The sale of a business is more than just about dollars and cents. It’s also about changes to your life, including changes that impact your coworkers that may have been a significant part of your personal and professional life for many years.
What you may be feeling
It’s difficult to predict the range of emotions an owner might feel during the sale of their pharmacy. While these emotions cannot always be planned, they can usually be managed with the right mindset and a little upfront preparation. The following are some emotional questions that a pharmacy owner might be considering as they get closer to selling:
“Am I doing the right thing?”
“What will the relationship be with my employees, many of whom have been with me from the start?”
“Is this the right thing to do for my patients?’
“Will the new owner respect what I built?”
“Is money the most important feature of my deal? Are other issues equally important?”
“What am I going to be doing the month after the deal closes? A year later?”
“I really regret that my children are not taking over the family business? I wonder if there is any chance they will.”
“Will I like the new owners? Will my employees like the new owner?”
What Colony RX does
ColonyRX helps answer these questions by working with you through the sale process. In our experience, these questions may not be answerable at the start of the process, but over time, as things fall into place, the answers will crystallize.
We also encourage you to communicate with your family during the sale process, and we are happy to speak to spouses, children or other family members if needed. As a business owner, your family has been a part of the company’s journey, and the company has been part of your family’s journey. Like you, your family may need some time to prepare for the fact that the business will no longer be a part of your (or their) daily family life. By involving your family in the decision making process, you can help prepare them for the transition and create an atmosphere of emotional support throughout the sale.
Knowing that whoever is going to take over the reins is ready
Just because a person has money (or available credit) doesn’t necessarily mean they are the right buyer for the business. One thing we do is carefully evaluate buyers to make sure that they can close the deal, and also has the ability to run and manage the business after they do. Then, we will facilitate conversations with buyers to ensure your values and goals are aligned, and that all parties have the comfort they need to move forward.
There are a lot of feelings tied up in the sale of a business. If you are feeling overwhelmed, give Colony a call today to discuss some options. I promise you will feel better after the call.
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Every profession has “secrets” that have been hard-learned by experts over the years. Buying and selling pharmacies is no different. Below are some of Colony’s secrets and best advice we give to our clients.
Competitor Calling (including chains)
If your most fierce competitor wants to buy your store, it may be a blessing or may be a curse. It really depends on your past relationship with that person. Don’t necessarily run away. Consult with the experts at COLONY RX to chart your path forward with this potential opportunity (or potential landmine).
Legacy vs. Cash
Selling to a third party compared to a family member almost always results in a higher price and better terms, but if you decide to sell to your family, I both respect and applaud you. Remember to set clear expectations about the family relationship if the business goes south, and be sure to bring in an experienced pharmacy advisor like COLONY RX to get the deal closed.
Owners vs. Employees
Former employees may be a good candidate to buy your pharmacy, but set a strict timeline. We have heard of negotiations with employees dragging on for over 5 years or more. Employee deals can take longer, but if a deal with an employee doesn’t close within 6-12 months, it is unlikely ever to close. In these cases, call COLONY RX to help get the deal closed, even if you have an ideal buyer ready.
Customer concentration is a problem. If you have one LTC home that is 40% of your pharmacy, you are going to have a problem selling it. Same if you have one doctor or clinic that is 80% of your scripts. At COLONY RX, we know how to mitigate against these factors.
Asking vs. Selling
If you heard what your friend was asking for his pharmacy and it sold, remember that his asking price was unlikely his final selling price. So don’t set false pricing expectations for your pharmacy based on someone else’s false expectations that never materialized. Additionally, every pharmacy is different, and the same buyer will pay different prices based on their needs and expectations of value. To protect yourself, trust the experts at COLONY RX to make sure you are getting top dollar.
Family on the Payroll
Non-working family members on the payroll can be counted as cash on the bottom line. Just be sure that you can prove to your potential buyer that they truly don’t work in the business or add any value to the business whatsoever. At COLONY RX, we will present your business in the best possible light to buyers, giving you the benefit of tax maximization strategies during the sale process.
Your debts or your retirement income needs are not a buyer’s concern and should not be a significant factor when determining your pricing strategy. COLONT RX will help present your profitability in the best possible light to get you top dollar.
Growth is Good
Declining revenue or RX scripts can be a problem for buyers. Buyers like growth. COLONY RX can help mitigate against these issues.
