3 building blocks for business success

Wealth management, retirement planning and business succession were among the hot topics at “The Business of Wealth Creation for Pharmacy Owners,” a one-day conference that brought industry experts together with participating pharmacy owners.

Held in Toronto, the event was co-presented by Intropharm & Associates and KJ Harrison Investors, a team of pharmacy business advisors that has served Canadian independent pharmacy owners since 1999. All proceeds from the event went to the Canadian Foundation for Pharmacy.

Think like an entrepreneur

Mike Jaczko

“The biggest challenge in today’s Canadian pharmacy ecosystem is there isn’t a balance between the business of pharmacy and the profession of pharmacy,” said Mike Jaczko, President of Intropharm and a portfolio manager at KJ Harrison Investors.

While the future is bright for the profession—“I would go so far as to say that the profession of pharmacy has never been more capable or stronger,” said Jaczko—he stressed there is plenty of room for improvement in the area of business acumen.

Jaczko, a former pharmacist and owner himself, emphasized the need for pharmacist-owners to think like entrepreneurs. That means constantly working towards higher profitability, lower risk and value creation, with a view towards realizing a comfortable retirement when they eventually exit the business.

How do they do that? Jaczko presented a confluence of “three circles” of action:

• Add value to the business through efficient/profitable operations and risk management.
• Establish sound succession through appropriatecorporate structure, tax mitigation, strategic use of insurance and shareholder governance, ensuring effective risk management, sustainable financial returns and a smooth and tax-efficient eventual transfer of business ownership.
• Achieve financial success through coordinated capital allocation and long-term strategic wealth planning.

Jaczko emphasized the need for experienced advisors with specific knowledge of pharmacy in Canada. For owners beginning to plan the sale of their pharmacies, he recommended an “advisor quarterback” to coordinate the efforts of everyone (lawyers, accountants, etc.) on the advisory team.

“Don’t wake up in the morning thinking about how much money you are going to make,” said Jaczko. “Think about the activities you need to engage in and doing them ethically and professionally. If you do that, the money will find you.”

What’s the (succession) plan?

Caitlin McGrath

“There is a huge opportunity for my generation to connect with the exiting generation of pharmacy owners,” said Caitlin McGrath, a community pharmacist in Alberta with Master degrees in Business Administration and Science in Health Quality.

As a young pharmacy grad working at a rural community pharmacy in Alberta, McGrath experienced the issues surrounding business succession firsthand. When the owner announced the decision to sell, she and her colleagues were interested in taking over, but “for whatever reason, that offer was never made.”

The experience impressed upon McGrath the need to better connect the next generation of pharmacist-owners with current owners—and to put pharmacy succession into sharper focus.

With that goal in mind, McGrath’s MBA project was a nationwide survey of independent pharmacy owners to gather their thoughts and approaches to business succession,  conducted with Dr. Jason Perepelkin, Associate Professor, College of Pharmacy & Nutrition, and Associate Member, Department of Management & Marketing, Edwards School of Business, University of Saskatchewan. They surveyed 45 pharmacist-owners across the country from all age groups, including new owners and those nearing retirement.

The resulting study, “Understanding the Succession Planning Mindset of Independent Community Pharmacy Owners in Canada,” found that selling, transferring or closing their business was the #1 goal of succession planning for 40% of respondents, and half of those said that they wanted to do so within 10 years.

However, more than two-thirds—68%—had no succession plan at all. And even among those who did, none had a formal succession plan.

“It is quite shocking that zero respondents reported having a formal succession plan,” McGrath said. “If they have one, it’s not written down. So, if something was to happen to them tomorrow, heaven forbid, what would happen to that business? And by extension, what would happen to that community?”

McGrath and Perepelkin gathered anecdotal evidence of the reasons behind this planning deficit. A common one was time management: owners were too busy operating their pharmacies to spare time for long-term planning. Others noted a perceived lack of financing for selling to young pharmacists, for instance through staged buyouts. Even though many would prefer to pass the torch to younger pharmacists who share their commitment to the community, they often perceived it as easier, and perhaps more lucrative, to sell to large pharmacy chains.

Dr. Jason Perepelkin

As well, “many of my students and former students don’t think ownership is an opportunity that they actually have anymore,” said Perepelkin. “They just see that there’s corporate ownership of so many things…and [think] that they could never compete.”

To overcome these perceived obstacles to independent ownership, Perepelkin and McGrath stressed the importance of formal succession planning. They also recommended maintaining a network of like-minded community pharmacists to be ready for opportunities to sell or buy.

Know and build your pharmacy’s worth

Darren Miles

“Essentially, we want to increase profit and decrease risk. If those two are going in the right direction, your pharmacy’s value goes in the right direction,” stated Darren Miles, a chartered business valuator and President and Founder of Fair Market Value Inc. based in Oakville, Ontario.

Miles warned against using “rules-of-thumb” measures to determine market value, such as dollars per script and simple multiples of revenue or cash flow, as these can be misleading and/or inappropriate depending on a host of factors about a particular pharmacy.

Instead, he spoke about the merits of so-called income methods, which derive value by dividing a business’s income (which can be measured in several ways) by the risk or capitalization rate, expressed as a percentage. So, as a simple example, a pharmacy business with annual income (profit) of $300,000 and an applied risk rate of 20% would be worth $1.5 million ($300,000/0.2=$1,500,000).

The income valuation approach gives a solid overall view of the business’s value, including tangible assets and goodwill (intangibles), said Miles. What it does not include are so-called redundant assets (e.g., buildings and land that are not directly part of the business’s operations).

Income or profitability is relatively easier to determine than the risk or capitalization rate, noted Miles. Figuring out the latter is where the art and science of valuation meet. An experienced business valuator will take many factors into account, including:

• risk-free rate of return (e.g., yield on a 10-year government bond);
• service and product mix (the more varied, the less risk);
• earnings growth and stability;
• stickiness of referral base (prescribing physicians); and
• legal business structure (proper agreements in place, documentation, etc.).

What can pharmacists do to enhance the value of their businesses? Miles boiled it down to boosting profitability and lowering risk. A key consideration is operational efficiency; that is, make the business run better to enhance its profitability.

Jaczko, who co-presented with Miles, pointed to several key metrics to use as benchmarks:

• cash flow as a percentage of revenue for an overall picture of operational profitability;
• professional services revenue to indicate whether your dispensary team is being fully utilized to maximize earnings;
• inventory turns to reveal opportunities to better manage inventory;
• wages as a percentage of gross margin and wage costs per prescription to indicate whether the business is “right-staffed”; and
• wait times for script fills to reveal opportunities to improve processes and staffing in the dispensary.

Buyers will typically pay more for a business that is growing in revenue, gross margin and earnings before interest, taxes, depreciation and amortization (EBITDA), with documented growth strategies and scalable operational advantages. If those measures are declining, then valuators “usually need to ask a whole bunch of questions,” Miles said.

Reliable financial information is also key. “The more disarray your books are in, the more red flags for a buyer,” Jaczko said.