1.    Timing

A perspective on timing brings about considerations beyond those of your retirement or exit plans. You will have other considerations to think about that will assist in the sale and support a smooth transition:

• Other owners / partners in the business. Their stage of career and ability (personally and developmentally) to take on more responsibilities. Whether they are interested and financially capable of buying your share in the pharmacy.
• Your staff. Will your departure impact the responsibilities of staff in the pharmacy? Do they need further development or are they ready to take on more responsibility now?
• Your business. Where is your business at and what are the opportunities to realise a higher value? If funding your lifestyle into retirement is your primary consideration, you’re going to want to maximise your sale price. This can take time in the planning and implementation.
• The market. What are the market conditions and are they favourable towards pharmacy valuation at present? Market conditions have changed, with 60-day dispensing and the new 8CPA agreement kicking in.

2.    Business valuation

An obvious step in the sales process is your business valuation and, importantly, what you can do about it if you want to maximise value. While we’ll have a good idea as your accounting advisors, we often work with pharmacy specialists to obtain an independent business valuation. There are a number of factors that they will consider, and we’ll work closely with them to provide them with the right information:

• Good accurate data. This goes without saying and the old cliché “Garbage in garbage out” (GIGO), the quality of your reporting data is determined by the quality of its input. Ensure you review your data and identify and correct any anomalies.
• Good trading results. Having good trading results along with at least three years of comparative reporting is imperative when preparing a valuation.
• Ensuring industry KPI benchmarks are being achieved. Two of the biggest KPI’s to ensure you are hitting the mark are Gross Profit Margin and Labour costs.
• Prescription volume. The number of PBS (Pharmaceutical Benefits Scheme) prescriptions filled (concessional scripts) annually is a critical metric. Pharmacies with a high and steady stream of PBS income tend to be more profitable.
• Location. The Pharmacy Location Rules in Australia regulate where pharmacies can be located, which can significantly affect your business’s market value. A pharmacy in a highly desirable or restricted location may command a premium.
• Inventory and assets. Your valuation will consider current stock and tangible assets like real estate (if owned) and equipment. Additionally, intangible assets like goodwill, customer loyalty, and any exclusive supplier agreements will be factored into the overall valuation.
• Lease tenure terms. Having long tenure is imperative as it provides certainty for any would be purchaser, reduces risk and is generally tied in with banking financing terms.
• Trading banner. Different trading banners will have different attributes and KPIs which may affect the valuation of your business.  Consider whether the current trading banner is suitable or whether a change will benefit.

3.    Tax implications and your exit strategy

Taxes and your business structure play a large part in determining how much you are left with following the sale of your pharmacy:

• Capital Gains Tax (CGT) concessions depending on your structure. Small business CGT concessions may apply if your pharmacy meets certain criteria, such as holding the business for at least 15 years. These concessions can reduce or eliminate CGT on the sale, depending on your circumstances.
• Superannuation contributions. Many departing pharmacy owners use the proceeds from the sale to boost their superannuation, taking advantage of tax-efficient retirement planning strategies.
• Creditor payments. If selling completely, you will need to allocate settlement funds to settle all remaining creditors including employee entitlements for staff not transitioning to the purchaser.

4.    Legal considerations and regulatory compliance

As you will likely know, having worked in the industry for some time, Australian laws and regulations around pharmacy ownership heavily influence the sale structure, but it’s worth us stepping them out here for those reading this article who are unfamiliar:

• Outright sale or partnership buyout. You may opt for an outright sale or consider a partnership buyout if there is an existing co-owner or employee interested in taking over the business. In some cases, an earnout structure, where payments are tied to the future performance of the business, may be suitable. This may also assist in financing the sale over a longer term, which may enable you to depart the business sooner.
• PBS approval transfer. You will require PBS approval to transfer the pharmacy to a new owner. This means working with the Department of Health to ensure the new owner meets all legal requirements to continue providing subsidised medications, together with applicable state authorities.
• Lease and contract assignments. If your pharmacy premises are leased, the lease must be transferred/assigned to the new owner. Ensure obligations under the lease are extinguished, or if timing issues, get existing partners to provide an indemnity. If the pharmacy has supplier contracts, for example, with pharmaceutical wholesalers like Symbion or Sigma and is part of a banner group like TerryWhite Chemmart, Whole Life, etc. these will need to be reviewed to ensure they are transferable or can be renegotiated.
• Other contracts/obligations. For example Bank Guarantees/finance etc. PPSR (Personal Property Security Register) will need to be assigned or relinquished.
• Non-compete clauses. If you are not retiring but considering investing in other pharmacies, make sure you are aware of any non-compete clauses in your current pharmacy partnership agreement. It may restrict your next moves.

5.    Employee transition and continuity

Employees are a critical asset in any pharmacy business, and their transition to any new owners must be managed carefully. Here are a few considerations:

• Employee retention. If the new owner intends to retain your staff, make sure employment contracts are transferred and that entitlements such as leave balances are honoured. The terms and conditions that are likely to relate to this are covered by the Pharmacy Industry Award.
• Staff communication. Transparent communication with your staff during the transition period can help ease concerns and maintain morale. It’s important to inform employees about their future employment conditions and how the sale will impact them. We recommend seeking the advice of an experienced human resources professional.

6.    Managing relationships

Your pharmacy’s success is likely built on strong relationships with customers, suppliers, and other partners. Managing and maintaining the goodwill in these relationships will likely be important in your pharmacy valuation, as well as reduce the stress in the transaction.

• Customer communication. Maintaining goodwill with your customers during the sale process is vital. Inform them of the transition, and if possible, introduce the new owner to ensure continuity in service.
• Supplier contracts. Australian pharmacies rely on long-term relationships with pharmaceutical suppliers. You’ll need to ensure supplier contracts are either transferred or renegotiated so that the pharmacy can continue operating without disruptions.

7.    Succession planning and handover

Succession planning is key to a smooth transition and so much more than a few points in this article is needed to plan appropriately. Here are a few tips:

• Pharmacist succession. If selling to a partner or an employee, a gradual transition plan may be required to ensure the successor is prepared to take over the business. This is especially important in rural or regional areas, where finding a replacement pharmacist can be challenging. We work with many pharmacists to support this transition, which can include, for example, having more junior pharmacists involved in quarterly financial meetings and educating them on the financial aspects and considerations of running the business.
• Handover period. Depending on the buyer’s experience, you may need to agree on a handover period where you continue to assist the new owner with operations and customer relationships.

Thoughtful preparation and the involvement of the right professional experience in the process will provide the support you need to reduce stress. Understanding the process from the buyer’s perspective is pretty useful too, so ‘A pharmacist’s guide to owning their first pharmacy’ may provide a useful read.

There are many moving parts involved in exiting any business and pharmacies add another level of compliance, due to the Australian regulatory environment and different state rules. Engaging with legal, financial, and industry experts can help you make informed decisions and ensure that your exit from the pharmacy business is as successful and seamless as possible.

About the author. Jacob Prestia is a Manager at Holman Hodge. He understands that his work with pharmacy clients encompasses much more than just the figures presented in compliance and management reports. He fosters personal relationships that extend to providing advisory services on critical matters such as restructures, cash flow management, and transactions, in addition to supporting clients in areas like property ownership, syndication, and development.