Landlords can seriously complicate pharmacy sales. COLONY RX knows how to deal with landlords to make sure everyone gets what they need.
COLONY RX has great expertise in pricing “growth potential” into our deals. In other words, we can get buyers to pay for not only what the business has done in the past, but what it is likely to do in the future.
First Offer, Best Offer?
Your first offer is sometimes your best offer. You are crazy to leave a great offer on the table because of what may happen in the future. Trust the experts at COLONY RX to know if you should take the offer on the table or keep shopping.
The best offers must be win-win for both parties. If both parties are not happy, something is eventually going to blow up. COLONY RX has considerable expertise in structuring deals so all parties walk away happy.
Due diligence is not a time for surprises. Every business has a skeleton or two, so share any problems with your broker early. If you reveal your concerns early in the process, you will hopefully have time to resolve the issues. However, if you wait until due diligence, that small little skeleton may suddenly become frightening enough to scare your buyer away. Trust COLONY RX to present any issues you have in the best possible light and use mitigation strategies to minimize the impact.
At Colony RX, we know many more secrets and use them to help our clients get top dollar for their stores, while avoid headaches and mistakes. Call Colony today for a no-cost, completely free consultation to see if we can help you. We may even share some more of our secrets.
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Just as with so many other things in life, it takes two to buy a pharmacy. A buyer and a seller are the key ingredients. While brokers and lawyers help make sure everything is in the right measure and neither party gets burned, without a willing buyer and a motivated seller there is no deal.
While the buyer and seller may appear to be adversaries in a zero-sum game, in reality, they may have more in common than meets the eye:
Both the buyer and the seller want the company sold. Both want as painless a process as possible. Both want it over quickly. Neither wants to get very far into the deal and have it fall apart. Neither wants the word to get out that a deal is in process. And neither wants the business to fail.
With so much in common, how could anything go wrong? Simple: buyers and sellers speak different languages. Each is reading for different clues, deciphering vastly different nuances, viewing the whole process through a different set of lenses. And this is exactly as it should be. Friendly skepticism is the ideal in all transactions. Former American President Ronald Reagan used to chide the then Soviet Premier, Mikhail Gorbachev, with the phrase “trust, but verify.” The United States was willing to accept what the Russians said was true only after the United States had verified it to be true. As with nuclear warheads, the same is true for pharmacy purchases.
It goes without saying that the wants and needs of buyers and sellers are sometimes at odds with each other. Knowing these wants and needs, being able to put yourself in the other party’s shoes, will help in reaching a deal that is acceptable to both sides.
Looking Ahead / Looking Behind
As a general overview, the buyer is watching the road ahead. All discussions are filtered through a view of future goals. In contrast, the seller is watching the rearview mirror. All discussions are filtered through historical contexts. While both may be in the same room, they often hear different conversations due to their respective filters. Knowing this and trying to see through the other ‘s filter can make the whole process clearer.
And the buyer and seller want to convey different things: The buyer wants to convince the seller that he or she will take care of the pharmacy. The seller wants to convince the buyer that his or her pharmacy is the best pharmacy. It’s important to remember who the audience is in order to give it what it wants. For example, if the seller is concerned about money and the buyer is only focusing on employee retention, neither will be satisfied.
When buyers and sellers work together, it is easy to develop tunnel vision. While numbers are important, there is more to the deal than money. A deal must work in reality as well as on paper. The repercussions of a sale that doesn’t work out can be far-reaching and long-lasting.
The only good deal is one that is safe for both parties. So keep in mind the reality of the other party’s situation. As the parties continue to work together, the buyer and seller should build a rapport that lends itself to trust. This is necessary for the buyer to be able to comfortably accept the counsel of the seller regarding the safety of the deal. However, this trust should not interfere with healthy skepticism. As a buyer, we will need to check the data. But as well, we also listen to what the seller is telling us.
Trust is important in any situation, and it is absolutely necessary to the process of win/win discussions. Both parties must feel free to offer suggestions and pursue safe outcomes. However, even in situations where trust is established, conversations may turn heated. In such cases, simply take a break from controversial items and leave them for later when cooler heads can prevail. Remember that the goal is to reach the safest deal, not just the one that brings you the most dollar signs.
Trust during the sale of a pharmacy is crucial. But trust isn’t something you just throw out on the table. Trust is earned. In time, a buyer learns to trust a seller and a seller learns to trust a buyer. As the sale process continues, both will reach a level of comfort with the trustworthiness of the other. However, if this doesn’t happen, it may be best to reevaluate if the person you are dealing with this the right fit for you.
