SELLER BEWARE

There are many factors which are driving the sale of independent community pharmacies and small, privately-held chains. At certain points in time in the last two decades of the 20th Century, it was mostly an activity that revolved around attrition, a sort of “survival of the fittest” as the community of 40,000 independents was reduced to 20,000 at the start of the new millennium. The vast majority of the 20,000 stores that were sold were sold to chains, at very low valuations, as they aggressively bought prescription files to build their market share.

          For the past seven years, there has been little to no attrition of independents. What has developed, and continues to expand, is an active and growing market for the sale of independent pharmacies, mostly to other independents, younger pharmacists who want to own their own businesses and to an active and rapidly growing group of multi-store owners, independents who are building local and regional “chains,” though rarely in the true sense of what a chain is defined as — a group of stores having a common identity, a common look and common marketing policies.

          These sales of independents, which we believe are changing hands at the rate of more than 1,000 stores per year, are driven by the following factors:

■ The age and demographic of the average independent owner, who is predominantly male and over 55 years of age. More than 60 percent of current independent owners fit into this category. Clearly, retirement time has come or is approaching for these people.

■ A resurgence of interest in academia in the opportunity that exists for young pharmacists in the world of independent pharmacy. For many years, close to three decades, this did not exist. Now, numerous pharmacy schools are putting courses in entrepreneurship into their curricula, and are generally being much more focused on and supportive of their students exploring career opportunities in independent pharmacy.

■ Active (and often aggressive) acquisition proposals being made by the large national chains, mass merchants and supermarket chains with pharmacies in them. Their acquisition teams spend their days walking into independent stores and offering to buy them out, files and inventory, at prices that may seem good, particularly to the uninformed owner who has not yet “tested the market.”

■ The commencement of Medicare Part D, which has created a fair amount of stress and a number of new concerns at the retail level. Frankly, some of the more experienced practitioners, those who have been in business for many years and have been successful, just don’t want to deal with these issues and are commencing to make the decision to sell and retire.

When contemplating the sale of an independent pharmacy, there are a number of issues that owners must deal with, all of which can and will have an effect on the transaction in many ways. Included among these are:

■ Valuation — Without having a reasonably accurate idea of the fair market value of a pharmacy, how can one attempt to sell it?

■ Options — Without knowing all the options open to you, how can you truly determine if you have chosen the correct one? Is the best sale to an employee, a family member, a competitor, an arms length, first time buyer or a chain?  Or is there some other option that you haven’t yet discovered or explored?

■ Tax consequences — Without knowing all the implications of the possible tax consequences and just how much deal structure and your current business structure can and will affect the net proceeds of the sale to the seller, it is difficult to move forward in the proper manner.

■ Financing — How can and should the deal be financed? What are the options in this regard and how do they work for (or against) you?

■ Real Estate — Do you own or rent your store? If you sell, what are the financial ramifications on you, whether you are a tenant or the owner of the building? What are your options in this regard?

■ Confidentiality — It is critical that your competitors, customers, employees and the local prescribers are not aware of your plans until the last possible minute. And when the time comes to inform anyone in the market that you are selling, you should remain in total control of that process to insure a successful sale and the transition of ownership in a mode and with timing that you control, not the purchaser.

          This year, as in the past seven years, more than one thousand independent pharmacies will be sold, many to other owner operators, some to employees or family members, some to chains who will close them up. We believe that the chains will become more aggressive in their acquisition activities than they have been in past years. Their need to build market share and prescription volume in their stores is being driven by the Medicare Part D program and the pending changes in generic reimbursements under Medicaid. Both of these activities will have a negative effect on pharmacy department gross margins and, from a chain perspective, one of the most meaningful ways to offset this loss of margin is to increase Rx volume per store.

          While we certainly respect and understand the chains’ need to pursue this activity, we strongly advise independent owners who are approached by chain store acquisition managers not to overreact or jump the gun in terms of providing information or strongly considering their initial offers to purchase without knowing better what your options are and what the value of your pharmacy may be. Do not be overly eager to turn over prescription logs or financial records unless and until you (a) have a signed nondisclosure agreement from any prospective buyer and (b) have consulted with someone outside your pharmacy, accountant, attorney, consultant in the industry who is more knowledgeable than you are about independent pharmacy valuations and potential options for the sale of your business.

          Our advice to independent owners who, for whatever reason, are currently contemplating the sale of their business is as follows:

                ■ Discuss your options with trusted advisors in a confidential environment before doing anything.

                ■ Ascertain the value of your pharmacy to others based on current marketplace conditions, in a professional manner, rather than trying to apply “rules-of-thumb” to determine market value.

                ■ Do not engage in serious dialogue with anyone, independent acquirer or chain pharmacy acquisitions person without first executing professionally prepared nondisclosure documents.

                ■ Fully understand all the financial and tax ramifications of a proposed sale before you enter into any contract or purchase and sale agreement.

          And finally, we always counsel prospective sellers who are engaged in the exit strategy planning process or the active marketing of their pharmacy to continue to operate the business as if you were going to own it forever. Do not stop trying to improve and grow the business in every respect. To do so, “pull in your horns,” so to speak, in anticipation of selling, will have a negative effect on the value of your business. Since the vast majority of independents only sell their pharmacies once in their lifetime, it behooves you to do everything you can to insure that you do not leave any of the value of your pharmacy on the table when you leave the closing.

Tony De Nicola is a pharmacist from New York who currently serves as president of Buy-Sellapharmacy.com, a national firm that evaluates and appraises pharmacies and advises pharmacists on all aspects of buying and selling a pharmacy.

 ã This material is copywrited by Anthony P. De Nicola of Buy-sellapharmacy.com, Inc. Publication or reprinting without the express permission of the author is forbidden.

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