A Chain Offers to Buy Your Pharmacy. What Do You Do?
Business and Operations
Review important considerations and explore the alternatives to accepting a chain’s tempting buy-out offer
If you haven’t yet had this experience, there’s a good chance you will. You receive a letter from a chain inviting you to call if you are interested in selling. Or, a chain consultant comes into your store and asks, “Have you ever thought about selling?” (And the visit just happens to be during a particularly frustrating and hectic day or week). Or, perhaps a chain consultant even makes an unsolicited offer to pay “top dollar” for your store. Such an offer may sound quite tempting and extremely appealing, especially on challenging days.
What should you do?
First: The Potential Upside of a Chain Offer
Some who feel strongly about maintaining the strength of independent pharmacy argue against ever selling to a chain. But depending on the situation, there may be advantages to accepting a chain’s buy-out offer, such as:
- Money. There may be situations where due to a pharmacy’s location, the number of prescriptions filled, and other attributes, a chain’s financial offer is so attractive that a pharmacy owner feels compelled to sell. But, as discussed below, owners should fully understand the offer and all of the terms, since sometimes these offers are not as attractive as they initially appear. For instance, when chains acquire independent pharmacies, they typically focus only on acquiring key assets of prescription files and inventory.
- Speed. A transaction with a chain can appear to be relatively easy and can happen quickly. There may be instances where a pharmacy owner wants to get out quickly, and chains can often accommodate.
Not So Fast: Important Considerations
While a chain may make an offer that on the surface sounds attractive, it is important to dig below the surface to fully understand all of the terms. This includes:
- Payment timing. Sellers typically prefer to get full payment at the time of the sale. But according to Karen Schmidt, RxOwnership vice president, West Region, when chains acquire independent pharmacies, they often pay 50% up front and the rest is paid as part of a “retention bonus.” Schmidt generally sees the 50% retention bonus paid in two installments: 25% after 6 months and the last 25% paid after 12 months, depending on the number of patients and prescriptions that are maintained. Schmidt advised, “It may look like a very lucrative deal going in, but may not pay off like you think it would.”
- Taxes. A large payout often subjects a seller to capital gains taxes, which can be significant, and can result in a lower payout than what was anticipated. Owners should always discuss tax implications with their accountant before making a decision.
- Work arrangements. In addition to possibly having to stay on for a year or more to earn a retention bonus, being acquired by a chain would mean working for a chain, just like any other employee. This could mean being told when, where and how to work — which might be a significant change of pace for someone who has owned and run an independent pharmacy for many years. Or, being acquired by a chain could mean not working at all and might involve a non-compete for some period of time. In all likelihood, being bought out will mean a change in work arrangements, which needs to be carefully thought through.
- Leases. An important and often overlooked area is the many leases and other types of contracts that a pharmacy often has in place. If a chain just acquires your prescription records and inventory — but not the rest of the business — as an owner you’re still responsible for the property lease, equipment leases, and any other contractual obligations. Just selling certain key assets doesn’t relieve an owner of these responsibilities, and could decrease the value from the selling price.
See “What’s Your Pharmacy Worth?” for understanding common valuation methods, estimating your pharmacy’s value and increasing your pharmacy’s worth.
After working for years to build an independent pharmacy and make it an integral part of the community, for most owners, the decision to sell goes far beyond just dollars and cents. Ownership involves passion and emotion as well as pride and legacy. Therefore, when contemplating a major financial transaction make sure you consider the other important factors — what happens to the pharmacy’s brand and reputation, what it means for long-time employees, how customers will be served, and what are the implications for the community.
Other Alternatives
For owners who have received an offer from a chain, or who are thinking about selling and retiring, there are two important alternatives to consider:
- Selling to another independent pharmacy. There are existing owners of independent pharmacies who are interested in expanding through acquisition and plenty of pharmacists interested in buying their first pharmacy. These first-time buyers and “consolidators” of independent pharmacies are more likely to want to preserve a community pharmacy’s local brand and reputation, retain employees, and serve patients with the same level of personalized care. They may also be open to structuring flexible work arrangements with the existing owner. This can be ideal for an individual who still wants to work as a pharmacist, but no longer wants to deal with all of the obligations of ownership. Or, for someone who wants to phase out their ownership stake in a way that matches their financial and personal retirement goals.
Unlike a chain, which often buys an independent pharmacy’s assets and then shuts the pharmacy down, what matters to another independent pharmacy is the ability to profitably operate the pharmacy. Chris Cella, RxOwnership vice president, Northeast Region, said that potential buyers will want to see solid financials from the past three years, so current owners are advised to keep their financials well organized. In contrast to selling to a chain, which can happen quickly, finding the right independent buyer with the right financing can take a bit more time.
Cella also notes that an independent pharmacy’s appearance influences potential buyers. For this reason, Cella advises independent pharmacy owners who are interested in possibly selling to another independent pharmacy owner to focus on improving the store’s curb appeal. Even small efforts like keeping the store clean, installing new fixtures, getting a fresh coat of paint, and adding new signage can make a sizable impact on a buyer’s appraisal of the store’s condition and its value.
- Exploring a junior partnership opportunity. For some, gradually transitioning financial ownership and operations to a junior partner over several years — possibly 5, 7, 10, or even 20 years — provides a comfortably gradual path into retirement by slowly stepping back from the business over time. Junior partnership can also ensure that the pharmacy continues to operate in the community in trusted hands, and can provide a payout over several years, which might have tax advantages. Many owners of independent pharmacies have had positive experiences with this option.
Karen Schmidt advised owners to engage legal counsel to create a clear agreement for a junior partnership that spells out the buyout options.
Download the guide: “Preparing to Sell Your Pharmacy Business”
As a pharmacy owner, planning for the sale of your pharmacy is one of the most important things you can do — for your staff, your customers and yourself. Use this guide as a blueprint that you can reference to help make the right decision at the right time (or help avoid making the wrong one). Whether you’re ready to sell in the next six months of the next six years, these tips that include assessing your pharmacy’s worth, selecting advisors, finding a qualified buyer, and negotiating a great deal can help you to get the maximum value for your lifetime investment when this big decision arises.
What’s Right for You?
There is no right answer about what to do when you receive an offer from a chain. The best decision is a matter of personal preference. What is important, however, is that you realize multiple options are available and avoid making a hasty decision when a chain provides a tempting offer. And, definitely don’t make such an important decision when experiencing stress or frustration. (See “11 Tips to Avoid Burnout.”)
Think through the many important considerations, such as your preferred post-sale work arrangements and retirement plans. Assess the impact on your customers, employees and community. Also, keep in mind that you don’t need to go through this process alone. You can take advantage of the free resources at RxOwnership.com and tap into the years of experience and the expertise of the RxOwnership® team, which has assisted over 1,600 independent pharmacy owners in smoothly transitioning their pharmacy.
By being aware of the various options, understanding the pros and cons of each, and thinking through what matters most, you will be better prepared when opportunity comes knocking.
What advice do you have for other pharmacy owners who might receive an offer from a chain? What has been your experience and what are your thoughts on the other options available?