Hire and Expert
This article is only an overview. The difference between success and failure is execution on these strategies. If you have not done this countless times, the sale of your business is not the time to learn. Give Colony RX a call today and we can help you decide which of these strategies is most applicable to you.
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As an owner, you either have to be all in our all out.
Rather than sell their pharmacy, one option pharmacy owners consider is to hire someone to run their business, such as a trusted staff member, while they go to the beach. They figure they will make more money in the long-term having somebody run the business for a few years and then sell it.
This plan almost always leads to disappointment or disaster.
First, the business owner underestimates how much time they will need to spend working as an absentee owner. Even if they give the manger full discretion to run the business, there are enough decisions that only the owner can make, enough documents that only the owner can sign, and enough people that will only speak with the owner that more time is spent in the business than on the beach. Their cell phone is ringing constantly. Then, the manager and staff grow frustrated because no matter how accessible the owner tries to be, it is not accessible enough. This causes a decline in performance and morale.
The bigger problem is that the manager is more likely than not to run the business into the ground. There are a few reasons for this:
They resent that they are doing the work when the owner is on the beach.
While you may give the manager a bonus, they don’t share in the downside risk, so they make decisions that can harm the business.
They behave differently without the owners supervision than with it.
They are not capable of doing their job and the work you did as owner, and burn out.
They fail to build the infrastructure to support and monitor the manager.
One situation we saw had a pharmacy owner leave the store to his trusted manager who had worked for him for 10 years. He let the manager run the store while he went hunting. Even though this manager made a huge salary and bonus, he became resentful of the owner’s constant hunting trips and increasing demands from the owner. When the owner went to sell the business to the manager two years later, the manager wanted a massive price discount for running the store when the owner was away. No discount was good enough and things broke down between them. The owner could not fire the manager because the manager had built up a relationship with all the patients and doctors and was, in a sense, more powerful than the owner. The situation grew toxic and the store became virtually unsaleable. The situation only got worse when the junior pharmacist left for a competitor and took patients with him.
The mistake that this business owner failed to make is that if a business owner is not 100% engaged in their business, they need to move on. It is all in or all out – there is no in between. If the owner does not want to retire, at ColonyRX, they are welcome to keep working in the store, without the risks, commitment and hassles of ownership.
The best time to sell is when the economy and the industry are in good shape, and when the owner does not have to sell. The owner in the above situation would have made far more money and peace of mind if he sold at the time he decided not to commit 100% of his attention to the business.
If you would like to discuss selling your pharmacy, give Colony RX a call today. Your call will be 100% free and confidential, and you will feel better after speaking with us.
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Agree terms and conditions of sale, which are favorable to you.
Have the sale progress through each stage quickly and with minimum stress.
Have a positive relationship with the buyer, the staff, and all other stakeholders during and after the sale.
You need to:
Adopt the right attitude. This means being committed to the sale. You should therefore be sure that you are ready to sell your pharmacy before starting the process.
Be realistic about the price. While ColonyRX has a reputation of paying top dollar for pharmacies, it is important to have a realistic objective.
Be proactive. The only way the sale will progress quickly is if everyone involved is proactive. This means that the seller, the sellers’ lawyer, the buyer, and the buyer’s lawyer, all need to be committed to the sale and be responsive.
Lawyer – Virtually any lawyer can close a pharmacy transaction. It is not important that they be experienced in pharmacy transactions, only that they be responsive.
Accountants – You will want to tell your accountant about the transaction in order to properly address any tax issues.
There are different types of documentation that ColonyRX will need to review during its due diligence of the pharmacy, including:
Accounting and tax records;
Script reports from the pharmacy software system;
Copy of the lease. If you own the property, we will agree on a new lease.
Look at your pharmacy from a different perspective, for example, what would you be looking for if you were buying the pharmacy?
To know they are making a sound investment.
Potential to increase the sales and profitability of the pharmacy
A pharmacy that they feel is relatively safe from competitors.
A pharmacy with a path to growth.
A pharmacy with dedicated and loyal employees.
To be confident that the pharmacy’s prescribers will be there in the future.
If there are issues that could negatively impact your pharmacy, this does not mean that you can’t sell it. A problem for the seller is not necessarily a problem for the buyer. Just be sure to disclose everything so Colony RX can work through any issues with you.
