The Keys to Succession

Matching the expectations of both the buyer and seller in a succession transaction can be tricky. The reality is that both parties hold the keys to a prosperous partnership.

The Seller

For the seller, the qualitative implications for life without a business in an outright sale may in fact be a much worse contemplation than a business that probably has flat or declining profit in the current or future market place.

Succession planning is but one of the options open to Pharmacists who want to both reorganise their working/retirement lives in an orderly fashion over a number of years and give something back to the profession by providing an opportunity to a young pharmacist/s.

The Buyer

The next generation of pharmacists are enthusiastic about the profession and are studying to engage customers and provide them with health outcomes (i.e. they are not studying to fill scripts nor to open discount pharmacy operations).

The current values of profitable pharmacies however, often make outright purchase impossible for the next generation.

The existing owners of pharmacy therefore have a unique opportunity to harness this next generation to grow the business through succession, ensuring the longevity of their current business, this industry and not burdening the next generation with unserviceable debt.

The Plan

Like all good adventures you need a well laid plan.  In a business sense, the succession plan must including the following key points in order to be successful:

• Definition of the roles the partners will take in the business;
• Remuneration of the partners;
• Transmission of additional/equity in the future;
• Valuation methodology to be adopted to value the equity;
• Financing arrangements of the partnership; and
• Pre-emptive rights in the event of death/default.
  

There are of course many other points to be included in a partnership agreement but a basic understanding of the above between the prospective partners will air any concerns either party may have before incurring costs on legal documentation.  I find most partnerships fail when there is a lack of understanding on any of the above points.  Once the partnership has commenced, it can be difficult to unwind.

So should I stay or should I go?

An outright sale will normally provide a higher immediate sale price because the purchaser is gaining 100% control of the business.  The introduction of a minority partner though is likely to provide a better long term outcome because of sharing in future profits and the expectation of a higher exit price in the future if those profits can be grown over time.

Of course, an exit over time generally means that the new partner’s borrowings are secured by the pharmacy and hence the original owner’s equity remains exposed to normal industry risk.  In addition, introducing a partner also means forgoing some control in the business, which can be difficult after years of having total control. 

However, the advantages of taking on a partner include:

• Gaining an injection of new ideas and enthusiasm
• Sale funds ($$$) while maintaining a future income
• Business management support
• Ready buyer of the business in the future
• Lifestyle
  

Personal satisfaction of remaining in ownership and contributing to the customers and community as well as mentoring staff

 The answer to the question……

As you may have guessed the right answer to the question is the one that suits you, the owner.  First you must define what is both important to you and the business as they are often in conflict (eg extract funds for retirement or invest in a refit?)
 
If you can’t or are unwilling to give the business what it needs but do not want to exit then you should consider a succession plan which involves a younger partner. Be aware though, this is a give and take process where the business’ interests need to be put first!  You both hold the keys to unlock the future potential of the pharmacy.

Finally, both parties should consult with advisors who understand your industry and the options and will add value to the process.