharmacy to purchase, your lawyer will create a Letter of Intent (LOI) that will detail the deal’s framework, along with working capital adjustments, non-competition agreements, and confidentiality requirements.
Then you’ll enter the due diligence period, when your team will go through the seller’s operational documents. Your lawyer will look out for regulatory violations, compliance issues or any company liabilities.
Once that’s complete, your lawyer will work on the definitive purchase agreement, which includes what’s expected of each party.
A helping hand in an uncertain time
While a pharmacy is still a solid investment, the economic climate will add new stressors whether you’re buying or selling. At Zeifmans, we have the experience to guide buyers and sellers through this often complicated process. Contact us to start the conversation.