If you would like to discuss selling your pharmacy, give Colony RX a call today. Your call will be 100% free and confidential, and you will feel better after speaking with us.
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At Colony RX, we speak to pharmacy owners daily who are considering the sale of their pharmacies.
We understand that selling a pharmacy can be a very emotional demanding experience. Most pharmacy owners are absorbed by their business for hours a day, sometimes over a period of decades, and sometimes over multiple generations. When it is time to part ways with a pharmacy, it can be a difficult process. For this reason, it is important to carefully analyze the common reasons why pharmacy owners sell their pharmacies, if only for reference that others have been in your shoes.
Pharmacy owners sell their companies for several common reasons. The following are some of the most common reasons:
The Owner is Burned Out: One of the most common reasons that pharmacies are sold is due to fatigue, boredom, and burnout. The ongoing daily grind of managing small business stressors can be very tiresome, especially in light of many industry changes. Beyond the actual stress, many pharmacy owners sell because they are no longer challenged or interested in the business. We sometimes hear pharmacy owners say that they will just take more time off and leave operations to their staff. These pharmacy owners underestimate the value of their presence in the store, and this plan often leads to disaster. If owners are not running their stores, someone else will run them into the ground, and take the value of the business with it.
The Owner Wants a Change:Other times, the owner is not necessarily burned out, but just needs a change. They don’t want to stop working in their pharmacies, they just want to stop owning them. These owners are the ideal partners for Colony RX because, whenever possible, we prefer (but not require) that the existing owner have some involvement in the operation after the sale.
Retirement: Pharmacy owners are passionate, driven individuals who typically love what they do. When a pharmacy owner has a sincere love for their business and work, they will stick with it until they can no longer physically keep up. As a result, many owners keep a pharmacy until it has finally come time for them to retire. The right time to retire is a deeply personal decision and is based mostly on how pharmacy owners want to spend their time going forward.
Physical Illness or Family Problems: Significant changes in a pharmacy owner’s life are causes to sell a business. When illness strikes, pharmacy owners need to have their affairs in order so they are not leaving a major burden (operating or selling the pharmacy) on their families. Likewise, an owner’s spouse may become very ill, requiring them to become caretaker, leading to disinterest in the pharmacy and a desire to sell.
Divorce or Partnership Breakdown: Sometimes, it is necessary to sell a business as part of a divorce settlement (especially when the husband and wife are business partners). Similarly, sometimes partners who share common ownership of a pharmacy need to get “divorced” and when one partner doesn’t have capital to buy out the other, the easiest path forward is to sell the pharmacy.
Need Cash for Other Things: Sometimes pharmacy owners sell because they need the money for other things, such as other investments.
Short-sightedness: When running a pharmacy, curve balls and unexpected events are common. When these seemingly small events continue to build, they can become insurmountable. Owners becoming too comfortable with the operation, getting into a habitual routine and overlooking the big picture often times put the business in peril. Some examples of this are when there is no redundancy in staffing, when there is no strategy for growth, or when a pharmacy owner is over-leveraged his personal assets to run the business.
Competition When pharmacy owners begin to see increased competition, they have two choices: The first is to proactively invest more time and resources in the pharmacy to keep up or choose an alternate path: sell. This can be a monumental decision, but the best time to sell a business is when things are stable or growing. The worst time to sell is while in a downward trajectory. In pharmacy, competition is now coming from the payers, including PBM mail order and closed networks.
Sticking to the Plan: Some pharmacy owners start their pharmacies with a pre-determined exit date in mind. For example, I once heard a pharmacy owner say that he would sell his pharmacy on his 65th birthday as a present to himself.
Opportunity to Capitalize: Right now, things are relatively stable in pharmacy. Savvy business owners know when their industry is in a stable time and sell during that time, instead of waiting for decline. Up, down and sideways trends come and go, from industry to industry; at times, many years apart. The smart pharmacy owner recognizes these opportunities and will strike while the iron is hot.
Whatever your reason for selling, give Colony RX a call to find out if we can help you move forward. Your call will be 100% free and confidential, and you will feel better after speaking with us.
When selling your pharmacy, it pays to learn from others who have completed transactions. As pharmacy buyers, we have earned scars from broken deals, learned many humbling and expensive lessons, and spent hours doing our best to structure the perfect win-win arrangement with sellers. Even now, I learn something new or experience something unpredictable in each transaction.
Here is the best of what I have learned about buying pharmacies that will be of benefit to those selling them.
Put Time on Your Side
Most business endeavors are easier and better when time is your friend. The opposite may also be true – it is difficult to optimize the results of a pharmacy sale if you compress the time available to work all of the components. This applies to both the time available each week and the time from the start to the finish of the overall process. As the saying goes, the best time to sell a business is when you don’t have to. Because of this, start the process early. And consider accepting a fair offer for your business even if it is a few years earlier than you envisioned selling your pharmacy. A fair offer may not be around when you need one.
Responsiveness is Godliness
Sellers may find it surprising how important responsiveness is to the buyer. If a seller is not responsive, and it takes weeks to respond to requests for information, the buyer will often assume the seller is not interested and just move on to other opportunities.
Real Estate Issues
It can be unbelievably frustrating when a landlord is holding up the sale of your pharmacy. Most stopgaps occur because the landlord is not being responsive or doesn’t know what they want to do with the premises.
Know When to Stop Negotiating
It is important for sellers to understand that pharmacy buyers can get distracted or dissuaded at different points in a transaction. One of the easiest ways to turn off a buyer is to try and re-negotiate fundamental elements of the deal after an LOI is signed. The message the seller is sending to the buyer is that they (the seller) are untrustworthy, and it makes the buyer question the entire transaction.
No Material Changes
To ensure a successful close, pharmacy owners should keep the underlying business performing (frankly, it is really good if the business results improve during the sale process). If there are any changes, the buyer should disclose them immediately, because if the seller finds out about a problem rather than learning about it from the buyer, it creates a second problem. That problem is that the buyer will now question what else the seller has not disclosed. As an example, there has only been one time when we have not closed a deal after an LOI was signed. This happened because we found out that the seller didn’t disclose that he had a $300,000 clawback from a PBM.
Selling a Business is All About Fit and Timing
Along with everything else, selling a pharmacy is a numbers game. You need to find a way to maximize your chances that you will find a buyer for whom your pharmacy is a great fit and the timing is perfect. For many buyers who may be great for your pharmacy, it may be bad timing as they are focused on other things. There are so many things behind the scenes that affect how buyers behave that you will never know what is truly happening in their minds. As such, it is very risky to decline a fair pharmacy deal because you are hopeful a better one will come tomorrow. It is more likely that the buyer will have found some reason not to buy your pharmacy when you come back to them in the future.
Everyone Freaks Out Sometime During the Process
In nearly every pharmacy purchase and sale, there has been a moment when the pharmacy seller and buyer both feel stress. This is quite normal because the sale process can become totally consuming. We feel the fundamental issue is that many sellers underestimate the time involved in completing the transaction, which is time spent in addition to their other usual personal and work activities. Some days they can question the transaction itself– although we have never had anyone walk away because of “deal fatigue”. It is no one person’s fault that the process is frustrating and time-consuming. Most everyone is trying their very best to do the right thing, and virtually all deals that get to the LOI stage will get to the finish line.
Control the Lawyers
While it is important to rely on lawyers (and accountants), sometimes lawyers can impede a transaction. In order for a transaction to be fair, there is going to be risk for the buyer and seller after the transaction. There sometimes comes a moment where everyone must tell his or her attorneys to pick the most important issues, ignore the rest, and get the deal done.
These are just some of the lessons we have learned buying and selling pharmacies for many years. There are many more, and we can help you avoid costly and dumb mistakes while getting you top dollar for your business. Call Colony RX today for a free, no obligation discussion about selling your pharmacy.
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Is now a good time to sell your pharmacy? Ultimately, each person is different and only you can answer this question for yourself. Here are a few points to consider:
Factors such as interest rates, the availability of credit and the tax regime are outside your control. However, these are key factors that will impact the valuation of your pharmacy. With interest rates at historically low levels, pharmacy sellers will realize more value for their pharmacies. This is because asset prices are inversely proportional to interest rates. Just as the stock market and real estate market inflate during low interest rate periods, so have pharmacy valuations. However, what low rates push up, high rates will push down. What is here today will be gone tomorrow.
Donald Trump will likely lower your tax rate. If he does, this will effectively raise the net proceeds you will receive on the purchase. This will not last forever. A change in Congress in two years and/or a change in the White House in four years can quickly eliminate this advantage for you.
Cuts to reimbursements
The squeeze on reimbursements impacts pharmacy valuations. Pharmacy goodwill values are based on the future cash flows of the pharmacy. If these come under fire, so too will the goodwill value you may receive for your store.
Similarly, in times of instability in a particular market segment, banks have traditionally been hesitant to lend into that segment for acquisitions until things stabilize. The problem is that nobody knows when any of this will happen. What is known is that over the past few decades, reimbursements have declined, and this trend is likely to continue.
Is now a good time to sell?
If your pharmacy is doing well, it is the ideal time to consider a graceful exit. The alternative is a forced exit. Deciding to sell after a problem arises will adversely affect the value of your pharmacy.
Whatever your feelings on the above issues, you need to be sure that you are making the right decision for you. This is based on your personal circumstances, your tolerance for future risk, and how you want to spend your time going forward.
If you would like to discuss selling your pharmacy, give Colony RX a call today. Your call will be 100% free and confidential, and you will feel better after speaking with us.
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For most pharmacy owners, selling your pharmacy will be a defining moment in your life. Whether it’s a family-owned pharmacy that has been passed down from generation to generation, or a company that you started, the process of selling your pharmacy can be an emotional rollercoaster riddled with unforeseen pitfalls — after all, the last thing you want to see happen is see your company in the hands of the wrong buyer.
Of all the things that can derail the successful sale of your pharmacy, timing the sale can have a huge impact on your company’s ultimate valuation and even determine if it is sellable at all. Most pharmacy owners we talk to have an exit horizon determined by when they plan to retire or leave the pharmacy – but to their peril, they often ignore a number of both internal and extraneous factors that can affect their pharmacy’s valuation and even the viability of a successful transaction taking place.
As you consider whether you should prepare to sell your pharmacy now, in three years, or ten years from now, be sure to include the following key considerations in timing the sale of your pharmacy
Core financial performance
Colony RX, like all other buyers, will look at the current profitability of the pharmacy. We then make a lot of assumptions about the growth trajectory of the pharmacy, but a generally accepted baseline is to look at a pharmacy’s historical financial performance and pattern – typically the most recent three years – in order to project growth. Accordingly, pharmacies showing strong, predictable growth will be worth more than those with erratic or little growth, all else equal. This is why you’ll typically hear experts recommend that you sell your pharmacy at the height of its financial performance, and ignore the temptation to hold onto your pharmacy. Here, we see two risks for sellers. The first is that sellers don’t realize their business is at its peak, and they do not sell when they could get maximum value. The second is that when they want to sell in the future, they cannot because the pharmacy has declining performance, and buyers find it hard to value declining pharmacies.
Broader industry and economic trends
Numerous factors external to your pharmacies core financial performance will impact valuation and your timing of a sale. Pharmacy is undergoing rapid changes – due to new technologies, regulatory changes, and most important, declining reimbursements. Government fiscal and monetary policies, too, can affect timing. For example, many sellers who had been contemplating a sale in 2012 were motivated to accelerate the process due to the expected hike in capital gains taxes in 2013. Similarly, rising interest rates will make it more costly for buyers to finance their transactions with debt. Perhaps the most glaring example of how the health of the broader economy affects the sellability of your company is the global financial collapse of 2007/2008. Amidst widespread uncertainty and volatility, banks were not lending, and pharmacies remain unsold. Though you may feel that most of your company’s value is tied to the strength of its financial performance, be sure to take into account how some of these other factors will impact the success of a transaction.
Your personal post-transaction goals
You may not know what you want to do after you sell your pharmacy, or that you want to exit your business entirely and move onto the next stage of your career (or life). This is one of the reasons that Colony RX gives the seller the choice to remain with the business, from full-time to part-time. In fact, the seller can often set their own schedule.
It’s about fit
For many pharmacy owners, the price of their business isn’t the only important consideration in pursuing a successful transaction. In fact, many pharmacy sellers care as much about the legacy and continued success of their company, patients and staff as they do about other factors. At COLONY RX, we work with sellers to make sure they are the right fit with the buyer, and that the needs of all parties are met.
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What does a pharmacy purchase look like, from start to finish?
In this post, I will describe the primary steps in selling and buying a pharmacy.
Step I: Sourcing
Before a buyer ever talks to a seller, before a deal even gets off the ground, the buyer and seller need to find each other. This is what we call sourcing.
During the sourcing stage, the pharmacy buyer is combing the landscape, sifting for pharmacies that have good traits, researching them, weighing risks and benefits, and using this information to decide which pharmacies to contact.
In this stage, ColonyRX on behalf of our sellers casts a wide net, and tries many different ways to reach people to tell them about the opportunity. We still find the best way is word of mouth, where we get a referral to a potential seller with someone who knows our stellar reputation in the pharmacy community.
Step II: Screening
The screening stage consists of a very high-level conversation with the potential buyer. When we have this first call, we assume the buyer knows nothing so they don’t pass based on wrong assumptions. We typically have four general things to convey:
1) What type of pharmacy dare we representing? For example, do you own a traditional retail pharmacy or a specialty pharmacy or a closed-door LTC pharmacy. In this question, we want to know where your scripts come from and what kind of scripts you dispense.
2) Where is it located? What kind of community are you in? What kind of building are you in?
3) What is your top-line revenue (gross sales)?
At the same time, we are screening the buyer. We want to know what the buyer will do with the store; what experience they have and what their financial capacity is to close.
Step II: Confidentiality Certificate
If the pharmacy buyer and Colony (on behalf of the buyer) decides to move forward, we will send a confidentiality certificate, also known as a non-disclosure agreement (“NDA”). In short, the NDA is a legal document that protects any confidential information about the business shared by the seller. For more information on this, see our blog post about Confidentiality. Sometimes we issue this earlier or later in the process depending on the buyer and the circumstances. It’s really a judgement call on our behalf.
Step IV: Due Diligence
A signed NDA kicks off the first round of due diligence (“DD”). Put simply, due diligence is the investigation of a pharmacy. In the first due diligence stage, we will ask for recent tax returns and/or financial statements. It should not take more than 10 minutes to get these documents from your bookkeeper or accountant.
Once we have this information, we will often have a more detailed phone discussion about the:
Pharmacy Operating history
Real estate/physical location
What the seller wants to do after the sale
The diligence process is a two-way conversation. The primary goal of diligence is to provide a general picture of the pharmacy, communicate risks, and answer any questions.
Step V: Indication of Interest
After a cursory round of diligence, if the parties are still interested in the transaction, we ask the buyer to send an e-mail (or call us) to review key terms. We try to keep this focused on just a handful of issues: The purchase price (and terms), the key items needing further diligence and the expected timeframe to close.
Step VI: Letter of Intent
Assuming the seller and buyer agree on the general terms, we ask for a comprehensive Letter of Intent (“LOI”).
The LOI is an agreement that discloses the most important terms of a transaction. Please see our other post called “The Letter of Intent” for more details. For the purpose of this post, the LOI will usually include:
Details on the pharmacy sale price and how it will be paid.
Any assets that are excluded from the transaction.
Estimate of closing date.
List of tasks that need to be completed by closing.
Period of exclusivity where the seller agreed to only deal with the buyer.
Any additional areas of due diligence required by the buyer.
The LOI is, in our view, the most important milestone in the successful sale of a company. This is because, to date, virtually 100% of deals for which Colony RX has received an LOI from a well financed buyer will close. If the buyer and seller can get past this stage, in all probability the deal will close. The next steps, while necessary, are largely a formality.
Step VII: More Due Diligence
Once the LOI is signed, the buyer will request more detailed documents and other diligence from the pharmacy, and arrange an onsite visit to view the premises and meet the seller in person.
Step VIII: Finalizing The Asset Purchase Agreement
In this step, all the paperwork is completed. The parties will complete a comprehensive asset purchase agreement, finalize things involving the landlord and employees, and get the pharmacy transaction right to the finish line, except for the inventory count. In this stage, things tend to be simplified because all of the key business terms are disclosed upfront in the LOI.
Step IX: The Closing and Transition
On the evening before the closing time, the inventory of the pharmacy will be taken by a third-party company. The company is hired jointly by the seller and buyer to ensure the inventory count is accurate. The price of the inventory is based on the seller’s acquisition cost, net of rebates and discounts (this formula is something we carefully negotiate). The morning after the closing date and time, any outstanding paperwork is finalized, such as populating the Asset Purchase Agreement with the final inventory amount.
Step X: Residual Transfer Issues
Once the transaction is complete, there is still some work to be done in credentialing the pharmacy with new third-party contracts, transferring different account from the owner to the seller, reconciling accounts, etc. The vast majority of the work at this point falls on the buyer.
This overview is only general. However, At Colony RX, we feel running a very structured process is necessary to completing a transaction with minimum frustration. The reason is that by following a structured process, we are sure to catch and address issues early, avoiding expensive and time consuming negotiation of issues later in the deal process.
Contact Colony Today
Contact Colony today for a confidential, no-obligation discussion about selling your pharmacy. You will feel better after speaking with us.
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When you sell a pharmacy, the buyer and seller will execute a comprehensive asset purchase agreement (“APA”) which is negotiated between them. Generally speaking, the purpose of the asset purchase agreement is to document what is being purchased, what is being paid, and clarify who is responsible for what both before and after the sale.
Each pharmacy purchase agreement is different, and is worked on by the seller’s and buyer’s respective lawyers. At a very high level, here are 20 key sections in every pharmacy asset purchase agreement:
Identifying the Parties: The legal name of the pharmacy seller’s corporation and pharmacy buyer’s corporation are identified.
Recitals: Here, the parties state their general intent, which is that the pharmacy seller and pharmacy buyer desire to enter into an agreement to sell the assets of the pharmacy, and that the pharmacy will continue to operate as usual until the transaction is closed.
Included and Excluded Assets: This section spells out which assets and liabilities are included and excluded in the pharmacy sale.
Purchase Price: This section details what the purchase price is, what it is for, and how and when it will be paid.
Allocation of Purchase Price: This describes how the purchase price will be allocated between the different assets.
Inventory Value. This section describes the inventory that will be bought, and how it will be valued. For example, damaged, spoiled or expired pharmacy inventory will not be purchased.
Representation and Warranties of the Seller. These are the promises the seller makes to the buyer. These include:
The pharmacy selling the assets has the ability to sell the assets. For example, there is no court order or shareholder preventing the sale of the assets.
Any contracts that the seller will assume are valid contracts.
The pharmacy is not involved in any lawsuits and is operating in compliance with all laws.
The seller has proper insurance in place.
There is nobody who needs to give permission for the seller to sell the pharmacy.
Seller has filed all required tax returns.
Seller confirms all financial statements are valid.
Seller confirms that nothing has changed since they showed it to the buyer.
The assets of the pharmacy are in good operating condition and repair.
The records of the pharmacy are true and complete.
The seller has all necessary licenses and permits to operate the pharmacy.
The pharmacy software is generally working and in good condition.
Seller has fully and proactively disclosed all material things to the buyer.
The pharmacy has conducted proper billing practices.
The lease is valid.
Representation and Warranties of the Buyer: These are the promises the buyer makes to the seller. Most of these are the same as what the seller promises the buyer, but there are less promises because the seller relies on fewer promises than the buyer.
Covenants of Seller: These are general promises that the pharmacy will continue to operate up to the closing date as it has before the closing date.
Confidentiality: These are mutual promises to keep the terms of the transaction confidential.
Employees: A section that confirms that all pharmacy employees are given employee contracts.
Buyers/Sellers Conditions of Closing. These are things that must happen for the transaction to close, including that all previously made promises continue to be true; All documents have been delivered; The pharmacy continues to operate as usual; and the landlord and buyer have executed a lease.
A section that confirms the that the seller will help the buyer obtain licenses and contracts needed to operate the pharmacy (e.g. BOP license). In addition, it references a power of attorney that allows the buyer can use the seller’s contracts and licenses until it has its own contracts and licenses.
This section sets out the terms of the seller’s non-competition and non-solicitation agreements.
The indemnification section promises the buyer that they will not be responsible for issues that arose before the sale, and the seller that they will not be responsible for issues that arose after the sale.
The expenses section confirms that the Buyer and seller each pay their own expenses.
The severability section confirms that if one section of the agreement is invalid, the rest of the agreement is still valid.
The APA is the only agreement, and this section confirms that any “side agreements” are invalid.
This section confirms that the agreement may be amended only if everyone agrees in writing.
Last, the exhibits and schedules contains all of the documents associated with the purchase agreement, such as a copy of the lease.
As noted above, these are only some of the terms in a standard pharmacy purchase agreement. Each transaction is different, and each pharmacy agreement is customized to the specific transaction. This is why it’s important to have a great advisor who will help you achieve the best possible result for your goals. Give ColonyRX today if you would like to discuss any of these contractual terms, or anything else related to valuing, buying or selling pharmacies.